In the movie Margin Call, the bank saves itself by dumping its assets on the market through a fire sale. But have you ever wondered what exactly a fire sale is?
A fire sale means selling goods or assets at heavily discounted prices. The term fire sale came from when people sold goods damaged by fire at a discounted price. These sales were done in the immediate aftermath of a fire. The goods were sold before they were further damaged, which led to the use of the term “fire sale,” emphasising the discounted prices.
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History of Fire Sale
Throughout history, economic downturns and financial crises have been associated with fire sales. During times of economic distress, individuals, companies, or governments may be forced to sell assets at lower prices to quickly raise cash or reduce debt.
Such sales occurred during the Savings and Loan Crisis in the 1980s, the Asian Financial Crisis in 1997, and the 2008 global financial crisis, as shown in the movie Margin Call. During the 2008 financial crisis, several notable instances of “fire sales” occurred.
Bear Stearn’s Fire Sale
One notable example was the sale of Bear Stearns in March 2008. Bear Stearns, a major investment bank, faced a liquidity crisis as a result of its exposure to subprime mortgages. To prevent a broader financial collapse, the U.S. government facilitated the sale of Bear Stearns to JPMorgan Chase at a price far below its market value. This move was considered a fire sale because the urgency and financial distress of Bear Stearns led to a sale at a deeply discounted price.
Lehman Brother’s Fire Sale
In September 2008, Lehman Brothers filed for bankruptcy, marking one of the most significant events of the financial crisis. In the aftermath of its bankruptcy, there was a sell-off of Lehman Brothers’ assets, with some being sold at discounted prices.
AIG Fire Sale
AIG: The insurance giant AIG faced a liquidity crisis in September 2008 due to its exposure to credit default swaps. The U.S. government intervened with a bailout, providing a massive loan to AIG in exchange for an 80% ownership stake. As part of the bailout, AIG had to sell off certain assets at discounted prices to repay the government loan.
Mortgage-Backed Securities (MBS): As the housing market collapsed and the value of mortgage-backed securities plummeted, all the financial institutions on Wall Street sought to offload these assets at discounted prices.
When a company is selling its stocks or assets in a fire sale, it means the company is in deep trouble.
Margin Call Fire Sale
Now let’s see the fire sell in the Margin Call. Their investment bank held a huge number of these mortgage-back securities, which were losing value. They needed to sell those MBS as soon as possible.
Now to sell these MBS, Kevin Spacey, aka Sam Rogers, came up with a plan to sell them as fast as possible in the first half session of the market. The buyer of these already knew that they were getting these assets at a discount, which means the seller is already in trouble. Then you might wonder why anyone would knowingly buy bad assets. Here comes the free market. In a free market, if someone thinks that a particular thing doesn’t have value, there is always someone else who thinks that he is getting that thing for a cheaper price, and if the price increases in the future, they will make a profit.
Plus, the bank was selling MBS, and before the 2008 crisis, nobody thought that the housing market would ever collapse, so the buyers thought whatever MBS they were buying from this bank was at a discount.
Fire sale first trade
So when the fire sale starts, Will Emerson calls the other traders at the other banks to sell them MBS products. As shown in the movie, just 4 minutes after the market starts in the morning, The first trade Will closed was at 93.5 cents on a dollar. It means he sold $1 worth of assets for 93.5 cents, at around a 6.5% discount price.
Second trade
The second trade he closes is around 10:54 am, and by now the price of the MBS has fallen more. During this trade, Will offers to sell $270 million of 15-year mortgage-backed securities to a bank for 85 cents on the dollar at a 15% discount price. That means the bank would buy those MBS for $229.5 million. Will’s Bank made a loss of $40 million on this trade.
Now, while trading the second trade, the buyer does ask which MBS he is selling and where it is from, to which Will replies, “Does she care?“
This was what the situation was before the 2008 crisis. The traders did not give much thought while buying the assets, as they were only looking for the best deals for the day, and when they got them, they took them without giving much thought.
Third trade
The third trade in the movie is with Merril Lynch, shown at around 3:07 p.m. Which is just an hour before the market closes. As most traders knew, they were dumping their positions in the market, and the value of MBS has fallen much more. In this trade, Will offers to sell $375 million of 30-year mixed mortgage-backed securities to Merrill Lynch. Merrill Lynch offers 63 cents on the dollar, and Will closes the deal at 65 cents on the dollar. This means Merrill Lynch would pay $244 million for those MBS. Will’s bank took a loss of $131 million on this trade.
This is how a fire sale works. Now, during the fire sale, Will also calls Deutsche Bank, but the trader at Deutsche bank abuses him and cuts the call. This is most probably because of Greg Lippmann, aka Jared Vennett, who worked at Deutsche Bank at the time. He knew about the potential crash of the housing market.
The 2008 financial crash was the result of the ignorance and greed of the government and big banks. The government did not keep an eye on the bad loans given by the banks, and they didn’t do anything until the last moment. The people were unaware of what exactly was going on. But some people were aware of what was going on, and they made huge profits by shorting the housing market. To know how these people figured out potential crash, you should watch these videos on our YouTube channel.
