Group-3 BSA22 Margin-Call PDF

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MARGIN CALL: A CASE STUDY

Chesley Magpantay Mary Ann Joy Magtabog Zoe Krista Nocon Monica Margarita Pablo Madelaine Ramos Rose Rodriguez

BSA 22

April 2021

I.

INTRODUCTION Overview According to Milton (2021), “A margin call is a warning that your margin account's equity balance has fallen too low, and it can no longer satisfy margin requirements. A margin call essentially tells traders that they must add funds to their account, either by depositing cash or transferring securities to the account. If they fail to do so, then the contents of their account could be at risk." This is exactly what happened in the year 2008, where an unnamed firm in the movie "Margin Call" pushed the market and economy into a financial collapse because of high-risk exposure to mortgage-debt securities which may lead them to bankruptcy. By accident, they discovered such a thing, and this trope showed the reality of making the margin call along with the repercussions it brings to the company and everyone else involved in the scheme.

Be first; be smarter or cheat – is one of the many explanations used by the characters to justify their actions and decisions. In this paper, the students will thoroughly discuss the characters' decisions using ethical theories, draw significant justifications and explanations on how the management of the investment bank should have acted during the company's financial crisis, and provide real-life scenarios for the readers to fully understand the application of the theories.

Main characters In a movie plotline, characters play an important role in leading the story to a place where it is supposed to be. They make the audience understand why such scenes, events, or outcomes happen. With that, the following are some of the most memorable characters in "Margin Call:

● Kevin Spacey as Sam Rogers - one of the bosses most employees seemingly trust. Sam showed his intelligence and created discussions, not most characters are ready to face. He is also stuck in a personal financial dilemma that took a big part in his decisions.

● Zachary Quinto as Peter Sullivan - a younger analyst than Eric Dale who was fortunately not included in the retrenching of employees. Peter completed Eric’s data analysis and first found out the state of the unnamed firm. ● Jeremy Irons as John Tuld - is the CEO of “the firm”. His role is to decide whether to proceed with the margin call or declare bankruptcy after finally understanding in simple terms that their stocks do not have any value anymore in the market. ● Paul Bettany as Will Emerson - is Peter's supervisor and one of the first two people he contacted after the discovery. As per Will's character, he and Sam usually have the same wavelength in what they think is right thus, he abided by the latter’s final decision. ● Simon Baker as Jared Cohen - another boss of the unnamed firm that holds a higher position than Sam. Jared is in charge of immediately calling the CEO so they can report Peter's findings and strongly suggesting the selling of the toxic assets during the meeting. ● Penn Badgley as Seth Bregman - another junior risk analyst alongside Peter whose current career is in danger because of the company’s bankruptcy. His role reflected the reality of worrying about not knowing exactly what would happen to an employee after the margin call. ● Demi Moore as Sarah Robertson - is a senior executive included in the unforeseen meeting who understood what was happening. By the end, Sarah was expected by John Tuld to be the scapegoat or the one “stepping up” for everyone else after all the company chaos. ● Stanley Tucci as Eric Dale - a senior risk analyst who was suddenly laid off hence, handed his unfinished work to Peter Sullivan. What he left had a huge impact on the whole plot of the story because the discovery of the company's true state is rooted in his work.

II. ETHICAL FRAMEWORK Utilitarianism As its definition suggests, utilitarianism emphasizes the effects or consequences of one’s actions. It is in the effects wherein the action is determined to be morally right or wrong. Furthermore, a decision is considered to be acceptable if and only if it caters to a lesser weight of consequence and the decision to be made is for the greater good or happiness for the greatest number of people. Unfortunately, the company in the movie failed to apply this ethical principle in their decisions. A handful of cataclysmic events such as the unjustifiable massive layoff, the sudden departure of Eric Dale, and the ethically questionable decision of John Tuld to sell the company’s toxic assets are proof of the lack of utilitarianism in the movie. The first major event that took place is the massive layoff of the company which is the company’s downsizing exercise; employees are evaluated based on their performance and only the strongest survive. An estimate of 80% employees was laid off which means that the people who are left employed are lesser, hence, it cannot be said that there is more net happiness in that situation. With this, one can already tell that the company failed to implement the concept of utilitarianism because even though they know that conducting such action will negatively impact most of the lower-level employees who represent the larger percentage of the total workforce, the company did not bother to give them a proper send-off nor take into consideration the aftermath of their actions to the lives of the employees who were laid off. The second one is when the company failed to weigh the consequence of their actions when the high officials decided to lay off Eric Dale, who plays a vital role in the company. This scene alone reveals the firm’s negligence not just towards their social responsibility but their management style as well. By suddenly laying off Eric Dale, the company was subjected to a race against time to find him and ask for his help so that they may be able to pull off their plan to sell their worthless assets to the public. In addition, being a long-time employee of the company does not guarantee immunity and special treatment because not even Dale, who is not just one of the key employees but has worked for the company for almost two decades, emerged unscathed from the massive layoff. This is further proof of the company’s

indifference towards its employees because instead of valuing and taking care of the people who make sure that the company lives to see another day, the company does the opposite.

Lastly is when John Tuld, decided to sell their worthless Mortgage-Backed Securities (MBS) assets. This decision alone tells the viewers of the lack of care and concern of the unnamed firm towards their customers because even though they are well aware that their stocks are of no value, they still proceeded to sell them knowing it is a fraud just so they can get the profit and save their image from facing bankruptcy.

Deontology The word Deontology is rooted in the Greek word deon which means duty. To see things from this perspective is an indication that actions are bound by a set of rules that would fall under the conditions of being morally good or bad according to universal norms. The decisions made should pass as consistent or logical because reason is important for it to make sense in this ethical framework. Like Utilitarianism, there is also a lack of Deontology in the Margin Call and the ending of the movie further proved that. Yet, one of the most memorable examples of Deontology is when Peter Sullivan immediately disclosed the unfinished data of Eric, a senior analyst, to his bosses with urgency after he found out that it would pose a huge loss for the company. Without any hesitations, he chose to share such vital information because it was the logical and right thing to do as an employee else under the company. It is his obligation to report it and since he was able to do so the people in high positions and power became knowledgeable about the problem, giving them the room to talk about what would be the next step. Characters like Jared Cohen, Sarah Robertson, and John Tuld should have been like him when it comes to communicating with their co-workers especially the ones working for them. If they had only done such action from the start then, they may have prevented a lot of challenges from happening. As mentioned above, Deontology gives a clear definition of what is supposed to be morally required and forbidden for the people. If dwelling on the latter part, in relation to the

movie, the Deontological definition of prohibited actions made by the characters outweigh the good. To elaborate on that, it is rational to think that trust between an employer and employee should have been present by default. But in the movie, the lack of trust relationships within the company is quite visible. The employees were clueless about the real situation and reason on what could have triggered their current status. On top of that, the authorities seemingly had their own plan in their minds while simultaneously pointing fingers at each other. Trusted relationships provide a competitive advantage for the company and failure to build them may result in weakness of business which will eventually lead to being out of business. Lastly, the most impactful abhorrent decision in this ethical framework’s point of view which was made in Margin Call is to proceed with the company’s decision to sell the toxic assets. This was an intentional action that involved the company in self-defeating behavior. It may not be legally wrong but it is not an ethical thing either because, with that, the company engaged in a fraud-like scheme to sell their valueless stocks. This framework uses the action itself rather than the consequences brought by the action to determine the morality of the action; and in the movie, what the company did was immoral which is why the principle of deontology almost became non-existent by the end.

Virtue Ethics This ethical framework states that action will only be morally permissible if the action is based on one's values and beliefs. Furthermore, it emphasizes a persons' distinct mental and moral characteristics, as well as the character that people choose to follow in their lives as individuals.

First and foremost, the main characters keep on emphasizing that their decisions are based solely on what they think is right from a business perspective, even if from the societal point of view, it cannot be said the same. Their goal is to survive that phase of bankruptcy and they just did that by risking everyone else like the name of the company, the trust between them and their buyers, and the employment status of the remaining employees. To further dwell on this thought, there is a scene wherein Will Emerson is talking to Seth Bregman, a junior analyst, about how Wall Street exists because the rest of the people demand its existence. All

of them including the normal people in the society are part of the system. Will mentioned that people like him who have the same attitude and disposition in the industry are going to be affected because they know how the system works and need to play their parts for these clients. Wall Street makes it possible for normal people to live with such a grandiose lifestyle, but the same people are the ones who will get mad and act innocent with how the system works which Will thinks is very hypocritical. He said that they are just the same so whatever decision they make with the stocks it would be justified for them. Besides, Jared Cohen and John Tuld, who is the CEO of the unnamed corporation, embodied the principle of virtue ethics because he alongside Cohen favored the fire sale of the problematic assets despite the negative effect on the broader market. This shows that the virtue that both Tuld and Cohen follow prioritizes saving the company regardless of the negative effects of the decision to the rest of the market outside the company, it paints them as people who will fight tooth and nail to ensure the future of the company. Meanwhile, Sam Rogers reflected a different virtue compared to those of Tuld and Cohen. Rogers brought up the negative effects that the fire sale may bring to the market and the destruction of this strategy to the existing trading partnerships. However, in the end, John Tuld and the rest of his employees who are left are all like him— following their natural disposition in life which is to secure their financial stability no matter what. After the numerous heated debates, their personal belief and attitude in handling the stock issue which is to sell them valueless still prevailed. Even Sam, who is torn during the beginning knowing it is not the right thing to do, ends up remaining loyal to what their CEO wants because like the rest he needs the compensation hence, the margin call is justified in his perspective.

III. ANALYSIS OF DECISIONS MADE Corporations are amoral, they exist to survive and succeed at whatever human cost (Erbert, 2011). Naturally, the firm superiors’ main concern is the welfare of the corporation. Keeping the company alive would ensure the economic stability and survival of the market. Decisions made by the executives are vital to the overall operations of the firm. These decisions determine the company's present and future status. Furthermore, it manifests their business ethics and principles. There are a series of decisions made by the characters in

the movie upon facing a great crisis. Below is an analysis of these decisions supported by the students' points of view and alternatives for each situation. a. Immediate Action As soon as Peter Sullivan completed and deciphered the data given by Eric Dale, he informed his superior, Will Emerson. This data contains predictions on volatility. Unfortunately, the firm was already experiencing the predicted data for weeks, if left as it is, the company’s losses will be greater than its total assets. Upon realizing that this is very crucial, Will Emerson immediately disclosed this matter to their head, Sam. Likewise, he reached out to the executives, then the executives to the owner, with this information. There was an immediate step taken to address the issue. They held meetings despite past work hours, particularly midnight until morning, to resolve this problem and plan for the next steps to be taken. If nothing was done at this time, the consequences might have been greater. This being said, the decision to disclose the information to higher-ups right away is the best option. b. Treatment to Employees

Retrenchment The company has decided to reduce the number of employees in different divisions in the firm. There was no particular reason stated in the film, but it can be assumed that this is to reduce costs for the company. Throughout the film, the lower-level risk analysts discuss their superior’s salaries while their colleagues are being fired. It was stated that John Tuld’s salary, having a public record, is $86 million dollars and Jared Cohen's is $18 million. From the standpoint that the company is in crisis resulting in downsizing, giving out millions to superiors is not the best option. Retrenchment is the result of losses in business operations. This must have been already predicted. However, the superiors have still received a tremendous amount of earnings. The unethical actions of firing entire departments and ruining the integrity of their employees with their careers at stake are justified by the management by providing

millions in payoffs to each employee. In application of utilitarianism ethics, the company would have involved the management by taking significant pay cuts to keep as many of the lower-level employees as possible. The $86 million-dollar income of John Tuld could have been used to keep people's jobs long enough for the employees to find employment elsewhere.

Layoff Terms and Methods The employees seemed to know of the possibility of the company’s downsizing, however, they were not fully aware of what was about to happen. Part of the employees assigned by the company for layoff was suddenly fired. It can be assumed that there was no proper disclosure of their layoff terms. This can be proved by the frustration Eric Dale felt when he learned that his mobile phone was already shut off by the company without even informing him. In Eric Dale’s situation, it can be perceived that he was being forced to get out of the building having two guards to keep an eye on him until he leaves the company building.

The company’s decision to not properly disclose the employees’ layoff terms and force some of them to retire is not the best option. Proper disclosure of layoff terms is crucial for the relationship of the employers and employees and it is an ethical choice. Instead of imposing retirement on employees without a proper explanation, the company may present the possibilities and benefits of the potential retiree without forcing him.

There must be proper compensation for employees who are suddenly terminated by the company. Furthermore, just like any employer, holding oneself respectable and accountable for employees is important. It is not only to keep the firm's image but also for the fact that these people deserve a good explanation on the sudden change or elimination of their positions in the company considering that they have made contributions for the company. With what happened with Eric Dale, the company would not have a challenging time looking for him if he was not fired in a sudden manner. Also, knowing the importance of the roles of employees can be a big factor to easily resolve

situations similar to what happened in the movie. If Eric Dale’s position was valued better, the company would have prevented the crisis. The company needed him when things went downhill, however, his role was not recognized. Acknowledging the significance of each role can strengthen the company’s knowledge of their competence. Non-disclosure of situations There were a lot of scenes in the movie that made it obvious that the bosses and their employees do not disclose important information between each other. It was so obvious that there was a lack of communication making everyone, even the CEO, clueless and taken aback by the situation. It is the reason why everyone else seemed uninformed when Peter Sullivan found out that the firm is in danger after completing the missing pieces inside the file that Eric Dale left him. For a company to function well in the extent of overcoming challenges that come through, there should be clear communication between the parties involved . This will be very important in circumstances like “Margin Call'', so each one of them would know what to do because they are well-versed about the historical data or operations of the company. Disclosure of important information within the company and proper communication is vital to monitor the firm's status and keep the business going. Building trust relationships between the employers and employees will establish a competitive advantage for the company. These relationships will contribute to the prevention of a great financial crisis as seen in the movie. If not prevented, the methods to resolve such issues would have been clearer and more ethical.

Coercion The first case of coercion is when the company came to Eric Dale's house to persuade him to come back to the company while the crisis is being resolved. He was threatened of his benefits and was promised to be compensated for doing so. The second case would be John Tuld persuading Sam Rogers to stay and be part of his plan. Rogers was firm with his principle that when he is working, his enthusiasm is fueled only by the passion of his working for the company, but not for his bosses that pay for his salary.

However, even with this principle, he was still persuaded to follow Tuld’s plan because he needs the money.

Coercion is a violation of ethics. Although the company did not physically threaten Dale and Rogers, their conditions imply force. They have robbed them of their freedom to choose and stick with their principles and decisi...