Margin Call Movie Explained

A subscriber asked if I would explain the movie, "Margin Call." As a disclaimer, I have not seen the movie however Wikipedia has a summary which I used.

The two main concepts covered in this video are Margin and Leverage. Both concepts contribute to the reason on why the investment bank in the movie is trying to unwind (sell) their derivative products. The firm is holding MBS (mortgage backed securities) which are derivative products. An MBS is where a bank lends money to a person to buy a house. Then the bank pools a bunch of these mortgages together (creating the MBS) and sells them to investors. Once the mortgages are pooled and sold the bank holds no assets and has no risk however they make a profit from pooling (packaging) these mortgages.

In 2007-2008 the financial crisis (and movie plot) had mortgages defaulting (failing) in waves. For anyone holding an MBS, they lost a lot of money as the people who bought the house could no longer make payments to them for the house. If the MBS was owned with no leverage the most you could lose would be the value of the mortgages in the MBS pool. However if you leveraged the MBS investment, then you can lose more than you own and even small losses would be magnified.

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