Does Life Really Imitate Art?
The world of finance has always, and will likely continue to be, a haven for compelling cinema. While many apathetic folks see to it that their personal viewing repertoire ends abruptly at Scorsese’s The Wolf of Wall Street, therein below the surface lies a wide selection of films in which tasteful critique and satirical conjecture are foregrounded. Simply put—as far as Hollywood is concerned, Wall Street professionals bear an irrevocable stain in the field of public relations with no room for salvage. All the while, themes of compliance and corporate responsibility are undoubtedly a focal point in contemporary financial markets. The ‘golden days’ of corporate raiders and pump and dump strategies are well past us, as key verticals in the industry have evolved into a closely governed and sophisticated machine. In this editorial piece, QBR Senior Editor, Ben Kavanagh, looks to evaluate the veracity of both historical and recent films that are focalized around investment management, and uncover whether creative liberties have outpaced the true advancement of the industry over the last three decades.
1980s: Corporate Hedonism
“Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit”, exclaimed by Michael Douglas as the iconic Gordon Gekko of Wall Street (1987), a villain fighting the greater good in the name of excess. The plot follows Bud Fox, an aspiring stockbroker who convinces himself a role at a high-powered brokerage led by Gekko. Upon an unsuccessful interview pitch, Fox eventually shares insider knowledge on an investment opportunity in order to land the role, opening the floodgates to a long and twisted path of securities fraud and impending indictments. The prevailing rhetoric is quite clear—tactless greed will breed champions of the industry, and those willing to cross any number of lines to close the deal will surpass their peers. The popularity of the film rippled across public perception of real-world Wall Street, shedding light on widespread hedonism and materialistic tendency. The question remains; was this a historically accurate depiction of life as a 1980s stockbroker, or rather an extension of creative bias?
According to James Stewart, author of Den of Thieves, suggests the meaning of the 1980s lies in the true crime stories of Martin Siegel, Dennis Levine, Ivan Boesky, and Michael Milken, participants in what Stewart considers “the greatest criminal conspiracy the financial world has ever known.” Siegel, in his mid-thirties, already memorialized himself as a premier dealmaker, was conspicuously caught dealing inside information in exchange for briefcases of cash at the Plaza Hotel, and it was far more than a one-time event. This, along with many other cases, such as the downfall of Drexel Burnham Lambert, and the junk bond fuelled-LBO era, were ultimately setting a precedent that the rich are not getting rich as a product of superior discipline and rigorous analytics, but rather via networks entirely inaccessible and detrimental to the average working American. Further, the sheer exuberance and braggadocious nature of wall streets’ finest was plenty reason for the broader populations to look unfavourably on the industry. It truly was the decade of BMWs, billion-dollar deals, and executive salaries trading at three-digit multiples on employees. Of course, that is not to suggest the average broker at any American firm was violating securities law every morning before even having their morning coffee, but their bosses-bosses-boss was much more likely to be. The 1980s was truly a textbook lesson in the perils of unchecked intemperance.
So, what is Wall Street trying to tell us? A first lesson to consider is that of efficient markets; whereby capital markets operated with semi-strong form efficiency at the absolute best, and those who informed their financial decisions based on privileged information could, in turn, be rewarded with illicit capital gains. Also, it sheds light on how the unprecedented wealth generated by these executives allowed them to inhabit a surreal world and remain out of touch with society. The historical accuracy in this film appears to hold up; until of course, black Monday arrived and stopped the overzealous pace of the 80s at a halt. Once investors panicked and exited their market positions, the point of re-entry that came to follow was far more pragmatic, forcing the remaining wall street hotshots who were not serving time to come by shareholder value honestly. As the 20th century rounded itself out, markets grew more efficient as further compliance and regulatory safeguards were instituted, and in many ways, Wall Street was cleaning up its act, regardless of whether public perception was catching up to that fact.
1990s: Negligible Risk Oversight.
The transcendence of the 1980s to the 90s on wall street can aptly be characterized by Sophocles’ phrase, you can kill a man, not the idea. While of course it was not another decade plague with corporate raiders and hostile takeovers, the 1990s, and particularly the collapse of Barings Bank, shed light on a newfound way for financial giants to fashion their way into obscene returns, arbitrage. While arbitrage in itself is by no means illegal or prejudiced, the complex execution leaves significant room for risk that can upheave the livelihood of millions when not closely monitored. Enter exhibit A; 1999’s beloved Rogue Trader which encapsulates one man’s trading mishap that caused a 200+ year old merchant bank, praised for stability, to go insolvent. Queen Elizabeth II was even a client of Barings. The film follows Nick Leeson, the 28-year-old who headed the derivatives desk for Barings Singapore and was responsible for the catastrophe which cost the bank ~$1.4B and deteriorated Asian markets for a brief stint. While this film doesn’t glamourize eccentricity and greed, it does maintain an agenda of exposing to the world what unchecked ambition and risk-taking can lead to.
In essence, Leeson was executing unauthorized arbitrage trades between two futures exchanges and failing to recognize losses in order of hundreds of millions that came when the strategy failed. Leeson was taking long positions (bought) in Nikkei futures, and short (sold) positions in JGB futures, as well as a short volatility in Nikkei ETFs. Instead of initiating simultaneous trades to exploit microscopic differences in pricing, Leeson held his contracts and held a ‘short straddle’. This is a strategy whereby the investor believes an underlying asset will move significantly higher (or lower) than the lives of the options contracts, and if the markets in which you hold these positions eventually turn on you, the losses can have unlimited downside.
The film shows that Leeson’s superiors convinced themselves his outsized trading success was a result of no more than putting meaningless management-speak into action and a culture that perpetuated that ‘being good was not good enough’. A sheer lack of risk management measures allowed for trades like Leeson to have autonomous coverage of their accounting records and standard P&L checks and balances that existed between back office and front. Ultimately, Rogue Trader does offer empirically verified insights to the shortcomings of financial service providers and their apathetic attitudes toward compliance in the 90s. In reality, a new leaf was turned shortly thereafter, as derivatives’ clearinghouses were mandated, and thus, further record of trade delegated into the hands of third parties. This, along with extensive audits and compliance crack-downs, sent shockwaves through the industry.
2000s-Present: Rebuilding the Global Economy Post-Financial-Crisis
As most are familiar with, the global economy errantly tumbled into an unprecedented recession that spanned between 2007-2009, as markets sternly corrected itself amid a subprime mortgage crisis that had been growing its legs in the years building up to the crash. Although maybe a convoluted storyline for those outside the finance discipline, the negligence of ratings agencies and major financial service providers regarding mortgage credit led to disastrous outcomes for people from all walks of life.
Subsequently, Hollywood wasted no time in releasing a myriad of cinema to dramatize how it went down from the inside and connect people to the facts of the situation. Namely, The Big Short based on Michael Lewis’ well-acclaimed book follows a small and unconnected group of savvy traders who caught on early to the speculative nature of the investment products that propped up the housing market. Alternatively, J.C Chandor’s Margin Call also recounts the events that took place immediately before the crash. Researchers and economists alike point viewers toward this film for a more vivid depiction of the U.S. Federal Reserves’ woeful ignorance to the issue, whereas The Big Short portrays a wider spectrum of sentiments before and after the bubble popped.
One can easily point to the vivid emotion of the protagonist in Lewis’ story; FrontPoint Partners’ Mark Baum (portrayed by Steve Carrell) as an individual who vehemently opposed the tactics in which banks and ratings agencies employed to market unattractive credit products, while still existing within the bounds of financial system and actually profiting from their demise. Therein also lies Michael Burry ( portrayed by Christian Bale) who created the market for Credit Default Swaps based on a keen intuition that the underlying market was irrevocably unstable, and in order to do so, went against his investors wishes in order to enter the short position. What he faced was an insurmountable pile of backlash as it had been widely agreed at the time that mortgage bonds traded like treasury bonds and carried low default risk. Both characters felt absolutely gutted by the fact they were right, and notably do not gloat as the banks topple, but are outraged with the malpractice that has been harboured within financial markets for years. Many even tried to sue the ratings agencies for their lack of objectivity and pushed for policy redrafting to ensure the process was permanently more bureaucratic.
Whereas compared to other films written about high-level finance executives are desperate to make sure the people regard them as reptilian-like hoarders of money with flashy suits, the Big Short places a much higher emphasis on documenting historical events and illuminating a spectrum of emotions. Regardless, the film neglects the thorough layers of diligence that one undertakes in the contemporary landscape to make an informed investment decision, the deeply self-regulating nature of shareholder approval considerations, and layers of compliance that members of the global capital markets must adhere to in every single aspect of their work—offering a much more telling reflection of the current state of roles within the industry, albeit at the cost of entertainment value.
The path of development for capital markets regulatory reform has been subject to several tune-ups, as catastrophic events tend to reveal themselves every decade—much like clockwork—to remind us that there is no free lunch and risk-assessment needs to be dynamic and agile at all times. After all, hindsight has always been and will always be 20/20. On the contrary, as far as Hollywood is concerned finance professionals will always be the blind leading the blind, despite undeniable levels of progress in creating a more efficient, honest, and meritocratic workplace. While the creative liberties of mass media may have underestimated the scale of procedure to which a vast majority of members in the industry adhere to, they do an excellent job in offering insightful critiques and satirical wisdom on the outlier. Perhaps art really does imitate life…