Real Fund Manager Reacts To Margin Call "Emergency Meeting" Scene

So why doesn't somebody tell me what they think is going on here?

Why am I in this business? Love a good Office quote. All right, welcome back to the channel. Today we're gonna do a blind reaction to this, a scene from Margin Call. Now I've seen this movie once before, it was a while ago, and I actually kind of forgot some of the parts. So this is truly a blind reaction. I haven't filmed this before, I'm just going off the cuff here and give my 2 cents of running hedge funds and all that kind of stuff. So it should be kind of fun. You guys ready? Let's dive into it. They're all coming in. So this is the main dude. I got dressed up.

Please sit down. Welcome, everyone.

This is the— I would say, I mean, you could say it's the fun part, but of running a hedge fund, it's kind of the crappy part of running a hedge fund, especially in markets. A lot of our fund right now is in the crypto markets, which run 24/7. And so things can happen at 2 a.m. or 5 a.m. and you're asleep and you get called and stuff's got to get done right then. We've had a few of these scenarios and it's just It's like, why am I doing— why am I in this business, you know? But it's also cool. It's like we're moving. Anyways, you'll see in a second.

But yeah. I apologize for dragging you all here at such an uncommon hour, but from what I've been told, this matter needs to be dealt with urgently. So urgently, in fact, probably should have been addressed weeks ago. But that is spilt milk under the bridge. So why doesn't somebody tell me what they think is going on here?

All right, give us the premise.

As I mentioned earlier, If you compare the figure at the top of page 13.

Jared, it's a little early for all that. Just speak to me in plain English.

Okay.

In fact, I'd like to speak to the guy who put this together. Mr. Sullivan, is it?

Oh yeah. So you come back. This this analyst found this problem in their risk management department that they were way well. He'll actually explain it right here.

Does he speak English, sir?

I'd like to speak with the analyst who seems to stumble across this mess.

Certainly, that would be Peter Sullivan right here.

Oh, Mr. Sullivan, you're here. Good morning. Maybe you could tell me what you think is going on here. And please speak as you might to a young child or a golden retriever. It wasn't brave.

I actually love that, by the way, because finance people talk like they try to talk over your head. They try to talk smarter than you. Most of the stuff in finance isn't that crazy to understand. It's actually pretty simple, but they use these crazy terms and all this kind of stuff and it makes you feel confused and makes them feel smarter than you. And I actually, I do actually appreciate that in this movie. They try to make it simple.

Well, sir, as you may or may not know, I work here for Mr. Rogers as an associate in the risk assessment and management office at MBS.

Please, just relax, stand up, tell us in a clear voice what is the nature of the problem.

Okay. Well, as you probably know, over the last 36 to 40 months, the firm has begun packaging new MBS products that combine several different tranches of rating classification in one tradable security.

So let me, let me pause there for a second. Just understand. So what they're doing, they're packaging together different tranches, which just means groups of investments into a package and they're selling those off to different groups. So you could take, and this is what they do, mortgage pools is a great example. So they'll take mortgages, broad example, let's take your whole neighborhood. Let's group that neighborhood together in a package and a big bank can buy that package and make the money on all the people you pay your mortgage every single month. They make that money in a package. And then what they do is they package together a bunch of neighborhoods in your city, put those together, and then they sell those to a bigger bank, right? And they package these together and they can put other things with them. So they say, hey, we're gonna take your neighborhood We're going to take a different investment category, different class. We're going to take, just for example, we're going to take some crypto, we're going to take some stocks, we're going to take some— we can do whatever and we can package it together. Typically, you probably wouldn't do that. But to give you an example, they package stuff together and say, this is a great little portfolio, you can buy it. So sometimes they'll package— most of the time it's the same type of thing. So mortgage is a good example. But this is what he's talking about here.

This has been enormously profitable, as I imagine you noticed.

I have.

Well, the firm is.

I love that. Yeah, so they're packaging it. You can sell them for a premium because they don't have to go through the work to buy all the stuff and put it all together. You can sell it for a premium, right? So they're making tons of money packaging these groups together. I forgot the product though. I don't know the investment product yet. I forgot on the movie. But they're packaging these together and selling these off to other firms.

Currently doing a considerable amount of this business every day. Now the problem, which is I guess. Why we are here tonight is that it takes us, the firm, about a month to layer these products correctly, thereby posing a challenge from a risk management standpoint.

So let me, let me pause for a second. So it takes a month, he said, to layer these products together. I wish I remember the— again, I'm just doing a blind reaction. I wish I remembered the products. Let's just say it was they're grabbing some bonds, they're grabbing some mortgages, they're grabbing some other stuff. It takes about a month to put those together into a tranche and then sell it. And what he's saying here is the problem is that month they have to hold all those assets on their balance sheet for a month. And if those things on their balance sheet go bad, they're the ones holding the bag when it goes bad.

And that challenge is?

Well, we have to hold these assets on our books longer than we might ideally like to.

Yes.

But the key factor here is these are essentially just mortgages. So that has allowed us to Push the leverage considerably beyond what you might be willing or allowed to do.

So, okay, so he's had mortgages. So it sounds like mortgage pools, they're grabbing mortgage pools, they're putting different types of mortgages together into a big tranche or a big pool together. And he's just saying we have to hold those. And now they're adding lots of leverage to be able to hold those.

In any other circumstance, thereby pushing the risk profile without raising any red flags.

No, thank you, Mr. Ellis. Sit down.

So essentially, they are overleveraged. They use all these fancy terms. To make it simple, they have too much debt. They borrowed too much. And now they're overleveraged. They have to— like, if you have too much credit card debt, they got to pay the payment and they don't have enough money to make the payment before they sell it to somebody else. Like, that's all they're saying, right? They just have too much debt and they've overleveraged. It's just a fancy term for too much debt on their mortgage pools.

What I'm guessing your report here says— and give me some rope here— what I'm guessing it says is that considering the, shall we say, bumpy road we've been on the last week or so, that the figures your brilliant coworkers up the line ahead of you have come up with don't make much sense anymore, considering what's taking place today.

Actually, not what's taking place today, but what's already taken place over the last 2 weeks.

So you're saying this has already happened?

Sort of.

So he's saying, yeah, they're, they're already declining, they're already in a really bad spot. And, uh, anyways, I'll let him keep going.

And Mr. Sullivan, what does your model say that that means for us here?

Well, that's where it becomes a projection, but, um, You're speaking with me, Mr.

Sullivan.

Well, sir, if those assets decrease by just 25% and remain—

I actually like how he talks to this analyst. I actually really like it. From a huge managing partner, there's a lot of pride and ego. I just love that he's like, dude, stop worrying about your bosses. Just talk to me plain English like I'm a toddler. You know, I actually love that. It's like Michael Scott when he says he has Oscar explain him a business model. He's like, explain it to me like I'm 10. And then he doesn't get it. He goes, Why don't you explain this to me like I'm 5? Love a good Office quote.

Pain on our books. That loss would be greater than the current market capitalization of this entire company.

So, they've leveraged so much. Let's just say their company's worth $100 million. They are overleveraged so much to the hilt. They've taken out so much debt. If it gets called, it's worth more than the entire company combined, total market cap. It essentially bankrupts their entire company.

So, what you're telling me is that the music is about to stop and we're gonna be left holding the biggest bag of odorous excrement ever assembled in the history of capitalism.

Mm-hmm. Sir, I'm not sure that I would put it that way.

So, yeah, he's— and that's why they're meeting at 2 AM, right? He's like, tomorrow morning, the market's about to open, couple hours. We are holding the bag and no one's going to keep buying these from us. And we're going to be stuck holding— I don't know, they don't say the number, but billions of dollars of these securities that are bad or fraudulent or aren't good anymore.

Okay, but let me clarify, using your analogy. What this model shows is the music, so to speak, just slowing. If the music were to stop, as you put it, then this model wouldn't be even close to that scenario. It would be considerably worse.

Let me tell you something, Mr. Sullivan. Do you care to know Why I'm in this chair with you all? I mean, why I earn the big bucks?

Yes.

I'm here for one reason and one reason alone. I'm here to guess what the music might do a week, a month, a year from now. That's it. Nothing more.

I actually like that explanation. It's funny, with, with money management, it really comes down to that, especially in a hedge fund. I mean, that's what you're paid to do. You are paid, which is a crazy thing, is you're paid to predict predict the future, right? It's predict what a certain security or product or market would— will go to. That's why if you follow this channel, I talk so much about economics and where things are going. Economics is, I think, the best way we have logically to predict the future. And so that's why I really like it. I love studying economics because it's cause and effect. It's like it's a science of where money will go and move and what people will do. They call it the invisible hand, right? Will move through the economy and push people because of incentives and different things, which is, I think, very interesting. So I love how she explains that.

And standing here tonight, I'm afraid that I don't hear a thing. Just silence.

So he thinks the music stopped. He thinks it's over and they need to essentially get out.

So, now that we know the music has stopped, what can we do about it? Mr. Cohen, Ms. Robertson, I'm afraid I think this is where you're supposed to step back in. Lord knows we've relied enough on Mr. Sullivan tonight. Well, I don't know. What do you have for us?

Yeah, what's the contingency plan?

What have I told you since the first day you stepped into my office? There are 3 ways to make a living in this business: be first, be smarter, or cheat. Now, I don't cheat, and although I like to think we have some pretty smart people in this building It sure is a hell of a lot easier to just be first.

I, uh, I had a mentor tell me this, and he's like, if you can't be smarter, be first, right? When a market's collapsing, music stopped, it's always better to be first though, to be first out. Just so you know, this is why firms in the stock market swings so drastically and so quickly. Everyone's trying to be first out, and you actually can save a lot of money being first. So he's saying sell, we should sell everything today.

Is that even possible, Sam?

So Sam over here is their trading floor, which is kind of, I think, a really cool part of this movie. They show how these banks interact. And so Sam, anyways, he's the one who runs their trading floor and they sell these products to other banks, other brokers around the country. They call them up, hey, I got a cool package, you wanna buy it? And they negotiate over the phone for these things.

Yes, but at what cost?

So he's like, yeah, we can sell them. What cost though?

I'll have to pay.

Really?

I think so. Where is this going to come back to us?

Everywhere.

Sam, I don't think you seem to understand what your boy here has just said. If I made you How would you do this?

So he's saying at what, you know, at what cost, right? Essentially alluding to it's going to ruin their reputation, number one, around the whole finance community, and they're going to take major losses trying to liquidate their whole portfolio today. And so Sam's pushing back. It's like, man, I don't know if we can do that. I don't want to ruin this reputation, ruin my career, all that kind of stuff.

Well, you call the traders in for the normal 6:30 meeting, and you be honest with them, because they're gonna know it's the end either way. So you're gonna have to throw them a bone, and a pretty big one. And then you've gotta come out of the gate storming. No swaps, no nothing. 40% done by 10:15. By 11 o'clock, all your trades have to be gone, because by lunchtime, word's gonna be out, and by 2 o'clock, you're gonna be selling at 65 cents on the dollar, if you're lucky. And then the feds are going to be in here up your ass trying to slow you down. Ramesh, they can slow you down. They can't stop you. It's yours to sell. But John, even if—

so he's saying we're going to throw them a bone, give them a bonus. They're going to know we're liquidating our whole company, right? It's going to ruin reputation, stuff like that. We got to throw them a bone, give them a huge bonus. I think later they say it's like they're going to give each trader like $1 to $2 million for the day's work if they can get rid of their portfolio by 11:00 AM. That's— I mean, that's pretty crazy.

Pull that off and that's saying something. The real question is, who are we selling this to?

Same people we've been selling it to for the last two years, and whoever else will buy it.

But John, if you do this, you will kill the market for years. It's over, and you're selling something that you know has no value.

We are selling to willing buyers at the current fair market. So that we may survive.

So yeah, very interesting. This, uh, Sam here is saying, dude, you're selling like dog crap to these people. They don't know it. And he's just saying, well, they're, they're willing to buy it. It's a fair market. They can decide to buy or not, right? At a fair price. There's two. And he's just saying, that's capitalism, dude. I'm selling something they're gonna buy.

You will never sell anything to any of those people ever again.

I understand.

Do you?

Do you?

Reputation's ruined, but this is it. They'll survive.

I'm telling you, this is it.

So he's saying those banks, those people will never buy from you again. It'll ruin your reputation, but it— we will survive, to his point.

Now it's 4 o'clock. Jared, you got till 5 to break this down and draw me up a plan. Is there anybody else who knows what's in here at the moment, block by block?

Eric Dale.

And where is he?

As of today, he's no longer with the firm.

We have been, uh, trying to locate him.

Carmelo.

Yes?

Get me Eric Dale here by 6:30.

It's done.

We meet back here in an hour. Sam, let's talk.

So they end here. So what— how it kind of goes through, I don't think we're gonna get the whole clip here. So they— he gets Sam, they go and do it. So they go out and Sam— I think they pay every trader $1.5 to $2 million to liquidate their entire portfolio by 11 AM. They call up all these agencies, say, hey, I'm selling, I'm selling this portfolio for 96 cents on the dollar, 92 cents on the dollar, 85 cents on the dollar, 70 cents on the dollar. They go all the way down. They liquidate their entire portfolio. It ruins all of these brokers' reputation. Pretty much everyone at this firm, their reputations are done because they liquidated their portfolio to the people. And it's very interesting. All these guys' careers is kind of, kind of ruined, really tainted careers. They still, they made a lot of money on the, they made millions of dollars each doing this, but it ruined their reputations. And it's kind of interesting way to end the show of just how cutthroat Wall Street is. So Anyways, fun show to watch. Kind of interesting on a, you know, a fictional show, but a very realistic type of example. It's very interesting. All right, there you have it. If you want to learn more about funds, how to start a fund, how to scale a fund, check out the other videos on our channel. Y'all are amazing. See you next video.

Bye.