As if attacks from paparazzi and star-crazed fans weren't enough, Hollywood stars may soon have a literal price put on their heads by investors in the Cantor Exchange, a real-money trading platform where people can bet on the gross profits of upcoming movies. Sales of The Dark Knight skyrocketed after Heath Ledger died unexpectedly, and so did sales after the deaths of Michael Jackson, Elvis Presley and Marilyn Monroe. Will greed-driven investors now be laying in wait for the stars of movies they have bet on?
The Cantor Exchange (CE) is based on a virtual trading platform called the Hollywood Stock Exchange (HSX), a web-based, multiplayer simulation in which players buy and sell "shares" of actors, directors, upcoming films, and film-related options. The difference is that where the HSX uses virtual money, CE will turn the game into a real casino using real dollars.
On April 21, Cantor Exchange reported that it had just received regulatory approval from the Commodity Futures Trading Commission (CFTC), which oversees futures exchanges. "This is a significant step forward in achieving our ultimate goal," it said in a letter, "which is to launch a market in Domestic Box Office Receipt Contracts."
Having "contracts" out on movies and movie stars, however, has an ominous ring; and the Motion Picture Association of America (MPAA) apparently doesn't like the sound of it. The Cantor letter said that its tentative launch date of April 22 was being delayed because the MPAA and others "raised concerns about the economic purpose of this market and its usefulness as a hedging vehicle."
The legitimate hedgers, the moviemakers and equity holders with a real financial interest to protect, don't want it. But Cantor is pushing forward, because gambling is big business and there are vast sums of money to be made.
Critics are worried that the new exchange will turn Hollywood into another derivatives casino, vulnerable to insider trading. Even if short sellers aren't hiding behind bushes waiting to trip up the stars, the exchange could create bizarre incentives for moviemakers to manipulate and distort the market for their own products, perhaps intentionally sabotaging movies they know are losers.
A "derivative" market is one that is "derived" from an underlying asset, but participants don't have to own the asset to play. Like gamblers at a race track, they can bet without owning a horse. Derivatives have now become a $605 trillion industry, about ten times the gross domestic product of all the countries of the world combined. This money is not contributing capital to businesses, helping the economy to grow. Rather, it is being diverted into wagers. Money is made by taking it from someone else.
Worse, half the wagers are negative: the players want the thing to fail. Warren Buffet called derivatives "financial weapons of mass destruction." By massively short selling a stock or a currency, speculators can actually force the price down. Derivatives can be used to sabotage not only businesses but whole economies. Derivatives have been blamed for such economic disasters as the collapse of Japan's stock market in 1987, the Asian crisis of 1998, and the recent collapse of Greece.
Max Keiser, who founded CE's virtual forerunner HSX in the 1990s, has firsthand knowledge of how the Hollywood exchange can be abused. When he was CEO of HSX, he says, he came under pressure from fellow board members to give in to studio heads who were offering cash and other inducements to manipulate the prices of projects, either up (to legitimize more marketing dollars) or down (to sabotage competing projects). "These guys, including my own board of directors," he says, "could not tell the difference between marketing and market manipulation."
Whether a movie's stock price rises or falls is considered to be a predictor of the movie's future success; but Keiser warns that today, the prediction value of market pricing is largely a hoax. Traders using sophisticated computer programs have learned how to manipulate prices, and market rigging has become institutionalized.
"The only difference between the new box office futures contracts being manipulated and blowing up," he says, "and stocks in companies like Lehman Brothers being manipulated and blowing up, is that people losing their money can imagine getting screwed by Scarlett Johansson instead of Dick Fuld."
Keiser predicts that his altered HSX computer technology, if approved by the CFTC for use in a real-money exchange, will produce an insider trader's paradise, with Hollywood going the way of Enron and Lehman Brothers in two years or less.
"But this is what rigged market capitalism is all about," he says. "It's not economics really. It's arson. They bet against a company or a country and then burn it down."
Follow Ellen Brown on Twitter: www.twitter.com/ellenhbrown
Plus, film is not exactly exhausted after consumption. When comparing films with corn, I've seen it said that we refer to a year's "crop of films." As if 200 productions from a dozen studios may compare with millions of bushels from thousands of farms. Here's another difference: cold weather in Florida and the price of oranges increases. The writers or actors go on strike, production slows down, and tickets are still the same price.
The parties are already going long and short. Everything is tested and tracked. The budget is based on historical expectations. I see where "Anchorman II" is being held up because the studio isn't willing to pay north of 40 million. As tracking results manifest, ad buys are changed to push strengths or cut losses. So-so movies only get a 1000 screens from exhibitors.
I think you put that all together and any savvy investor would give very wide berth to this market.
The only sad part to all this is that certain Wall Street folks gamble with other people's money. I don't bother going to casinos, but sure dislike living in one, especially since it's forced upon me. Wall Street has always considered Main Street their marks, although they'd never admit it. Much too profitable, so they lie. I'm hoping that as folks understand what you've written here, they'll make the mental connection of how their pension funds, retirement accounts, etc. are being played, and why they're losing. Only then, when the majority of folks understand, will our economy right itself. Until then, it's way too profitable for the thieves to stop on their own. There's no Elliot Ness to nail the Untouchables. So the only way to win, is not to play.
Now, regarding "half the wagers are negative: the players want the thing to fail", I think it is important to note where the concentration of negative wagers are situated, and I postulate that is often with the market makers themselves.
In my view, we should run our financial markets exactly like a casino. When is the last time a casino went under because a gambler took down the house? A casino operates a certain well defined set of "games" according to very specific and time tested rules. Our financial industry should do the same. Instead of taking problematic financial instruments like "Synthetic CDO's" and saying these are now banned, we should take the alternate view and define specifically what is Allowed, with everything outside that description banned by definition. That, it seems, is the only way to ensure that "financial innovation" does not someday create the "Bride of Frankenstein".
In last week's Goldman Sachs' Senate hearings, an effort was made to define so-called "synthetic CDO's". I am sure it sailed over many heads that a synthetic CDO, often offered in Wall Street, is just pure casino gambling for bettors who have no material interest in the underlying asset that is the subject of their bets.
But here it is as plain as day, and Ellen has done a great job both in exposing the synthetic CDO as the casino gambling that it is, and also pointing out the danger of having bettors with big sums at stake who could affect the outcomes of their bets, for example, by wreaking physical havoc on a movie star.
It will be a sad day in America if this kind of betting is ever allowed by law. And those synthetic CDO's on Wall Street should be made illegal ASAP.
All trading in derivatives that isn't based on an insurable interest in something real has to be stopped.