Good Film, Bad Economic Theory

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As Arbitrage begins, Robert Miller (Richard Gere), the respected head of a billion-dollar capital investment firm, is being interviewed on a cable news show. “Competition for our limited amount of money causes asset bubbles, and then they burst,” he explains in terms simple enough for even the most casual moviegoer to understand. I rolled my eyes. This common fallacy of limited wealth was debunked in 1776 by Adam Smith in his magnum opus, The Wealth of Nations. But the notion simply will not die. It has been the source of envy, greed, and empire building for centuries.

The mercantilists believed that there was only so much wealth in the world, only one “pie,” so to speak. Thus the only way to increase one’s wealth was to steal someone else’s piece of the pie. Nations did just that, invading other nations to plunder their wealth. President Obama uses this same misguided argument to fuel the flame of class warfare, claiming that the wealthy have somehow stolen goods and services from the poor. It is the foundation of his redistributionist policies.

However, Smith rightly pointed out that wealth is not finite. We are not competing for a “limited amount of money.” Wealth can be created; the pie can be expanded. By adding time, labor, and innovation, value can be added to raw materials, and new products can be created. A pound of copper can be transformed into pennies, electric wire, or computer processors, for example. Wealth expands. It’s simple economics.

But filmmaker Nicholas Jarecki set out to make a movie, not to teach an economics lesson, so let’s cut him some slack and get back to the film. It’s a good one. Arbitrage is an absorbing, fast-paced financial and crime thriller whose intertwining stories and well-conceived characters create growing tension throughout the film.

In the world of high finance, arbitrage is “the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.” In Arbitrage, the protagonist, Robert Miller (Richard Gere), is in a race against time to execute deals that he hopes will restore balance in both his financial and his personal life.

The mercantilists believed that there was only so much wealth in the world, only one “pie,” so to speak. President Obama uses this same misguided argument to fuel the flame of class warfare.

In his financial world the imbalance could lead to prison time. Like the majority of white-collar embezzlers, Robert has not intended to defraud his investors. He made a bad investment decision, and instead of cutting his losses, he threw more company money at the investment, hoping to buy enough time to turn the bad deal around. Down by over $400 million, he is now trying to sell the company, but that means cooking the books. In order to cover up the gaping hole in his asset ledger, he has borrowed over $400 million and plunked it into the company account for the auditors to see. His intentions are honorable; he plans to repay the short-term debt (with interest) as soon as the deal is signed, and then refill the gaping hole with cash from the sale of the company. He will be left with just a few million for his own retirement, but his shareholders will be protected, and that’s what matters to him.

All of this is illegal, of course, despite his good intentions. When wealthy investors borrow money from one source and lend it to another to earn money on the float it’s called “arbitrage”; when ordinary people do it it’s called “check kiting”; and when CEOs do it to cover up a bad investment it’s called “fraud.”

Looming at the end of the week are two major functions: the sale of his company and a hospital charity event over which his lovely and supportive wife, Ellen (Susan Sarandon), is presiding. Ellen needs a check to honor their commitment to the hospital; Robert can’t spare a dime until the company audit clears. “It’s only two million,” she reminds him, and the audience chuckles. They are the perfect family — elegant, rich, charitable, and close-knit. Robert’s son and daughter, Peter (Austin Lysy) and Brooke (Brit Marling), are on the company payroll, Peter as an attorney at large, and Brooke as Chief Investment Officer. Brooke can’t understand why her father wants to sell the company when they seem to be so successful. “We make a great living. We give to the causes we believe in. We have a great life. Why sell?” she asks, perplexed. Brooke is a pretty smart cookie, but Peter is only there because of the family connection. One can’t help but think of pipsqueak Don and sharp-nosed Ivanka “playing office” in the Donald’s empire.

And then there is Robert’s girlfriend, Julie (Laetitia Casta). Of course. When high-powered investment types are in the picture, there is always a mistress. Julie’s art gallery opening is another event converging on Robert’s perfect storm. Julie’s petulant texts insisting that Robert attend her event distract Miller during negotiations for the sale of the company.

Robert is on the verge of success when he is involved in a car accident that could sidetrack his buyers and derail the sale if the news of his involvement gets out. Rather than report the accident, he engages a young acquaintance, Jimmy (Nate Parker), to help him cover it up. Robert still hasn’t figured out that coverups never stay covered up (unless, of course, you are Teddy Kennedy). What follows is a tightly written, superbly acted game of cat and mouse as Robert rushes to stay one step ahead of the police, the negotiators, his injuries, his wife, and his own daughter, who has begun to suspect that someone in the company is defrauding her father.

Arbitrage has opened to limited release, and that’s a shame, because it is a well-made film with a great story and well-developed characters. If it isn’t showing at a theater near you, watch for it on Netflix.


Editor's Note: Review of "Arbitrage," directed by Nicholas Jarecki. Green Room Films, 2012, 107 minutes.



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