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Movies: the contagion of derivatives spreads ...

There are few human beings alive today who were not affected by the economic crisis precipitated by Wall Street’s use of derivatives – securities yielding a rate of return based on some underlying asset like mortgage payments, credit card payments, auto loan payments and now … future movie box office receipts!

The Los Angeles Times is reporting …

“The major movie studios lost a critical battle in Washington on Friday as the Commodities Futures Trading Commission unanimously approved the creation of one of two pending box-office futures markets that were opposed by much of the Hollywood establishment.”

“The CFTC decision allows Chicago-based Media Derivatives create its new exchange through which investors buy and sell contracts that predict the box-office performance of upcoming films. However, the governmental body must give Media Derivatives, which is funded by the Indiana-based company Veriana, separate approval to offer the contracts that will be traded on the market. The CFTC has until June 7 to make that decision.”

Gambling pure and simple …

Until Bill Clinton signed the Commodities Futures Modernization Act of 2000 on December 21st, 2000, derivatives were somewhat prohibited by state “gaming” laws – yes, gaming as in gambling!

“(2) This Act shall supersede and preempt the  application of any State or local law that prohibits  or regulates gaming or the operation of bucket shops (other than antifraud provisions of general applicability) in the case of  “(A) an electronic trading facility excluded under section 2(e) of this Act; and “(B) an agreement, contract, or transaction that is excluded from this Act under section 2(c), 2(d), 2(f ), or 2(g) of this Act or title IV of the Commodity Futures Modernization Act of 2000, or exempted under section 2(h) or 4(c) of this Act (regardless of whether any such agreement, contract, or transaction is otherwise  subject to this Act).''. <Source>

This was one of the proximate causes of the near-collapse of our economic system. Derivatives created, rated, marketed and insured by entities without adequate regulatory control, oversight and transparency. An open invitation to manipulation, corruption, fraud and misuse.

Others are concerned …

“The Motion Picture Assn. of America, joined by a number of other industry groups, has opposed the exchange as well as a similar market proposed by Wall Street firm Cantor Fitzgerald that is awaiting CFTC approval. The trade group has argued that these markets are ripe for manipulation and will create negative publicity for movies before they are released.”


“Media Derivatives will operate under the name The Trend Exchange (“TrendEx”). TrendEx is primarily focused on the development of a variety of products to benefit the entertainment industry with one if its initially proposed products being designed to help mitigate risk and enhance the successful financing of motion pictures through trading of opening weekend domestic box office receipts.”

“By designing its products for institutional traders and commercial users, TrendEx intends to fulfill critical financing needs. Historically production companies have had no effective way to minimize the risk of producing major motion pictures, which cost on average $107 million per title.” <Source>

Will these receipts include funds from tee-shirts and other paraphernalia that is often being bundled with opening week tickets? With so many Hollywood accounting tricks, will this be the gross receipts or will their be an “adjustment” formula?

Imagine the future …

In my mind, this is an extremely dangerous product as it is backed by very little other than the public’s perception of a movie. It seems to me to simply offload the risks of movie sales to willing gamblers while reserving the real profits for the producers, distributors and star talent.

So I ask, how long will it be until the Wall Street Wizards  figure out some way to ostensibly hedge the risk of these so-called futures, convince the ratings agencies that they deserve an investment grade rating and then bundle the resulting toxic securities into mainstream investments where the broader public will assume a major portion of the risk in return for a very thin slice of the reward.

One could easily manipulate the value of these derivatives by spending or withholding funds used to create marketing campaigns. You could find that the value of your investment deeply affected by how the critics perceive the movie, the plot or its actors. Every person who works on a production is now a potential source of insider trading.

Bottom line …

Movies, in and of themselves, are a crap shoot. Depending on the story, the stars, the execution, the special effects, the timing of the release, opening day weather and, above all, the receptivity of the public.

Why therefore, should movie financing be move from the realm of the sophisticated investors that now finance movies to a broader public market – a market which may potentially be accessed by ordinary individuals who are ignorant of the underlying business and its risks? People who can be whipped into a frenzy by the media buzz – which often turns out to be manufactured?

Does this seem to be another example of  a government-approved  scheme to benefit their special interest friends whose propaganda can make or break politicians. In the words of a famous political contender: “You betcha!”

-- steve

Reference Links:

H. R. 5660: To reauthorize and amend the Commodity Exchange Act to promote legal certainty, enhance competition, and reduce systemic risk in markets
for futures and over-the-counter derivatives
, and for other purposes.

Like most legislative titles, this particular one could not be further from the truth given the 20-20 hindsight of 2010.

Box-office futures market gets key approval from government | Company Town | Los Angeles Times

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