Movie

Film analysis: Too Big To Fail

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Film analysis: Too Big To Fail

Foreward

A pervasive moral stigma follows the financial sector, which has a dogged reputation for unethical and illegal behaviour. However, the ethical lapses often associated with finance are not always intentional. Instead, a contributing factor is that the teaching of finance and other business disciplines presents the challenge of linking theories and conceptual models to the “real world”. Entertainment media – such as films or books – are useful in this aspect as case studies; they provide students with an organisational frame of reference to better understand both situational contexts, and importantly, the human dimension behind financial numbers.

Marie Poff

This article written by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020) analyzes the Too Big To Fail film and explains the related financial concepts.

“Too Big to Fail” is a dramatic retelling of the near collapse of the US banking system during the 2008 financial crisis. No-one saw the financial crisis coming, nor knew how to deal with the disaster when it arrived. This film follows financial leaders US Treasury Secretary Henry Paulson and Ben Bernanke as they try to protect a faltering U.S. economy, and eventually offer a no strings bailout, but leaves Paulson wondering if banks will lend. The issue of moral hazard is explored and begs the question, should banks really be too big to fail?

Film summary

“Too Big to Fail” gives a behind the scenes look at the conversations between major players during the 2008 financial crisis from March to mid-October. In 2008, Lehman Brothers were on the verge of collapse and its CEO Richard S. Fuld Jr. blamed the declining share price on short sellers, refusing to recognize his bank’s weaknesses. Instead, he sought a cash fill from Warren Buffett, and even pursued mergers with Bank of America (BOA) and Barclays. Treasury Secretary Henry Hank Paulson rejected the use of public money to save Lehman, and so in September 2008, Lehman filed for bankruptcy. However, shortly afterwards, Paulson announced AIG’s $85bn bailout, confusing investors with this message. Lehman could fail, but AIG couldn’t? In response to a deteriorating economy, Paulson pushed forward a plan where the US government purchased $500bn worth of toxic assets. After failing to pass congress, he redrafted the plan to assume direct ownership of stocks in banks. The Troubled Asset Relief Program (TARP) was hence created to normalise banks and increase investor confidence, putting the market back on the path to recovery.

The Wolf of Wall Street movie

Financial concepts from the Too Big To Fail film

Too Big to Fail (TBTF)

The name of this film is a financial term referring to institutions which are so large and essential to the functioning of the economy that they cannot be allowed to collapse, no matter the cost to the taxpayer. This was the logic behind the $182 billion bailout the US government provided to AIG, for example, along with the relief funds directed to titans like JPMorgan Chase, Citigroup, and the Big Three automotive companies.

Moral hazard

Moral hazard is a term used to describe how if a party is protected from risk, they will increase their risk tolerance and act less cautiously. In the context of banking, if the leaders of major banks feel confident that they are too big to fail – that is, that the government will bail them out – they will make increasingly risky decisions with the confidence that taxpayer dollars will rescue them if their bets go bust.

Bear Stearns

One of the first banks to fail, Bear Sterns’ hedge funds had accumulated over $20 billion in collateralised debt obligations (CDOs) and exposure to other toxic assets. In March 2008, due to the subprime mortgage crisis, Moody’s downgraded Bear’s MBS to Grades B and C (junk bond levels) and triggered a bank run leaving Bear with only $3.5 billion in cash. As Bear relied on repurchase agreements (short-term loans) – meaning it traded its securities to other banks for cash – Bear imploded when other banks called in their repos and refused to lend more. Bear’s insolvency forced a rescue organised by the Federal Reserve, where JPMorgan Chase bought out the bank for $2 a share (one month prior to this share price was $48). Bear’s demise triggered a panic on Wall Street and caused a banking liquidity crisis, where banks became unwilling to lend to each other. This is often used as a marker for the beginning of the 2008 financial collapse.

Lehman Brothers

On September 15th, 2008, the investment bank Lehman Brothers filed for bankruptcy. It was the biggest filing in U.S. history, with Lehman’s holding $691 billion in assets at the time. By the end of trading that day, $700bn had been wiped off the global stock markets. The Dow Jones had plummeted 500 points, its biggest drop since the terrorist attacks of 9/11. Lehman then sold its IB and capital markets operations to Barclays, kickstarting a global liquidity crisis.

Government Bailout (TARP)

A $700 billion bank bailout bill was signed on October 3, 2008 and was used to establish the Troubled Assets Relief Program (TARP). The fund was used to launch the Capital Purchase Program, which included buying $105 billion in preferred shares in Chase, Wells-Fargo, Goldman and five other leading banks. The insurance giant AIG had also become a major seller of credit default swaps to boost its profit margin, which insured the assets that supported corporate debt and mortgages. If AIG went bankrupt, it would trigger the bankruptcy of many of the financial institutions that had bought these swaps. TARP funds contributed $67.8 billion to the $182 billion AIG bailout, and also used $80.7 billion to bailout the Big Three auto companies.

Homeowner Affordability and Stability Plan

In addition to the TARP, $75 billion was put aside to help homeowners refinance or restructure their mortgages. HOPE NOW required the Treasury Department to both guarantee home loans and assist homeowners in adjusting mortgage terms.

Great Financial Crisis (GFC)

Although TBTF banks were not the sole cause of the recent financial crisis and Great Recession, given the scale of job losses, home foreclosures, lost savings and costs to taxpayers, there is no question that their presence at the centre of the financial system contributed significantly to the magnitude of the crisis and to the extensive damage it inflicted across the economy.

Key insights for investors

Banking reform

Major changes were made to prevent another financial crisis, including introducing stricter capital requirements and ensuring banks are less interconnected or vulnerable to contagion. However, some familiar risks are creeping back, and new ones have emerged as global debt continues to grow – for many countries, the combination of large debts in foreign currencies and weakening local currencies is becoming harder to sustain.

Significance of politics

A key takeaway is the intertwined relationship between politics and finance. Moral hazard asserts that ties between bankers and politicians create dangerous incentives for both parties and indicates the importance of observing not just numbers in our market research, but also non-quantifiable factors which influence expectations.

Learn from the Past

Note that “too big to fail” is a phrase still used today in finance and big business. For example, “Is Facebook too big to fail?” As well, while significant progress has been made to strengthen financial systems internationally, the biggest banks are most likely still too big to fail. It’s useful to be aware of this potential risk to an economy when considering the roles that massive companies and institutions play in our society. Economists will always speculate that we may be “overdue” for another crisis and learning from the past is the best way to prepare for the next crisis.

Relevance to the SimTrade certificate

SimTrade is your introduction to the global financial market; through a combination of theory and simulations, you learn to develop your confidence in your decision making and critical thinking skills. The course teaches you how to analyse the impact of events on expectations and stock prices, eventually teaching you how to build a position and make the market work for you.

Famous quote from the Too Big To Fail film

Paul Giamatti: “I spent my entire academic career studying the Great Depression. The depression may have started because of a stock market crash, but what hit the general economy was a disruption of credit. Average citizens unable to borrow money, to do anything. To buy a home, start a business, stock their shelves.”

Trailer of the Too Big To Fail film

Related posts on the SimTrade blog

▶ All posts about Movies and documentaries

▶ Akshit GUPTA The bankruptcy of Lehman Brothers (2008)

▶ Akshit GUPTA Analysis of the Margin Call movie

▶ Marie POFF Film analysis: The Big Short

About the author

Article written in November 2020 by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020).

Film analysis: The Wolf of Wall Street

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Film analysis: The Wolf of Wall Street

Foreward

A pervasive moral stigma follows the financial sector, which has a dogged reputation for unethical and illegal behaviour. However, the ethical lapses often associated with finance are not always intentional. Instead, a contributing factor is that the teaching of finance and other business disciplines presents the challenge of linking theories and conceptual models to the “real world”. Entertainment media – such as films or books – are useful in this aspect as case studies; they provide students with an organisational frame of reference to better understand both situational contexts, and importantly, the human dimension behind financial numbers.

Marie Poff

This article written by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020) analyzes the The Wolf of Wall Street film.

The movie The Wolf of Wall Street is the true story of how rags-to-riches trader Jordan Belfort started with an OTC brokerage firm using pump and dump schemes, but eventually became a main player on Wall Street, where he launched the IPOs of several large companies. This black comedy shows Belfort’s rise to the high-life and excess of Wall Street, followed by a sharp fall involving crime and corruption – all while being seriously entertaining.

Film summary

The movie The Wolf of Wall Street follows one of Wall Street’s most infamous brokers, Jordan Belfort, who makes a fortune by defrauding investors out of millions. Directed by Martin Scorsese, the film starts with Belfort as an entry-level stockbroker at a Wall Street brokerage firm, where he is schooled on their cut-throat selling techniques. After a major market decline, he loses his job and goes to work for a small business selling penny stocks. After discovering the higher commission on penny stocks, he establishes his own firm, Stratton Oakmont, where he sells penny and IPO stocks with speculative returns. Jordan builds a business empire by presenting himself as a polished entrepreneur and training his employees on effective selling techniques. He is soon living the high life and becoming one of the major players on Wall Street, but soon discovers the dark side of success when he blurs ethical boundaries, quickly falling into a world of crime and corruption.

The Wolf of Wall Street movie

Financial concepts from the The Wolf of Wall Street film

Penny stocks

Penny stocks are low-priced stocks that do not trade on major stock exchanges and are issued by companies that typically do not publish financial statements. These trade anywhere from a fraction of a cent to a few dollars, and because the market capitalization, stock price, and the daily volume of these stocks are quite low, they are highly vulnerable to manipulation. For example, a sudden large volume of purchase or sale could cause the price to drop by triple-digits in a single day.

‘Pump and Dump’ schemes

‘Pump and Dump’ penny stock schemes are explained as the manipulation of the market through the accumulation of shares from penny stock or other companies, which are then stored in secret accounts. Investors are then ‘cold called’ to convince them that these companies are potential stocks for investments. The influx of purchasing orders would rapidly inflate the price, assuring investors that the shares are showing bullish behaviour. Belfort’s firm was a type of boiler room, with a team that pressured investors to place their money into highly speculative securities. At its peak, the firm is said to have employed about 1,000 stockbrokers overseeing more than $1 billion worth of investments.

Sales vs financial advisors

While working at L.F. Rothschild in the 1980s, Belfort is quickly taught that a stockbroker’s only goal is to make money for himself. Brokers seemed to focus on selling stocks and generating sales commissions, instead of advising clients on the financial risk of an investment or suitability for their portfolio. Belfort and his team are depicted as sales professionals, not financial ones, who are trained to sell investments at the expense of the client. Today, it’s still debatable whether financial professionals should be held to a fiduciary standard, requiring them to act in the best interest of a client, rather than simply providing a product.

Key insights for investors

Too good to be true: be your own investment expert

As the saying goes; if it sounds too good to be true, it probably is. Especially for beginners to the stock market, it’s important to remain clear-headed about your investment decisions and do your own research. Many of Belfort’s victims trusted him and invested all their life savings in ‘guaranteed’ stocks. Even with an advisor, it’s useful to understand financial markets and strategies, perhaps by at first investing small and diversifying your portfolio.

Legal vs ethical behaviour

Legal standards are the rules which govern the financial sector; but while something can be legal, it may not always be ethical. Belfort’s company was within the law when selling penny stocks, but not fully disclosing the speculative nature of the stocks was completely unethical. While he started by simply blurring this line, Belfort soon crossed the line and was convicted for not following securities regulations. Ethical business practices are the foundation of trust and goodwill; it’s important to take responsibility for your actions.

The road to success

While perhaps not the best role model, Belfort shows that long-term success is not a straight road. He experienced both failures and successes before reaching the height of his career on Wall Street. Losing his job lead to him starting as a stockbroker, and even after going bankrupt and serving time in prison, Belfort finished his sentence and turned his strength in sales and communications into a career as a motivational speaker. Financial mistakes can be rectified and instead become lessons for success. The most important step a person can take, is the next one.

Relevance to the SimTrade certificate

SimTrade allows you to make mistakes in a simulated setting, without suffering the financial consequences of trading with your personal funds. This course teaches you how to analyse the impact of events on stock prices and understand important concepts like market efficiency. As well as theory, you practice building a position, liquidating a position, and how to make the market. SimTrade is the best way for you to take risks, make mistakes, and learn how to make the best decisions for your portfolio.

Famous quote from the The Wolf of Wall Street film

Jordan Belfort: “Sell me this pen.”

Trailer of the The Wolf of Wall Street film

Related posts on the SimTrade blog

▶ All posts about Movies and documentaries

▶ Akshit GUPTA Analysis of The Wolf of Wall Street movie (another analysis)

▶ Alexandre VERLET Working in finance: trading

▶ Akshit GUPTA Market manipulation

About the author

Article written in November 2020 by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020).

Film analysis: The Big Short

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Film analysis: The Big Short

Foreward

A pervasive moral stigma follows the financial sector, which has a dogged reputation for unethical and illegal behaviour. However, the ethical lapses often associated with finance are not always intentional. Instead, a contributing factor is that the teaching of finance and other business disciplines presents the challenge of linking theories and conceptual models to the “real world”. Entertainment media – such as films or books – are useful in this aspect as case studies; they provide students with an organisational frame of reference to better understand both situational contexts, and importantly, the human dimension behind financial numbers.

Marie Poff

This article written by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020) analyzes the The Big Short film and explains the related financial concepts.

The film “The Big Short” recounts the subprime housing bubble which lead to the financial crisis in 2008. Through a compelling storyline, the complexities of the financial market – including CDOs, mortgage backed bonds, and the reckless trading of complex derivative instruments – lead to the subsequent financial collapse of the US housing market.

Film summary

“The Big Short” directed by Adam McKay and based on the best-selling book by Michael Lewis, explains how the subprime housing bubble, caused by increasingly risky subprime mortgage bonds, lead to the 2008 financial crisis. The danger was hidden such that only a few players predicted the collapse and used it to “short” the market. Once the bonds failed, the value of billion-dollar securities dropped to nothing, which bankrupted major investment banks and forced a government bailout to prevent economic collapse.

The film is presented as three concurrent stories about the investors who realised the risk of the subprime housing bubble and predicted the 2007 housing market crash. Wall Street investor Michael Burry realised that many subprime home loans packaged in the bonds were in danger of defaulting, and bets against the market with one billion dollars in credit default swaps. We also follow the stories of banker Jared Vennett, hedge-fund specialist Mark Baum, and two younger investors – Charlie Geller and Jamie Shipley – who work with retired banker Ben Rickert. After reading Burry’s findings, they also make a series of successful bets and profit off the downfall of the economy.

The subprime housing bubble caused worldwide chaos as banks entered a liquidity crisis, stock markets crashed, reputable companies collapsed, and millions suffered in the wake of the disaster. The crisis was felt worldwide, irrespective of your position and whether you benefited, survived or lost everything you’d worked towards. This movie helps those who aren’t in the financial sector, understand exactly what happened.

The Big Short film

Financial concepts from the The Big Short film

Financial derivatives

Leverage

Financial leverage can be used to increase (expected) profits but also increases risk by accentuating the gains and losses of a market position. When the largest banks and financial institutions in the world leveraged using derivatives, CDOs and other highly complex securities – the exacerbated losses can lead to collapse.

CDO

A Collateralised Debt Obligation (CDO) is essentially the repackaging “old” products as new, by the securitisation of loans into a product sold to investors on the secondary market. Another example are synthetic CDOs, which essentially bets on the direction the market is going to take and amplifies the monetary gain of a bullish market, but heavily exacerbates the losses from a bearish one.

Subprime Mortgage Backed Securities

Subprime mortgages are a loan to borrowers with a low credit rating, which increases the risk that they will default. Tranches in subprime mortgage-backed bonds are when subprime mortgages are mixed with top-rated mortgages, which effectively hides their risky nature from unsuspecting customers. These top-rated securities could not stand when the subprime mortgages failed, but the danger was looked over even by the banks who sold them.

‘Shorting’ the market

By predicting the danger of mortgage-backed securities and expecting defaults on subprime mortgages, some investors profited from the crisis through credit default swaps. However, this does not mean shorting the market is a good idea. As said by J.M. Keynes; the market can stay irrational much longer than you can stay solvent. Due to unpredictable factors such as politics, going short is a bet that can run out of time – even with a simple options strategy, your options will eventually expire. Sticking with a long term, value-based approach eliminates that problem. Keep short investments on the side to meet short term cash flow needs, but also know that a quality company will generate profits, dividends, and market returns over the long term, without ever expiring.

High Risk vs High Reward

Why did the banks making the loans expose themselves to subprime borrowers at such high levels? Because high-risk borrowers also offered high rewards. Before home prices imploded and the labour market tanked, banks were able to charge sufficiently high interest rates on loans to subprime borrowers which more than overcame the costs of their higher default rates. This combined with the banks’ ability to securitize loans and sell them meant that banks thought their risks were mitigated. Instead they focused on how higher subprime interest rates could boost their margins and profits. However, those default rates eventually grew too high for any interest rate to justify the risk, and the entire system collapsed.

Impartial assessors

Impartial regulators and assessors are critical to the safe functioning of the financial sector. A contributing factor to the crash was years of financial malfeasance and incompetence among the top salesmen and executives among Wall Street’s largest banks. Conflicts of interest and abuse of power by the banks meant credit rating agencies as well as professionals supposedly managing CDOs for the benefit of the customer, were in fact working in the bank’s interest. This fraudulent system meant the credit rating agencies were rating housing debt securities highly, right up until the crash.

Counter-party risk

This simply means the risk of the other party, if their investments are not able to pay out when the time comes. An example is how Baum and Geller bet against the banks, but when the crisis hit the banks eventually went bankrupt – these two investors had to be careful about receiving payment before the banks became insolvent.

Key insights for investors

Trust your instincts

It’s important to do your own homework and trust your instincts. Despite external pressure, the investors shorting the market held their ground, ensuring their investments paid off in the long-term. When the numbers go up and down, it’s important to be patient and study the reasons behind any change. While investment advice is useful, the incentives of others may conflict with yours. It’s your money, and just because an opinion is popular, doesn’t mean its correct.

See the reality

When buying securities, it’s vital to understand the reality of what the numbers represent – real people, real companies. In the film, we see workers paying off loans for three properties at varying rates, and how the incentive system cushioned bank managers’ salaries, helping the mortgage market expand. “No-one can see a bubble; that’s what makes it a bubble” – people lost their ability to see the forest for the trees. They were the weak link in the chain, which once broken, caused the crisis. Your finances are only as strong as their weakest link, so it’s important to diversify your risk.

Mentors

In the film, Geller and Shipley asked their mentor and retired trader Rickert for his support to meet the ISDA threshold. More than that, he taught them that greed is not good, and that their win was at the expense of millions of Americans who would lose their jobs. Have a mentor to guide you both morally and financially.

Opportunity in adversity

A final lesson from this movie, albeit a dark example, is that you can find the good in adversity. By shifting your mindset when facing failures or disasters, you can learn to find opportunity in anything.

Relevance to the SimTrade certificate

Through the SimTrade course, as well as a strong understanding about trading platforms and orders, you are taught about information in financial markets and how to use this to make successful trades. Several case studies teach you how to analyse market information to make valuations, and correctly assess how market activities will affect your own trades. The simulation and contest allow you to compete against others in the course and deepen your understanding of how a market reacts to different players.

Famous quote from the The Big Short film

An investor: “No one can see a bubble. That’s what makes it a bubble.”

Trailer of the The Big Short film

Related posts on the SimTrade blog

▶ All posts about Movies and documentaries

▶ Akshit GUPTA The bankruptcy of Lehman Brothers (2008)

▶ Akshit GUPTA Analysis of the Margin Call movie

▶ Marie POFF Film analysis: Too Big To Fail

About the author

Article written in November 2020 by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020).

Film analysis: Other People's Money

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Film analysis: Other People’s Money

Marie Poff

This article written by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020) analyzes the Other People’s Money film.

“Other People’s Money” is a film about a near obsolete publicly traded company, the New England Wire and Cable Company, interwoven with romance and community spirit. Issues arise because the original wire and cable division has become an obsolete parent firm of an otherwise profitable group of subsidiaries, but it employs much of the town’s population. While exploring the world of hostile corporate takeovers and the market for corporate control, this film shows the human impact of shareholder decisions. Good capitalism and greed clash in this fight to keep shareholders satisfied and save the factory from a dying industry.

Film summary

“Other People’s Money” directed by Norman Jewison, delves into the hostile takeover of New England Wire and Cable Company (NEWC) by Garfield Industries, where corporate raider Lawrence “Larry the Liquidator” Garfield is president. New England Wire is a publicly traded, debt-free company founded and managed by the Jorgenson family. Garfield arrives offering a peaceful takeover, explaining that the wire and cable division is in a dying industry, and is harming the profitable subsidiaries by depressing the share price. He believes that liquidating the harmful wire division is necessary to act in the best interest of the shareholders. However, Jorgenson denounces this offer as a death sentence for the employees and their town, arguing that companies should protect their community and have social responsibility. However, the market value of the company’s common stock decreases to equal less than the underlying value of its assets. Garfield then makes a takeover attempt, which culminates at the company’s annual shareholders’ meeting with Garfield succeeding in closing the wire and cable division of NEWC. The film ends with Kate Jorgensen calling with good news from a Japanese automobile company, who are interested in hiring the NEWC to product stainless steel wire cloth instead of wire.

Otehr peoples's money film

Financial concepts from the Other People’s Money film

Other People’s Money

Other people’s money (OPM) is a slang term referring to financial leverage, whereby using borrowed capital it’s possible to increase the potential returns, but also increase the risk, of an investment. In the film, the NEWC had an inefficient capital structure with no debt to leverage the company. Instead the company had a high amount of cash and liquid assets, as well as a fully funded pension plan for its employees, but had a debt-to-equity ratio of zero. There are trade-offs to having a higher debt-to-equity ratio, but in this case, leveraging OPM would have allowed the NEWC to remain in business by transitioning into a more profitable industry.

Corporate restructuring

Corporate restructuring is a process where the structure or operation of a company is significantly modified, usually in periods of significant distress and financial jeopardy. This could involve for example, mergers, takeovers, or divestiture. In this film, Garfield persuades the shareholders to divest of the failing division by selling the division and its remaining assets. Kate Jorgensen offers a better solution – a Japanese automobile company which will hire the NEWC to produce stainless steel wire cloth, allowing the company’s assets to be repurposed instead of liquidated.

Corporate takeovers

A corporate takeover refers to when one company makes a bid to acquire or take control of another, without necessarily obtaining the actual title. A takeover is usually done by purchasing a majority stake in the shares of the target company. In the film the NEWC is debt-free, making it attractive to corporate raiders or ‘takeover artists’, who aim to provide shareholders with a better return for their money.

Market for corporate control

The market for corporate control is the role of equity markets in facilitating corporate takeovers, and mainly refers to the market for acquisitions and mergers where there is competition for control rights. In this film, takeover artist Garfinkle is blocked from purchasing more shares in the NEWC by a judge’s injunction. He fights this as he believes that a free market for corporate control is needed to enable restructuring essential for the company to remain competitive. As a value-focused individual, Garfinkle believes in market dynamism as an effective tool for poor management, where market forces put pressure on managers to perform or risk sale of the company.

Creative destruction

Creative destruction is the union of evolutionary natural selection and economics. Resources are necessarily scarce, so the world advances only when outdated industries are encouraged to die quickly, allowing capital to be reallocated to more efficient and innovative industries. In this film, cable and wire is a dying industry due to the widespread adoption of fibre optics, so Garfield encourages shareholders to sell to him and reallocate their money towards a more productive venture. The underlying assumption is that though a transitioning industry will cause disruption, there is more to gain than lose when capital is put to best use and assets are used in an economically rational manner.

Key insights for investors

Wealth maximisation vs Social responsibility

As investors, the main goal is often to maximise wealth, and the game of making money can make it all too easy to value a business solely on its share price. However, this film shows that behind the numbers are the people who keep the business afloat, and who in turn rely on employment at the NEWC to support themselves. Jorgensen’s focus is on his social responsibility to the employees whose livelihoods depend on the wire plant, while Garfield believes in free enterprise and shareholder wealth maximisation. It’s clear that a balance between the two is required to create ‘good capitalism’, where all parties involved are treated fairly and humanely.

Many sides to every story

A meaningful insight from this film is that both players had valid reasons for their actions. While Garfield is painted as profit-focused at the expense of the employees, he’s also acting in the best interests of the shareholders – he refuses to take a “greenmail” bribe because he believes it would be immoral to sell out and victimise the shareholders whose funds are not being put to best use. Conversely, while Jorgensen is painted as the town’s hero, he is also neglecting his obligation to the shareholders by failing to recognize that his company was in a shrinking market, and would become obsolete if he did not accept innovations in the industry. This dual perspective is an introduction to business ethics, showing how utilitarian thinking can clash with other ideals pushing social responsibility and awareness. As investors, this is a reminder that there are always many perspectives to an issue, and real life is never black and white.

Relevance to the SimTrade certificate

SimTrade is a course designed to teach investors how the market works, including how to make orders and build a market position, while also teaching investors how to interpret and understand what these numbers represent in the real world. A combination of theory and practice helps you to understand the complexities of the stock market – including firm valuations, the impact of events on stock prices, and how to appreciate the degree of market efficiency.

The Other people’s money concept is introduced in Period 3 of the SimTrade certificate:

  • The Financial leverage course
  • The series of simulations about market making

Famous quote from the Other people’s money film

About leverage: “I love money. I love money more than the things it can buy. There’s only one thing I love more than money. You know what that is? Other people’s money.”

Watch Garfield making his point about wealth maximisation at the shareholders’ Annual Meeting of their company.

This could be compared to Gordon Gekko explaining “Greed, for the lack of a better word, is good” to the shareholders during the General Meeting of their company (in the Wall Street movie).

Trailer of the Other People’s Money film

Related posts on the SimTrade blog

▶ Shruti CHAND Financial leverage

▶ Akshit GUPTA Wall Street: Money Never Sleeps

▶ Kunal SAREEN Analysis of the Wall Street movie

About the author

Article written in November 2020 by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020).

Analysis of the Wall Street movie

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Analysis of the Wall Street movie

Akshit Gupta

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) analyzes Wall Street movie.

Analysis of the Wall Street movie

The Wall Street movie released in 1987 is an American drama film based on the life of a junior stockbroker aiming to work with a major Wall Street player in America.

The movie has been regarded as the most iconic film of the 1980s throwing light on the capitalistic trading mentality existing in one of the world’s largest financial markets. It replicated the drastic changes that daring corporate raiders introduced in the financial system. It focuses and enlightens us on concepts of a financial market that we observe in our daily life, which also correlates with some of what we study in the SimTrade course.

Wall Street movie

Key Characters in the movie

  • Bud fox, a junior stockbroker
  • Gordon Gekko, A famous Wall Street investor
  • Lawrence Wildman, a corporate raider
  • Carl Fox, Bud’s father and a mechanic at Bluestar Airlines

Summary of the Wall Street movie

The movie starts by introducing a character named Bud Fox, who is a junior stockbroker at Jackson Steinem & Co, a New York City-based firm. Aspiring to work with one of the leading Wall Street players named Gordon Gekko, Bud Fox visits Gekko’s office carrying a box of contraband Cuban cigars on his birthday.

In response to Bud’s gesture and courage, Gordon Gekko offers him an opportunity for an interview that Bud has always longed for. Being unable to impress Gekko, Bud takes the extra step and plays his last card. He imparts some inside information about Bluestar Airlines to Gekko which he overheard from his father.

Impressed by the act, Gekko ends up placing an order for Bluestar Airlines’ stocks and becoming one of Fox’s clients. Over the next few months, Fox made several stock deals for Gekko but none showed an increase. Furious Gekko offers a last chance to Bud for him to keep his job. Desperate to continue working with Gekko, Fox agrees to spy on a British CEO and a corporate raider, Lawrence Wildman, and discern his upcoming plans of investments. By following him, Fox learns about an investment Wildman is planning to make in a major steel company named Anacott and take the controlling interest. By leaking the news in the press, Gekko buys the controlling shares before Wildman and sells him the same for a lucrative profit.

The deal leaves Bud significantly rich and provides him with a lot of additional perquisites. He goes on to engage in illicit trading activities and makes a lot of money for Gekko and himself. In the dark, Bud does not realize that he is being put on the hotlist by the SEC.

Bud pitches a plan to Gordon Gekko, which is to expand the Bluestar Airlines after buying it. Bud does all in his power to push the deal through. But in no time he learns about the plan Gordon has, to sell all the assets once the stock peaks, thus leading the company in ashes. Being racked with the guilt of leading all the employees into unemployment, Bud plans to manipulate the stock. He also arranges for a secret meeting with Lawrence Wildman and convinces him to buy a controlling stake in Bluestar Airlines with a significant discount.

On the execution day, Gordon Gekko, realizing that his stocks are plummeting, gets rid of his remaining stake in the company on Bud’s advice, ending up in losses. But soon, Gekko finds out about the plot set up by Bud Fox and Wildman to deceive him.

To teach a lesson to the young broker, Gekko informs the SEC about the insider trading and unethical practices undertaken by Bud Fox to make illicit gains. However, Bud ends up cooperating with the SEC to get a lighter sentence and helping SEC arrest Gordon Gekko.

The relevance of the Wall Street movie for the SimTrade course

The SimTrade course focuses on the concepts of observing the market news and using types of orders to trade and create value at the end of the trading period, which of course goes into detail. The movie correlates with the concept of market efficiency where it shows that the market functions as a semi-strong efficient market at best. Since private inside information is not embedded in the market price of the stock, there is a possibility to make gains higher than the market gains by bringing it into use. It also shows how demand and supply play a fundamental role in any financial market, driving the prices in either direction. Moreover, it establishes the importance of a buyer, a seller and a common trading platform for a transaction to occur.

The ending of the movie is quite relevant portraying how illicit and unethical behavior is dealt with in present-day markets. It also shows how effective measures have been put in place by governments throughout the world to provide traders with a transparent and efficient financial market.

Famous quote from the Wall Street movie: « Greed is good »

Watch Gordon Gekko explaining « Greed, for the lack of a better word, is good » to the shareholders during the General Meeting of their company.

Trailer of the Wall Street movie

Related posts on the SimTrade blog

   ▶ All posts about Movies and documentaries

   ▶ Akshit GUPTA Trader: job description

   ▶ Akshit GUPTA Analysis of the Wall Street: Money Never Sleeps movie

   ▶ Marie POFF Film analysis: The Wolf of Wall Street

About the author

Article written in October 2020 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Analysis of The Hummingbird Project movie

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Analysis of The Hummingbird Project movie

Akshit GUPTA

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) analyzes The Hummingbird Project movie.

Analysis of the movie

Also known as The Wall Street Project, the Canadian movie was released in 2018 featuring the evolution of high frequency trading and ultra-low latency direct market access (DMA) in one of the most developed financial markets in the world. The name ‘The Hummingbird Project’ is well suited as it relates to the time a hummingbird’s wing takes to beat. The title of the film impeccably connects with the project the movie is based upon. The movie portrays how the line between success and failure is sometimes very thin. It correlates with the SimTrade course as it teaches us how to make use of technology in markets and stay ahead of others.

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Summary of the movie

The The Hummingbird Project movie starts by presenting Mr. Vincent Zaleski, a stockbroker working for Eva Torres, keen on convincing Mr. Bryan Taylor, an investor, on investing in his idea of installing fiber optic cables between the Kansas Stock Exchange and the New York Stock Exchange, at a distance of approximately 1,000 miles, to front-run the orders into the system giving a time benefit of at least 1 millisecond. The high frequency trading operation would have led to an increase in profits by millions of dollars.

Buying into Vincent’s idea, Mr. Bryan shows his faith in him. In order to execute the plan, Vincent convinces his cousin Anton Zaleski, a genius programmer, to resign from their current stockbroking firm, owned by Eva Torres, and work tirelessly to achieve the new feat.

Both the brothers start working on their dream project with Anton handling the technical aspects of the technology of improving his previously coded software and Vincent working on the ground for the installation of the fiber optic cables. Anton has previously coded a software that had the capability to run trades in 17 milliseconds and now, it is required to be brought below 16 milliseconds in order to gain from the system. Since success doesn’t come easy, they encounter many difficulties in attaining their dream.

Meanwhile, Eva becomes aware of their dream project and threatens Anton against using the proprietary software he developed while working for Eva. She also finds a student, at New York University, who wrote a research paper on boosting high-frequency trading using microwave pulses. Seeing a chance to beat Vincent and Anton, Eva immediately hires the student and begins with the building of a series of cell towers to make trades using microwave pulses. As a revenge for deceiving her, Eva gets Anton arrested by the FBI under charges of stock market fraud of utilizing proprietary software owned by Eva’s company.

While Vincent struggles with the digging and the installation of the cables, Eva’s company starts their operations using the microwave impulses, and thus, the front runs the market. Meanwhile, Anton being furious with the arrest unwinds a bug that he has installed in the software, used at Eva’s company, which results in a 20 second slowdown in the high-frequency trades leading to losses of millions of dollars. In order to regain access to her system and save her company, Eva agrees to take back the charges against Anton.

Due to delays and an unforeseen health condition, Vincent fails to roll out his fiber optics project resulting in losses to the investor.

The movie ends with Anton introducing a new idea to his cousin which can bring down the processing time to 9 milliseconds, named neutrino messaging.

Relevance to the SimTrade course

The The Hummingbird Project movie perfectly blends with the structure of present-day financial markets and shows how in just a matter of a few seconds, a person can gain or lose a great fortune. The concepts taught in the movie deals with ‘High-Frequency Trading’ and ‘Direct Market Access’ which are relatively new. These correlate with the courses on exchanging orders and market makers in the SimTrade course. These orders, if executed at ultra-high speed, can help in bringing liquidity to the market and narrow the bid-ask spread. If applied with great precision and knowledge, a trader can earn big fortunes using high-frequency trading which is changing the face of financial markets.

Most famous quotes from the movie

“But the thing is, if all traders use the same system, and have the same information, how do you beat the others? By having the fastest line” – Anton Zaleski

“High speed is not our priority. We don’t believe that making things faster makes things better.” – The Amish guy

“One millisecond faster!” – Anton Zaleski

Trailer of the movie

Related posts on the SimTrade blog

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About the author

Article written in October 2020 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Analysis of the Margin Call movie

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Analysis of Margin Call movie

Akshit Gupta

This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2022) analyzes Margin Call movie and explains the related financial concepts.

Margin Call (2011) is an entangling American drama movie based on the events that took place within an investment bank during the financial crisis of 2008. The movie mirrors the impact of high exposure to Mortgaged Back Securities (MBS) that prevailed across big banks and depicts the events that lead to a near fall of an unnamed investment bank based out in New York City. It provides a very good analysis of the present financial system and throws light on the working of some large financial institutions.

Key characters in the Movie

  • Eric Dale- Head, Risk Management Department
  • Peter Sullivan – Junior Analyst, Risk Management Department
  • John Tuld – CEO of the Bank
  • Sarah Robertson- Chief Risk Management Officer
  • Jared Cohen- Divisional Head
  • Sam Rogers- Floor Head

Summary of the movie

Bolier room movie

The movie begins by introducing an unnamed investment bank where, owing to decreasing profits, 80% of the staff is getting laid off. Eric Dale, director of the risk management team, is one of the victims of this layoff. Before leaving the office Eric hands over a USB, which contains important analysis that he has been carrying out, to his junior named Peter Sullivan and asks him to complete the model with proper care. During the night, Peter finishes the model and discovers information that has the potential to bankrupt the entire firm. As per the model, the firm was over-leveraged and has even crossed historical volatility patterns many times in the past couple of weeks. If the market value of the firm’s risky assets drops by 25%, the losses would be greater than the entire market capitalization of the firm.

Alarmed by the findings of the model, Peter calls upon his supervisor Will Emerson to check the numbers. An emergency meeting is called up in the middle of the night where all the members of the senior executive committee are present including the CEO of the bank, John Tuld.

Running through the numbers and finding no other optimal way, John orders for an immediate sale of all the toxic financial assets firm holds, before the market could react.

The decision taken by Tuld is demurred by many top executives since they knew that it would destroy the firm’s relationship with all its customers and cause a major blow to the entire financial system. The value of the product they were selling to their customers in the name of MBS was plunging, just as the real estate market in the USA back in 2008.

Initially reluctant, Sam agrees to the sale of the toxic assets in exchange for huge compensation from Tuld. Sam orders all the traders on his floor to unwind their positions in the toxic asset purely in cash deals and offered them huge bonuses and commissions once they achieve a set target. Information about the company’s misdemeanor is spilled out and the traders are forced to sell at significant discounts.

Once the target sale is achieved and all assets are cleared, another round of laying off starts and most of the employees are let go with hefty compensations and bonuses. Sarah Robertson, the chief of risk management, is used as a scapegoat and also dismissed from her duties. Dismayed, Sam reaches out to Tuld to explain to him about his longing to leave the firm.  Tuld reminds him how the current crisis is no different from the previous crises and how the proportion of winners and losers always remains the same. Entwined between the dubious system and the need for financial resources, Sam decides to continue with the firm for another 2 years in anticipation of earning more money.

Relevance to the SimTrade course

The concepts shown in the movie correlates to the concepts of ‘Demand & Supply’ and ‘Financial Leverage’ taught in the SimTrade course. During the first decade of the 21st century, low-interest rates prevailed in the US economy giving rise to debt-financed consumption. The easy availability of sub-prime housing loans lured people from the lower strata of the society to avail the benefits of it. Subsequently, the increase in loan availability raised the demand for customized securities which came in the form of MBS, which became a trending asset in the market. The financial bubble kept on building up as the intrinsic value of MBS started dwindling. The falling asset value affected the investment bank as their business model was built on high exposure to these assets.

Also, this high exposure to subprime mortgages and toxic assets subsequently led to high level of leverages at the firm and statistical models of VaR (Value at Risk) and historical volatility failed to show a potential downside which could result in losses greater than the entire value of the firm. The risk models used by the firm considered the positions of other firms in the same assets and were not effective enough to take into account the risk magnitude of black swan events such as the default rates on subprime mortgages, the root cause behind the financial crisis of 2008. The financial damages and moral hazards associated with such an event are justified by the discount rates traders had to offer to unwind their position and also the client trust the firm lost as collateral damage. The movie shows the rationale of firms, referred to as too big to fail, in dealing with situations created as a by-product of their own actions.

Most famous quotes from the movie

“Sometimes in an acute situation such as this (referring to the sale of all toxic assets), often, what is right can take on multiple interpretations.” – Jared Cohen

“You know, the feeling that people experience when they stand on the edge like, this isn’t the fear of falling; it’s the fear that they might jump.” – Will Emerson

Trailer of the movie

Related Posts

   ▶ All posts about financial movies and documentaries

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Useful resources

SimTrade course Financial leverage

About the author

Article in October 2020 written by Akshit GUPTA (ESSEC Business School, Master in Management, 2019-2022).

Analysis of the Wall Street movie

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Analysis of the Wall Street movie

Kumal Sareen

This article written by Kunal SAREEN (ESSEC Business School, Global BBA, 2021) analyzes he Wall Street movie and finds out its relevance for the SimTrade course.

The Wall Street movie (1987) has been regarded as a movie that entails a day in one of the world’s largest financial markets which is truly enlightening and entertaining at the same time. It functions as a movie which is not at all an exaggeration of how the world of the financial markets operate in the daily life and puts light on how at times people end up in the market. Lastly, it focuses and enlightens on concepts of a financial market which seems to be excessively interesting and correlates with some of what we study in the SimTrade course in the ESSEC BBA program.

Summary of the Wall Street movie

In the 1980s, a character named Bud is a junior trader at Jackson Steinem & Co. He aspires to work with a renowned Wall Street player he admires, Gordon Gekko. He works in the city of the Wall Street, New York, where he tries to call Gordon Gekko’s office as many times as he can, every day, in a row. But at last, he is not able to secure an interview to have a possibility to be working with him. At last, to make things work, he plans to visit Gordon Gekko on his birthday where he brings him a gift, Contraband Cuban Cigars, in hope that he will be able to land an interview at his firm.

Wall Street movie

In response to Bud’s gesture and the courage that he implied by his actions, Gordon Gekko is inclined to offer him an opportunity and he gives him the interview that he for so long worked for. On his interview, Bud Fox pitches Gekko a portfolio of stocks at the end of which Gekko is left unimpressed. In a last attempt, Bud plays his last card and tells him inside information about Bluestar Airlines which he overheard from his father.

Gordon Gekko is curious yet intrigues and unsure. He asks Bud for time to think about their conversation. Gordon Gekko ended up placing orders for Bluestar Airlines’ stocks and ends up becoming a client of Bud. At the end Gekko gives capital to Bud to manage and investing a portfolio of stocks. But Bud ends up losing money on all the other stocks that he selects. Gekko offers a last resort to Bud and offers him to keep his job in exchange of spying on a British CEO, Lawrence Wildman and figure out his upcoming plans of investments. Bud learns the fact that Wildman’s next plan is to invest in a steel company. Through Bud, Gekko ends up making capital gains and Wildman is obligated and forced to buy Gekko’s shares to complete the takeover.

Bud ends up rich with an office and a relationship. He goes on to engage in illicit trading activities and makes a lot of money for Gekko and himself. In the dark, Bud does not realize that he is being put on the hotlist by the SEC.

Bud pitches a plan to Gordon Gekko, which is to expand the Bluestar Airlines after buying it. Bud does all in his power to push the deal through. In no time, Bud learns that Gordon plans to dissolve the company to be able to use the funds trapped in the pension plan, leaning all of the company in ashes. Bud has an idea which involves driving up the stocks of Bluestar before manipulating them back down. The other Union Presidents along with him arrange a meeting in secrecy with Lawrence Wildman and get started on their plan for him to buy controlling stake in Bluestar Airlines with a significant discount. Gordon Gekko, realizing that his stocks are plummeting, gets rid of his remaining stake in the company on Bud’s advice only to realize that Lawrence Wildman is purchasing the stocks of Bluestar Airlines at a discount and realizes the Bud had maneuvered all of that.

In the end Bud gets arrested for insider trading and ends up cooperating with the SEC to get a lighter sentence and helps them arrest Gordon Gekko.

Relevance of the Wall Street movie for the SimTrade course

The SimTrade course focuses on the concepts of observing the market news and using types of orders to trade and create value at the end of the trading period, which of course goes into detail. It focuses on all aspects of a market in terms of trading in the form of courses, simulations, contests and case studies. All the forms talk about different paradigms of the market and explains how the market functions in reality.

The movie correlates with the concept of market efficiency where it shows that the market functions as a semi-strong efficient market at best. Since private information is not embedded in the market price of the stock and there is a possibility to make gains which are more than the market gains by taking advantage of the fact that private information is not taken into account of the stock price. In the regard, how that is illegal and unethical to perform and comes with white collar punishments from the judiciary.

It further goes on to explain the basic concept of information, that is the market news about the firm influences the price of the stock. Moreover, the price of the stock can also be manipulated by the buying and selling function of the market.

Lastly, it correlates with the function of the market where there must be sellers for the buy side and buyers for the sell side, as Gekko sells and Wildman buys, at a price that meets the buy and the sell side, for an order to be fulfilled and a transaction to occur.

Trailer of the Wall Street movie

Famous quote from the Wall Street movie: “Greed is good”

Watch Gordon Gekko explaining “Greed, for the lack of a better word, is good” to the shareholders during the General Meeting of their company.

… and the follow-up 30 years after in the Wall Street money never sleeps movie

Related posts on the SimTrade blog

   ▶ Akshit GUPTA Wall Street: Money Never Sleeps

   ▶ Marie POFF Film analysis: The Wolf of Wall Street

   ▶ Marie POFF Film analysis: Other People’s Money

About the author

Article written in December 2019 by Kunal SAREEN (ESSEC Business School, Global BBA, 2021).