Not so much the film itself but the underlying problem with the investment firm which was a real life issue back then. I’m no investor. So they had lots of mortgage backed securities, right? Does that mean they actually held all those individual mortgages or something else? And they were forecasting onto the future and seeing a problem that was serious enough to wipe out the company? People were being foreclosed at an increasing rate?
I haven’t seen Margin Call, but they don’t hold the individual mortgages; those are held by the company (in the form of the trust) that has packaged them all into an investment vehicle. In that sense it’s not different from a bond fund; you get access to the interest cash flows, but if the mortgages start failing, not only do you lose those interest cash flows, but the underlying value of the fund you bought can collapse.
The movie The Big Short does a pretty entertaining job of describing it.
To expand on that, the dialog shows that the firm is repackaging these Mortgage Backed Securities into new tradeable assets, a process that takes some time, leading to risk where the individual securities can collapse in value while the new assets are being formed. The firesale is liquidating not only the new assets the firm has completed but all of their held underlying MBSs.
From the movie:
Tuld: 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 brains that got me here. I can assure you of that.
Peter Sullivan: Well, uh…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.
Tuld: Please. Just relax. Stand up. Tell us in a clear voice – what is the nature of the problem?
Sullivan: Okay, uh…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. This has been enormously profitable, as I imagine you noticed.
Tuld: I have.
Sullivan: Well, the firm is 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.
Tuld: And, Mr. Sullivan, that challenge is?
Sullivan: Well, we have to hold these assets on our books longer than we might ideally like to.
Tuld: Yes.
Sullivan: 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 in any other circumstance, thereby pushing the risk profile without raising any red flags.
Full Meeting Dialog found here
They are discussing a change in the risk profile, that is, the mortgages were starting to see increasing levels of defaults, meaning that the MBS ratings were becoming increasingly inaccurate, no longer matching the acceptable risk levels. Historically Mortgages were considered a very safe investment (property value only goes up, right?, after all, they aren’t making any more land…).
If you want a general overview of the whole mortgage crisis, wikipedia has a decent overview:
One thing worth mentioning about this is there is a revolving door between various public sector and private sector agencies. The people working in the private sector rating agencies that rated these subprime mortgage assets as AAA were hoping to eventually be hired at the private firms that were selling them, and giving more realistic ratings would damage their job opportunities in the future.
Then at the same time people work in the private sector, then get jobs in the public sector regulating the industries they worked in, or vice versa.
The same process was used by pharmaceutical companies to help create the opioid crisis. Federal regulators who assisted in approvals were subsequently employed by the companies on massive salaries.