The Ethics of Margin Call
The following is a paper I wrote for my ethics class about my favorite financial movie, Margin Call.
"Be first; be smarter or cheat" says the CEO of an unknown Wall Street investment bank in directors J.C. Chandor’s 2001 film, Margin Call. The film takes place in a 24-hour timespan, depicting the events on the eve of the 2007 financial crisis. The film is one of the most accurate portrays of ethical and moral dilemmas that occur in the business environment. The movie explores across a wide range of business ethics, corporate responsibility, and the decision-making process of a public company.
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, I will compare the character’s decisions using the classical ethical theories under Kant’s deontology model and the utilitarianism model. I will evaluate their moral justifications using the AICPA Code of Professional Conduct standards and deem that character’s action as ethical or unethical. Concluding the paper, I will provide justifications and explanations on how the management of the investment bank should of acted.
Synopsis
The film opens with massive department layoffs as part of a corporate downsizing exercise. The layoffs are being conducted by an outside firm and not by the bank’s managers themselves. The first to get fired is Head of Risk Management, Eric Dale. Upon learning upon his firing, Dale confusingly says “I’m the Head of Risk Management. I don’t see how that’s a natural place to be cutting jobs.” Nonetheless, he is let go and access to his company email and phone are shut off immediately. While packing up his personal belongings, Dale asks two managers if they had anything to do with his firing which they both respond that they had nothing to do with it. Before being escorted out of the building, Dale hands a Junior Risk Analyst an USB stick and tells him that he was working on a risk model but never got a chance to complete it.
The young Junior Risk Analyst completes the risk model and discovers that the company’s Mortgage Backed Securities (MBS) assets are worthless and the firm and the rest of the financial industry are on the brink of complete economic disaster. He quickly reports this discovery to his immediate superiors, who, in turn, spread the news further up the corporate hierarchy. Sam Rogers, Head of Trading Floor, calls a department meeting at 2AM with his superiors, Sarah Robertson, the firm’s Chief Risk Management Officer and Jared Cohen, Head of the Investment Division.
Robertson and Cohen confirm the accuracy of the model and are unable to locate Eric Dale due to the company shutting off his phone. A decision is made to hold a late-night emergency board meeting and CEO, John Tuld, arrives aboard his private helicopter from the roof of the building. The CEO decides for a fire sale to take place the following morning at market open. Sam Rogers points out the ethical issues in selling something that has no value and Tuld responds that they are just selling to willing buyers at the current fair market price so that the firm may survive.
John Tuld meets with Rogers privately and offers a generous compensation to him and his traders that take place in the sale. Rogers states again the ethical issues involved but nonetheless, he will stand by the firm. Tuld then meets with Sarah Robertson and informs her that Wall Street needs “a head to roll” and that it will be her. Again, he offers a generous compensation and informs her to not fight him against this.
The following morning, Sam Rogers informs his traders that if they sell 95% of the firms MBS by the end of market day, they will each receive $3 million dollars. Rogers concludes the meeting with his traders saying, “sell it to your mother if you have to.” The film ends with Sam Rogers and John Tuld eating dinner in the private executive suite overlooking the Manhattan skyline. Tuld informs Rogers that the firm has been in the business of putting people out of business its whole existence and what took place today is no different then what the firm does every day. He says that money is just made up and that all it is is just pieces of paper used so we don’t have to hunt anymore. Tuld goes on saying that him nor Rogers can control the market and that they can only react and if they get it right, they can make a lot of money in the process.
Evaluate, Compare, and Analyze
The classical ethical theory of utilitarianism defines the term as: the greatest good or happiness for the greatest number of people and moral decision is one that benefit the greatest total utility. The investment firm’s management team failed to incorporate utilitarianism ethics into their decision making. Lower level employees which represent a larger percentage of total workforce were the first to lose their jobs. Meanwhile, the higherups which represent a lower percentage of the total workforce, remained employed. The laying off of workers by an outside firm shows the bank’s lack of social responsibly. The firm’s negligence is noted by Eric Dale, who asks why, as Head of Risk Management, he was the first to be fired. The firm laid off one of the most important workers and did it in a reckless manner.
John Tuld, CEO and chairman of the board is based on real-life Lehman Brothers CEO Richard Fuld, who was nicknamed the “Gorilla on Wall Street” (Zamansky). Tuld is a larger than life character who forcefully persuades the board members and management to go through with the fire sale of the worthless MBS assets. Tuld is keen to ensure the survival of his bank and very eloquently provides several rationalizations as to why this is the right thing to do. John Tuld’s ethical dilemma arises when he needs to make the decision to pull the trigger on selling the worthless MBS assets. His action is to sell all the assets which had been suggested by Head of the Investment Division, Jared Cohen. Tuld simply wants to go through the crisis with whatever the firm has left. His actions are to the firm and not to the public and the financial industry. His decision violates the public interest principles which states: members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism. Tuld’s concern is only for the firm’s benefits while destroying the market to protect his interests and without concern for the company’s investors or the global economy. Tuld’s ethical actions are deemed to be unethical.
Jared Cohen must decide on what the best strategy for the firm is when solving this economic crisis. Cohen has proposed to sell all the assets and recommends this strategy to John Tuld. Cohen knows the consequences of his actions will destroy the market and the trust of his firm for years yet he still goes on. Cohen believes that selling off the assets is the right thing to do and in the best interest of the firm. He also makes sure that he will not have to take any blame for the crisis. In this situation, we can see that his actions are deemed unethical as he violates the public interest by putting the firm above the shareholders and the public.
Sarah Robertson is not concerned with her employees by not defending the layoffs of one of her important workers, Eric Dale. Dale asks her if she had anything to do with his firing and she quickly doesn’t take any blame and shifts any responsibility she has to her employees. Following Tuld’s decision to sell off the firm’s assets, he decides to put the blame on Robertson for the firm’s crisis and to let her head roll. This could be seen as a “glass cliff” decision, where women in corporate leadership roles are blamed for a business crisis or downturn (Cooper). Nonetheless, she accepts her fate and when ask if her compensation will be a lot she responds, “It better be.”
Sam Rogers has been with the firm for more than 30 years and appears to uphold professional standards at first but after some persuasion by the CEO, agrees to go along with the fire sale. Rogers’ ethical dilemma is he must decide to go with the CEO’s plan or not and in the end, must choose between loyalty and the truth. Rogers chooses loyalty and backs his decision by stating that he needs the money. In the final scene, we learn that Rogers’ ex-wife lives in a lavish mansion and that he is paying $1,000 a day to keep his sick dog alive. Rogers’ actions in taking part of the fire sale would also be considered a violation of the Acts Discreditable Rule which state: a member shall not commit an act discreditable to the profession. Rogers’ knows that by selling worthless assets, the customer will eventually learn of the firm’s plans which will destroy the firm’s trust and the integrity and careers of his employees. His actions and position to take the money by John Tuld is considered satisfying his own means and putting his own interest above the public. Therefore, Sam Roger’s acts would be deemed unethical.
What Should of Been the Company's Ethical Response
Throughout the film, the lower level risk analysts discuss their superior’s salaries while their colleagues are being fired. We learn that John Tuld’s salary, which is public record, is $86 million-dollars and Jared Cohen’s is $18 million-dollars. Upon learning of one of their manager’s annual salary of $2.5 million-dollars the following year, one risk analysts shows concern by asking “Does that seem right to you?” The manager accounts to how he spent the money; which included $150,000 for a new car and $76,000 on hookers and booze.
The unethical actions of firing entire departments and ruining the integrity of their own employee’s careers is justified by the management by providing millions in payoffs to each employee. True utilitarianism ethics would involve management taking significant pay cuts in order 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 at long enough for the employees to find employment elsewhere.
Under the deontology model of ethics, humans have fundamental rights that should be respected in all decisions. Informing the shareholders of the MBS value would be detrimental to John Tuld and the companies wealth. Tuld and the rest of management should have considered their clients well-being and inform them of the value of the MBS. The company would have to take the fall rather than the clients. Surviving any economic fallout would also allow the firm an opportunity to work with those clients again in the future.
This film is a reminder how moral ethics and business can be disregarded when the company is at risk. The characters of the film continuously make unethical decisions and justify their actions without taking in considerations of others. They deliberately withhold information and put their own interest above the public. The CEO and his managers goal is for the firm to survive even at the risk of their clients, the public, and the shareholders; who will ultimately bear most of the burden of the disaster. Tuld’s final speech stating that money is just “made up” shows no concern for the public or the individual who may not hold that same belief.
Works Cited
"Code of Professional Conduct." The Complete CPA Reference (2015): AICPA. Web. 14 May 2017. Cooper, Marianne.
"Why Women Are Often Put in Charge of failing Companies." PBS. Public Broadcasting Service, 22 Sept. 2015. Web. 14 May 2017.
Duska, Ronald F. Accounting Ethics. Malden, MA: Wiley-Blackwell, 2011. Print.
Margin Call. Dir. J.C. Chandor. Perf. Kevin Spacey, Jeremy Irons, Demi Moore. Lionsgate, 2011. DVD.
Zamansky, Jake. ""Margin Call" Is For Real!" Forbes. Forbes Magazine, 07 Nov. 2011. Web. 14 May 2017.
Image source:
http://www.newyorker.com/magazine/2011/10/31/all-that-glitters-david-denby