Margin Call : Why was Sam hesitant to dump the toxic assets?

By having reservations, Sam (Kevin Spacey) and some others seemed to imply that the firm could take another course of action rather than dumping the toxic assets.

This doesn't seem to make sense as it was already made clear that the entire firm could easily go under the next day if they were kept on the books.

Even when it was asked if he could clear the MBS assets over the course of regular operations, he pointed out that it would take weeks but would quickly be discovered within a couple of days - rendering any remaining assets worthless.

Of course it sucks that the reputation of the firm would be damaged and the jobs of the traders would be destroyed, but that would have happened anyway if the assets were not dumped.

Does anyone know why he was so hesitant - other than to provide some dramatic tension?

Because the consequences were devastating and far greater than just the company's failure. They were selling things that had no value, thus causing a market crash and the recession.

The other option would be to you knownot cause the market crash.

Brokerage firms becoming insolvent due to toxic assets would the inevitable outcome and have the exact same effect. In fact, that is what happened with Bear and Lehmann Brothers.

I'm open to others' opinions, but preventing a market crash isn't a valid response, because it would have happened anyway within days.

If his firm had held onto the toxic assets and then gone under within a few days, the MBS market would have crashed anyway. At least under this situation, a firm didn't become insolvent and cause a panic.

In fact, the buyers of the dumped securities may have been able to deal with the devalued securities far better - they weren't worthless, just not as marketable as they once were.

Well the alternative would have been to sell the toxic assets 100cent on the dollar to the taxpayer instead of 65cents on the dollar to other traders. aka bailout

It's mostly about having blood on your hands. As you say the market would probably crash anyway, but at least then, this firm wouldn't have been the direct cause of it.

This is somewhat the main theme in the movie for me. A rookie figures out what's going on before anyone else - but the only people who benefits from this knowledge is the executives (and eventually the rookie himself) who uses it to save their own asses, by sending everyone else to the wolves without seemingly getting emotionally affected by it.

And there's always the fact that when you sell something you know is worthless, you really risk ruining that great reputation you've been building.

He's been with the company for 34 years, building its reputation, servicing its clients, earning their trust.

To throw all that away in a single day ain't easy.

"I am not a complete idiot, some parts are missing."

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By having reservations, Sam (Kevin Spacey) and some others seemed to imply that the firm could take another course of action rather than dumping the toxic assets.

This doesn't seem to make sense as it was already made clear that the entire firm could easily go under the next day if they were kept on the books.

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That IS the other course of action. To let the firm go under the next day.

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That IS the other course of action. To let the firm go under the next day.

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The firm going under would be even more harmful to other firms as it would create a panic and instantly make any mortgage backed securities anyone else owned instantly worthless.

Sam had to know this, which is why it was so odd that he was against the plan even after he had some time to think about it.

I don't think that's true at all. There would be some degree of ripple effect, to be sure, but one company going down is nowhere near as bad as trashing the entire market.

I think the oddity you detect is based on your false assumption.

Bear Stearns going under did cause much more problems than if they had just dumped their inventory.

Panic is what made mortgage backed securities become toxic. They were already overvalued, but the panic from the failures of Bear Stearns and Lehmann is what turned them toxic.

Why do you think that this company going down would be benign? If they truly had enough inventory to "trash the market" then they were big enough to create a full fledged panic if they went under.

It is doubtful that they had enough inventory to truly "trash the market" in the long term anyways.

No offense, but I think you're assumption is the one that is flawed and is preventing you from seeing the oddity. Even the other characters pointed it out to Sam.

They had two choices; do nothing and go bust with 100% certainty, no doubt taking some others with them. Or do what they did and take down half the market, but give themselves a slim chance to be amongst the ones left standing. The whole point is that in their worldview, it's perfectly fine to trade a 100% certainty of failure in for a 95% certainty of failure along with screwing everybody else.

I don't see why this is difficult; it's the entire premise of the film.

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it's perfectly fine to trade a 100% certainty of failure in for a 95% certainty of failure along with screwing everybody else.

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There was never a 95% chance of failure. If they dumped their toxic assets like Goldman Sachs did, there was almost no chance of failure.

So in reality, it was trading 100% chance of failure by holding the toxic assets for almost 0% chance of failure by dumping them.

I don't see why this is difficult, it's the entire premise of the film.

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Panic is what made mortgage backed securities become toxic. They were already overvalued, but the panic from the failures of Bear Stearns and Lehmann is what turned them toxic.

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Hardly. The fact that the mortgages behind the securities were worthless was what made them toxic. The fact that there was a huge number of those securities in the market was what made it crash when people started to realize it was all smoke and mirrors. Bear Stearns and Lehman Bros essentially had no, or possibly negative, net worth. The company in Margin Call just passed the poison on to other companies.

The MBS weren't worthless as the underlying mortgages still held some value. The problem was that they were losing most of their tradable value, which certainly is toxic for firms that needed liquidity.

As Demi Moore's character pointed out, they could have dismantled the securities but they would have had to have gone block by block which would have taken months.

I do agree that the assets would have become toxic eventually no matter what, but Bear's demise raised the alarm and instantly made them hot potatoes.

A rough analogy would be the pilot of a 747 hesitating to bail out of his plane to save his own ass, because he knew that if he did, it would crash into an hospital, an elementary school, and two orphanages.

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it would crash into an hospital, an elementary school, and two orphanages.

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The only way your analogy would apply is if the hospital, elementary school and two orphanges were sitting on a nuclear bomb that was already set to go off the next day.

Then maybe it's a matter of holding onto an irrational hope that the bomb might somehow be defused before it goes off and the lives could be spared. Dropping the toxic assets was akin to 'Pushing the Button'. It was abhorrent to him and he just had a natural resistance to doing it. That's my take, anyway.

You make a good point. The damage was already done. The only other option was to wait until the market devalued them and accept deeper losses.

"I'm perfect. Are you?"

I was trying to figure out a scenario that would justify Kevin Spacey's position and all I could come up with is that the firm, industry and his reputation would be in shambles if he dumped on his clients, friends and trading partners. The firm may not keep him around afterwards or there would be no function for his job afterwards and he's left with a trashed reputation.

If he refused, he would have some dignity and reputation left. I think Jeremy Irons knew that and so did Spacey. That's why they gave them (traders)_all that bonus money if they achieve the goal of dumping it all the next day. We didn't see the check Spacey got, but I think it covered any doubt about his financial security for a ruined reputation.

I take a slightly different view here from the OP and let me explain why. Mortgage loans at that time were already beginning to sour, and it was just a matter of time before one IB firm or another would make the analysis/simulations, which would show just how severe the impact was.

The OP quoted Bear Stearns as the assumed firm that the film was modeled on, which could have influenced his point of view especially if seeing this under a Bear Stearns scenario. If anything, I think that the firm in this film was more closely modeled after Goldman Sachs. In real life, Bear Stearns failed to get out of the market and neither were they the first mover. In fact, they pretty much denied they had a problem right up to their spectacular failure. The truly smart guys during those times were the Goldmans, who pretty much looked for an escape path much like Tuld and Co. did; except in real life GS did it via CDO default insurance, which pushed AIG into the brink of bankruptcy. They also placed the nails on Bear Stearns coffin by announcing that they would no longer back up BS's derivatives deals.

So going back to the original question of why Sam was so hesitant on dumping these asset class imagine that you are part of Goldman, which was founded more than a hundred years ago, and through that time, bit by bit, had built the firm to the biggest and most prestigious firm on Wall Street by mostly doing the right thing and of course one of the shrewdest. What Tuld was proposing would destroy the firm as they all knew it, and unwind the more than hundred years of goodwill and trust, as people get wind that they knowingly dumped these toxic assets on their clients/counterparties just so that they would survive.

In real-life, Goldman Sachs did survive thanks to the bailout, and indeed went on to become the first bank to return the bailout money. They also made a lot of money, similar to what Tuld had predicted in the film, by taking advantage of the fallout and panic that happened; but to many, and even many within GS itself, the old Goldman Sachs as they knew it had died that day.

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http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?pagewanted=all

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There was never a 95% chance of failure. If they dumped their toxic assets like Goldman Sachs did, there was almost no chance of failure.

So in reality, it was trading 100% chance of failure by holding the toxic assets for almost 0% chance of failure by dumping them.

I don't see why this is difficult, it's the entire premise of the film.

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It was not as high as 95% but it is probably unfair and unlikely to think it was anywhere near zero percentand GS is a poor (albeit all to common) example of a 'firm' that (some) people think would have survived (or rather did survive on its own).

No pure investment bank was surviving without government help and turning into a holdco. The universals as well; C, BAC, JPM, WFC would need bailouts.

TARP, TALF, and the alphabet soup saved the system, which had and was collapsing. GS and even JPM can say what they want in retrospect, but the bailouts were necessary and they wholeheartedly benefited.

All the banks were massively levered (to varying degrees)
All the banks borrowed short and lent long and the ST funding market was dead
All the banks were massively exposed to counterparty credit riskwith each other
This was coupled with stalled liquidity and an ice age in credit markets

Reputation!

This is THE MOST important thing for a business.

I read every comment to your question (Well skimmed, so forgive me if I'm repeating somebodies point) And nobody mentioned the most obvious reason. Every body talks about the company this, the crisis that but are missing the most fundamental reason. I think he had moral problems with selling people things he knew were worthless. I think he just knew it was a crappy thing to do to people. It's not illegal but it's a morally bankrupt thing to do. In the end he caved because like he told his boss, he needed the money. But I'm positive he knew it was wrong and that's why he didn't want to do it.

clubhonda alludes to this in his response. I saw the movie a while ago but the implications that I recall are (1) the firm knows more than the broader market about the degree to which these assets are toxicthey are significantly overvalued and dumping them at some of the prices mentioned is substantially better than holding the assets and (2) for every seller there is a buyer, whoever buys these assets even at 70 cents on the dollar is going to take a bath eventually, e.g. as a broker dealer you are going to be screwing a client.

I, like others mentioned, think Sam wanted to maintain his reputation and also felt it was morally wrong to sell something which you know to be worthlesss. There was a scene outside the bank with Peter Sullivan where Peter described Sam's son as "Nice" and Peter asked Sam if he had told his son about what was going to happen, In that scene I think for the first time we saw Sam considering the wider implications and the effect it would have on the average person.

Keep in mind that this bank created the MBS products as well. This is stated very clearly when Quinto must step up to address Tuld directly at the main Board meeting.

They were not only selling the MBS's heading south in value, they were selling a packaged asset product class they themselves created, marketed, and sold.

The analogy in the film is to Lehman Brothers, not GS. After Bear went down, Lehman quickly earned a rep as an investment bank holding and selling poorly qualified assets. Lehman didn't exactly have a "fire sale" but they were no longer standing behind products of their own creation and after word got out on this matter, no one would trade with Lehman.

This is what Spacey's character feared. His loyalty was to the firm and he saw the end of trading, thus the end of his firm, and his years of loyalty.

The market is screwed anyways because all of the banks borrow off of everyone so if one goes down they all do, which is why the government had to bail them out.

I think Sam was thinking about moral hazard..and was pretty burned out by the stages by the constant double dealing and horsetrading on the street around CEO /upper managment level.
In the end his trading floor even made his own sons firm take a hit..

moral hazard `plus a real own inner ethical struggle should go a long way explaining it..you leave a lot of your ethics at the door to the trading room floor,but everyone has a limit..unless your a complete sociopath

OP flat out missed the entire premise of the movie. There's really nothing more to say.

I know the content of the movie must of have been intimidating to you, but there's no reason to get passive aggressive.

If the movie was too complicated for you, you should just ask the rest of us to explain it to you.

I'll start you out - every time Sam raised an objection another character would adequately point out how Sam's reasoning was flawed. Sam never had a counterpoint in the those situations, but still was hesitant.

"Does anyone know why he was so hesitant - other than to provide some dramatic tension?"

For the same reason he was hesitant about saying goodbye to his dog. He still had some degree of ethical direction and moral purpose, though he ended up shelving even that when he agreed to stay on the extra 24 monthsfor the money!

I'm sure it's a combination of things. He's obviously a moral person and seems to have earned the trust and dedication of his staff and they look up to him. So imagine that dumping everything means not just that he's telling them to willfully make the day their last day on the job, but possibly their last day in that field of work. He's basically saying "this firm and all the others are in tremendous danger, and you all would be losing your jobs, but before you do, here's a fat check in it if you bilk all those other firms especially well today." Aside from any legal implications, it IS morally reprehensible even if probably no company in the same position would do anything differently.

That's all aside from the bigger picture - that being that even if the market was going to go into the toilet inevitably, they were doing the flushing. Imagine having that weigh on your conscience? It might be easy to look at it years after the fact and think "well, it was going to happen anyways so it's not my fault", but when you're being asked to MAKE it happen, the gravity of the decision is huge. It's easy to watch it in a movie and think it's not a major choice to make with severe consequences but it is.

Additionally, there is probably a part of him that either doesn't want to believe it's over or simply wants to believe there is a way out even if there really isn't - just like the situation with his dog. Tuld knows full well it's going down and someone's going to be first, so it has to be them, especially considering a lot of his wealth is probably directly tied to the outcome, i.e. make a wrong move and he could go from billionaire to in debt.

After reading the OP's question, the only impression I am left with is:

The OP must not have watched the film. All of the answers spelled out in the responses in this thread were already spelled out in the film.

The adults are trying to have a conversation.

If you're going to get all emotional, passive aggressive and try to drown out all of the legitimate conversations, it would be best if focus that angst on the Twilight boards.

They had 3 options

1) dump the assets asap
2) slowly sell of the assets, but don't buy anything else
3) let some other company realise these assets were worthless and be stuck with them

Sam wanted option 2 I guess. but Tuld realised option 2 of slowly selling of the assets would not work, as companies would realise soon that they were not buying only selling. then they would be left stuck with it anyway.

The other reason tuld did not want to sell was because it was a reference to Goldman Sachs and the other banks. These investment banks also had clients who they would advise buy these investments, sell these investments etc. What MBS did was actually sell these toxic assets to these people. This is what Goldman Sachs did. They sold a lot of their junk assets to new york and other states pension funds, which wiped out a lot of Americans pensions. As well as a lot of peoples kids college funds.

They deliberately sold toxic assets as top triple A assets to people. They sold to everyone and everywhere. they were fined a few million by the US government, measly amount, but made profits of billions.

It hit their reputation quite a bit, they lost a lot of trust and a lot of their business over it, but they didn't care, they survived and they made billions and people quickly forget.

In truth, option 2 is what Goldman Sachs did and they did it 18 months before anyone.

I sensed it was for dramatic effect also.

I could not see an alternative presented anywhere just Spacey's hesitancy to unload assets that were believed to be toxic. The firm's belief that the fire sale was necessary was based on their internal research and their management's judgment. There was no certainty that selling assets at 65 cents on the dollar was a smart move. The buyers had no advisory from their management that they should not be buying, and their firms had internal research and management judgment to rely upon too. The market was comprised of willing sellers and willing buyers.

Each time even a stock trades, one person believes it's worth less than they're selling it for and another person believes it's worth more than they're buying it for. The stuff is not sold with a money-back guarantee.

At one point Sam says the market is collapsing because Tuld is panicking, that it is their actions that are causing the problem. Even if it were true, and their simulations showed that it was not true, there is another consideration. The firm was exposed to losses that exceeded its market capitalization. Regardless of whether the market was good enough or a bubble bursting, management still had to act to lower the risk profile of the firm, and quickly.