14Nov2011
Author
SOA Blog
Category
Risk

Margin call risks overshadowing reality

 

Photo: Ken Teegardin

Actuaries in the U.S. and Canada have been curious to see  the portrayal of a chief risk officer by Demi Moore in the new movie “Margin Call.” We wanted to see if she is as intelligent and charming  as we all know risk officers and actuaries are in general (tongue in cheek, of course). In a Dealbook column, Eric Dash describes Ms. Moore’s character as a risk officer who is grappling “with the disastrous consequences of failing to persuade her bosses to pull back on their risky but lucrative mortgage trading business.” The movie, which showcases a fictitious bank on the brink of collapse back in 2008, has received enthusiastic reviews by pundits and audiences alike for its entertainment value.

A number of actuaries authored or contributed to reviews of the movie, its portrayal of a risk officer and the accuracy of the debates that occurred throughout. Through the lens of an actuary’s glasses, the efficacy of Margin Call is more mixed than with the general public.

In a Reuters blog post, Max Rudolph, founder of Rudolph Financial Consulting, and Dave Ingram, a risk management advisor for Willis Re’s insurance company, lauded the film for focusing on the cultural aspects of risk management.

“Movies are great teachers, helping everyone better understand complex situations that can be confusing even to experts. “Margin Call” does just this, by putting a spotlight on the crucial role that proactive and skeptical risk management (or lack thereof) plays, particularly in financial services. Although the Occupy Wall Street movement is still in its infancy, it demonstrates how ordinary people feel the impact of the financial industry’s actions – and mistakes. Likewise, the movie demonstrates how great an impact one firm’s actions can have on the entire financial industry, underscoring the importance of risk management in such an interconnected system.”

While Rudolph and Ingram did not give away the ending of the movie, they did suggest that four conclusions come from watching Margin Call:

• Models should be questioned;
• …and so should CEOs and upper management;
• Independent oversight is not always welcome “at the dance”; and
• Chief Risk Officers should not be the Chief Blame Officers.

The benefits of making a general public aware of the importance of risk management are mitigated by the entertainment licenses the movie takes, suggests Sim Segal, president of SimEnrgy Consulting, in a Forbes article.

“You might expect a new film about an investment bank on the brink of collapse during the financial crisis to lay the blame on bankers for the economic catastrophe that happened. Surprisingly, Margin Call attempts to absolve them. In this film, first-time writer-director J. C. Chandor offers a variety of ineffectual arguments and half-truths in what comes across as a shameless attempt to rewrite history.”

Segal, also an adjunct professor in risk management at Columbia University’s Business School, went on to explain some of the darker takeaways from the film in a CFO Magazine article. “It’s still the case that bankers are not measuring risk properly,” says Segal. Despite passage of the Dodd-Frank bill in 2010, according to Segal not much has changed in three years.

For an insider’s point of view on the movie, the Yahoo! Contributor Network tapped Ellen Lamale, a Society of Actuaries member and a former chief risk officer. Lamale stopped short of suggesting the situation at the fictitious firm was avoidable. However, Lamale believes “it’s possible that more could have been done to ensure that the framework of policies, guidelines, procedures, models, metrics, controls and people that made up the firm’s risk management program was implemented effectively to identify and control risk.”

Many people are pondering whether Margin Call will win an Oscar and make history. Based on the reviews by actuaries, we may want to ask if the business community has learned anything from the history of the financial crisis.

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