Margin Call
The movie Margin Call recounts a fictionalized version of the fall of Lehman Brothers in the autumn of 2008. The story centers around the trading floor, the company's exposure to toxic mortgage-backed securities and its responses to these challenges. The movie discusses and provides a framework for analyzing a number of financial concepts. This report will use Margin Call to discuss a number of different microeconomic concepts that are seen in the movie.
Market Failure
Lehman Brothers is ultimately a story of market failure, so this is a natural starting point for this analysis. Marker failure occurs when the "quantity of a product demanded by consumers does not equate to the quantity supplied by suppliers" (Investopedia, 2013). Market failure is evident in a number of ways, based on the story of the movie. For example, the traders are instructed to unload their positions in the toxic assets, but they fear that to do so would cost them the relationships with their clients. They must offload these positions because the positions are going to cause the company to go bankrupt, but must do so in a 'fire sale' manner because there is no market for them.
This situation bears several hallmarks of market failure. The first is that the fire sale implies that there is a mismatch between demand and supply of these MBS products. The market at present is in a state of equilibrium but if Lehman begins selling, that equilibrium state will be disrupted. This market failure causes several problems. There are social costs to the traders, who will lose their relationships in the industry. Such costs are not priced into the transaction and they are large enough that they factor into the market failure. Further, the market failure is brought about by information asymmetry. Lehman has knowledge about how bad these products are, and how they will bankrupt the company. Other firms in the industry do not have this information yet. Thus, they will buy the products not realizing this. When they do realize it, there will be market failure because nobody will want to buy the products and everybody will want to sell them. The result is that Lehman must unload the products as quickly as possible, before the inevitable market failure occurs. When the company cannot do this, it goes bankrupt. Thus, market failure occurs because of information asymmetry, and has strong social costs attached to it.
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