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Marginal Thinking and Economic Crisis in "Margin Call"
by Dirk Mateer `

An employee of a financial firm discovers that trading will soon exceed the historical volatility levels used by the firm to calculate risk. Because the firm is over leveraged, the firm will become worthless (the firm's assets are mortgage-backed securities) if there is just a small drop in price. The key employees remain at the firm all night for a series of meetings with more senior executives. The CEO opens the meeting by stating that he wished he had known about the firm's impending collapse sooner but states that this is spilled milk (a common phrase for sunk costs). Given the dire situation, the CEO constructs a plan to sell off all of the toxic assets before the market can react to the news of their worthlessness, thereby limiting the firm's exposure. This will create a financial contagion and it will also destroy the firm's relationships with its counterparties, who will never trust them again. The late hour meeting serves as a wonderful example of cost benefit analysis and it is quite useful when discussing moral hazard.

This Commentary is related to the following Clips:
Marginal Thinking and Economic Crisis in "Margin Call" by Written and Directed by J.C. Chandor (2011) This great scene from "Margin Call" discusses sunk costs, marginal thinking, and economic crisis.