Damned if You Do, Damned if You Don’t
The recently released movie Margin Call tells the story of a seminal moment in the general financial collapse of 2008. A fictional investment bank, probably a thinly disguised Lehman Brothers, discovers that its huge holdings of subprime mortgage bonds are worthless. If they are liquidated, even at virtually any price, the damage caused to the bank’s reputation by doing so will be irreparable. If the bank do nothing they will be bankrupt in days. The Board of the bank convene, in the dead of night, to decide a course of action for the following trading day.
The dilemma is simple. If they offload the junk bonds, every buyer they sell to, in many cases contacts with whom they have done business and developed long term relationships over the years, will unknowingly be buying worthless too, and the effect will be a catastrophic end of these relationships and a fatal blow to the reputation of the bank. If they hold off, they will drown in their own worthless assets anyway.
The decision is made and the young team of brokers in the bank are instructed to sell, sell, sell the bank’s holding of junk bonds during that trading day, which they successfully achieve. In the film, the longer term outcome is unreported. In real life, Lehman Brothers is no more.
Similar instances of ‘damned if you do, damned if you don’t’ are common in business. For example, Bernie Madoff must have been as aware as the rest of us that no Ponzi scheme has ever proved to be viable in the long term. When he continued to accept investment money from his friends and family, amongst others, even after the writing was clearly on the wall that the pyramid was collapsing, the ethical option still escaped him.
Recently some grocery suppliers have been placed in a similar position by their retailer customers who use their buying power misanthropically. The