“Sir, if those assets just decrease by 25% and they remain on our books, that loss will be greater than the entire market capitalisation of this company”, said a young risk analyst named Peter Sullivan (Zachary Quinto) in a 2011 American drama film called Margin Call, written and directed by J. C. Chandor. The principal story takes place over a 24-hour period at a large Wall Street investment bank during the initial stages of the financial crisis of 2007–08. In the film, an unnamed investment bank begins a mass layoff on the trading floor during a normal business day. Among those let go is Eric Dale (Stanley Tucci), Head of Risk Management. Dale tries to speak about his current, unfinished project, first with human resources staff and then with desk head Will Emerson (Paul Bettany), but is told that this is no longer his concern. While being escorted out of the building he meets one of his risk analysts, Peter Sullivan, and gives him a USB stick to look at with a vague instruction to “be careful.”
The film explores capitalism, greed and investment fraud. At the same time, it demonstrates the catastrophic effects of excessive leverage. When Sullivan works late night to finish Dale’s project he discovers that current volatility in the firm’s portfolio of mortgage-backed securities had exceeded the historical volatility levels of the positions. Because of excessive leverage, if the firm’s assets decrease by 25%, the loss will be greater than the value of the firm, implying that the firm will go bankrupt.
Margin Call (2011) Cover Image
While the film looks leverage at investment bank level, there are definitely lessons to take away especially when you are looking at excessive debt at a country or national level. Zimbabwe is battling with a massive debt overhang and will have to expunge its external debt that is now sitting at USD8.0bn. This will enable the country to create more room for capital expenditure as well as boosting productivity in key sectors of the economy such as Agriculture and Mining. Of the USD8.0bn external debt, an estimated USD5.2bn is in arrears which includes cUSD1.2bn owed to the World Bank, cUSD600.0m owed to the African Development Bank and cUSD200.0m owed to the European Investment Bank.
As part of the roadmap to arrears clearance, the Government signed a Staff Monitored Programme (SMP) with the International Monetary Fund (IMF) covering the period 15 May 2019 to 15 March 2020 with quarterly performance reviews. Overall, it remains to be seen on how the engagement process will evolve considering that Zimbabwe Democracy and Economic Recovery Act (ZDERA) sanctions remains in place. This is definitely a mammoth task for the new administration but it might just be worthwhile taking a cue from the Margin Call movie; Be first, be smarter or cheat!
Here are some movies that could be of interest;
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