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Got an economics question:
I was watching 'Margin Call' the other day, and there is a scene where two day traders are lamenting the (then incipient) 2008 financial crisis. The senior of the two gives his justification for existing to the other:
Is there anything to this? if so, how does that work? I always assumed that day traders basically created no value and just shuffled wealth around to nobody's benefit.
Margin Call is a great movie but it’s even less realistic than the average Wall Street film, in part because most tend to focus on people more interesting / more on the fringes of finance (like The Wolf of Wall Street) rather than the comparatively more staid PMC culture that exists in bulge bracket investment banking and even increasingly (probably since about 2000) on the trading floor. The bank in Margin Call is based on Goldman Sachs, which partially hedged some of its exposure to the mortgage crisis. But the real life story (and there is some reporting on it) is less exciting than the movie, the events took place over a much longer time, and the drama with the board in the movie was fictionalized. I hope someone makes a similar movie fictionalizing the Credit Suisse collapse though, I think that’s a more fertile ground for storytelling although it would work best as a miniseries that takes place over maybe 3-5 years.
On one hand, the US did and does have an addiction to cheap credit. The housing crisis was spurred in large part by the Bush administration’s relentless push to ‘end the legacy of redlining’ by pressuring banks into lending to just about anybody without much consideration of their long term ability to pay, and many mortgage salesmen and retail banking compliance/KYC deliberately looked the other way as people lied and were coached to lie on application forms to borrow even more money. A movie about mortgage salesmen in Arizona in 2007 could include this line and I think it would be a fun (and accurate) description.
On the other hand, the credit traders in Margin Call aren’t mortgage salesmen. They have little to nothing to do with the provision of credit. The securitization of mortgages was not primarily responsible for the housing boom and collapse, even though that crash subsequently caused the financial crisis in part because of said securitization. You can twist the words into making a point that credit would possibly have been slightly more expensive if the MBS market had been less developed, but the reason for the housing bubble was primarily the fault of governments and retail banks, not investment banks.
So as a statement, it doesn’t make much sense, no. The thing is that traders at big banks aren’t really cowboys, for the most part these are people who make what they believe to be very predictable, very safe moves to hedge clients’ money. They’re not at a hedge fund or a hotshot at a small prop trading firm. They’re not Jordan Belfort type boiler room operators. They’re not Glengarry Glen Ross salesmen. They’re doing what is, almost all the time, a very low risk job where doing very well means making the bank a very small amount of money on the work they do for clients.
Appreciate the post thanks man. So let me see if I've understood this correctly:
Day traders as depicted in Margin Call do/did perform some modest (probably very modest) service to society in that all the jiggery-pokery and complicated financial instruments have the effect of making investments more appealing, which in turn would reduce the downstream cost of credit to borrowers which is good because all other things being equal cheap credit is better than expensive credit.
It's also not completely fair to lay blame for the financial crisis at the feet of traders/investment banks, at least no more than any other bankers, because they weren't fundamentally responsible for the rotten mortgages that were the root cause of the crisis. At worst they simply didnt look too hard at the numbers because they were making money quite handily from the status quo.
But it certainly isn't true that credit traders etc. give 'Joe Everyman' a big advantage over his global competitors.
Day trader typically means private individuals who trade with their own money from home, like on WallStreetBets. The traders depicted in Margin Call are professional sell-side traders working for an investment bank, whose job is to trade on behalf of the bank's large institutional clients (major corporations, pension funds, hedge funds, university endowments, other banks). To limit the bank's risk, they hedge these trades as they make them. If they're good at their jobs, they make a small amount of money for the bank in the process, but on huge volume, this can amount to a large profit for the desk / their team, which is why many top traders are paid very well. Sometimes, as with the MBS the bank itself issued (a consequence of the GLB Act passed in 1999), their job would also be to trade/sell the bank's securities. I actually don't remember whether the MBS the credit traders in Margin Call were selling had been issued by the bank itself; it might not even be mentioned in any detail.
Traders in general had relatively little to do with the 2007 crash. Lehman Brothers, the largest casualty, collapsed because of decisions made by its leadership to directly enter the mortgage market by acquiring mortgage lenders, to keep acquired mortgages (including commercial ones) on its books for longer before packaging and selling them, and even to some extent to directly enter the commercial real estate market in 2006. None of these decisions were made by even senior credit traders, whose only job was to (try to) sell the securities.
Sure. There were huge mistakes made by senior bankers (although even more by regulators) in the run up to 2008, the biggest of which was a total failure to consider the possible catastrophic implications of a liquidity issue / credit crunch caused by a seizing up of the US housing market. There are ethical issues on the trading floor and in investment banking/advisory (ie. M&A, equity and debt issuance and so on), mostly to do with bankers taking advantage of management that doesn't know what it's doing. But the financial crisis is hard to lay at their feet.
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