not right+not wrong=not science

A lot of nonsense has been written in the name of finance, and a lot is being written today about the causes and cures of the subprime crisis. Much of the latter is politically motivated, designed to deflect blame and promote the broader application of self-serving pet theories. The distraction value of these debates is very high. That is why Richard Alford’s focus on science in his discussion of the open letter “Economics is hard. Don’t let bloggers tell you otherwise” is a refreshing direction for the dialogue to move.

two assets backing the same liability

The other interesting Tweet on Yves Smith’s 8/13 feed is about rehypothecation. In the context of revolving portfolio finance (aka corporate finance) this goes by the name of leverage, but in non-recourse receivables-backed finance (aka securitization) it goes by another name, one that Dr. Pauli would understand. It is fraud. Asset-liability parity is a precondition for all securities to go to market. Unless 100 cents of real asset value backs the 100 cents of liabilities issued, the lender will lose money with 100% certainty while the borrower and financial arranger make out like bandits.

two sides of the same intellectual coin

These two points are actually related—not only in Dr. Pauli’s mind but also in financial system governance and engineering.

A simpler way of approaching Richard Alford’s posting is to think about the rating process as a rehypothecation of company business receivables at different rates; these rates are based on the “gold-like” certainty of repayment, with AAA suffering an average level of impairment so low as to be beyond human intuition, AA slightly riskier, etc. Carried to the limit, this process of rehypothecation is the valve of leverage getting into the macro-economy. And, in a world where the traditional role of banks has been superseded by debt capital markets, think about the assignment of structured ratings as a de facto replacement for the Fed window.

A structured rating process that has integrity is also the control mechanism for balancing leverage with fundamental working capital demand. When business is brisk, clients pay on time and business receivables can be pooled to perform to a AAA standard, the borrower can borrow cheaply based on current receivable performance. When business slows, it costs more and the leverage in the system goes down.

But structured finance, like economics, isn’t easy. It isn’t intuitive, can’t be learned from cyberbabble. It requires rigor, which means mathematical training; and consistency, which means financial training. The good news is that it can be learned. And, it can empower an economy to transform itself towards doing more good than harm. That’s a scary - but inspiring - thought.

Elements of Structured Finance

In many respects, the mighty blue wave is pretty meaningless. As was the case with Titanic, James Cameron’s blockbusters don’t leave a very lasting impact on the cultural scene. It’s a bit like dating Warren Beatty. You have some fun, get a few quick thrills, but there’s no way you’re planning the rest of your life around it.

But Avatar has succeeded in demonstrating the new and extremely schizophrenic structure of contemporary cinematic presentation. It isn’t just the issue of 3D, though that’s the most obvious effect of the film’s success. Virtually every major big budget film that’s going into production is being geared toward 3-D. Every major movie that has already been shot is being converted into 3D. Eventually, older movies will be converted and re-released in 3D. I have to assume that George Lucas (who has been working on his own 3D system) will eventually do this with the original Star Wars trilogy. Why not? He’s pulled every other trick in the book.

Theaters are caught in a mad rush to switch to the digital 3D format, but they’re still running way behind in converting. With a cost ranging anywhere from $100,000 to $150,000 per screen, the conversion process is threatening to send many theaters into the financial red zone. Some companies, such as IMAX, are actually paying for the cost of conversion. They’re not doing this as an act of charity; they’re simply taking over. Let’s be honest, the extra $3 to $4 you’re paying at the box office barely covers the cost of those Elvis Costello-styled glasses.

For now, a mad rush of 3D movies is storming a small number of theaters. That’s why the sudden box office drop for Avatar has actually been a plus for Hollywood. With the impending March 5 release of Alice in Wonderland, Disney would like Cameron to clear out so they can use the same space. The 3D stampede is already starting to resemble the Oklahoma Land Rush as staged in Rhode Island. There just isn’t enough space for all these movies, and due to the cost of the theater conversion process, the situation isn’t about to change soon.

So all of the big-budget movies are preparing to stage a mammoth head-on collision, which is sort of OK. With the exception of Avatar, the theatrical life span of most of these films will not be all that great. Actually, the major studios could just cut a gentleman’s agreement and start rotating these suckers on some kind of every-other-week basis. Or maybe just start stacking the daily screening schedules. Commercially, there wouldn’t be as much of a difference as they might think.

But the real negative effect will be on everything else in the theaters. 3D may be just another dog-and-pony show, but the dog is getting fatter and the pony is pretty old. A movie like Avatar is its own event. It doesn’t have much of a spillover effect to the other screens, which leaves the theater operator in an odd situation. Suddenly, mere movies are just too mundane.

So “special event” presentations have become the new buzz. Not exactly an original idea, since various sporting events have already become a steady sidebar at many multiplexes. The Metropolitan Opera has also done frequent presentations. But the list will grow in 2010. On Jan. 30, Bill O’Reilly and Glenn Beck attempted to take their misnamed The Bold and Fresh Tour to 400 selected screens for a live broadcast. Though a winter storm derailed the event, they’ll be back — along with everyone else, from NASCAR to football to anything that can be acquired for theatrical transmission, as the average multiplex becomes an extension of cable TV.

All of which sounds bad for independent films — unless something can be done to make them an event. Actually, this is starting to happen. There have been successful combination movie/rock concerts done at selected theaters. But it needs to go further. Since the current special events model being used at theaters is an extension of cable TV, why not use that as the basis for a theatrical version of an independent channel?

The Sundance Channel has already experimented with this format, but it can be taken even further. Through a combination of cable providers and regional media centers, a network for weekly presentations of independent movies at theaters can be done (regional efforts have already demonstrated this point). It can be done on a national scale. The organizational effort would be complicated, but by no means impossible. It could even be worth it for one of the major studios to take this under its wing as an experimental effort. The system would provide a vital research group for what is an otherwise unpredictable audience. The main resistance would be with the theaters. But what would they really have to lose?

Not much. They are already being whittled at from every other direction. A once-a-week special independent film presentation would be the least of their worries. Besides, indie moviegoers eat just about as much popcorn as anyone else (except for that “butter” stuff).

As a repairman once told me, “There are so many ways this could go right.”

Writers, publishers, structurers and structured analysts, NY FinTech members, family and friends of R&R, are all welcome to join us at Williams Club on 2/22 from 6-8 PM. Cash bar and DJ-ing by R&R’s own, very talented head of risk management, David Abitbol, aka, Japanster!

Well, that’s pretty much the way it works. Nobody will put it that way, but it’s a fact. And that’s not just the case with African-American filmmakers; the same goes for American Indian, Hispanic and Asian-American filmmakers. Though the contemporary American cinema is not exactly a white man’s club any more, it’s still pretty exclusive in many areas (especially the executive offices).

Which is why the history of ethnic filmmaking in the United States is primarily a history of the independent cinema. As Oscar Micheaux demonstrated with his ground-breaking African-American films of the 1920s, low-budget independent production was the only way of getting the job done. The same is still true today, more or less.

I was thinking about this not just because it was Martin Luther King Day (that odd semi-holiday that some companies won’t take because they don’t want to give their employees another day off), but also because of the weekend release of The Book of Eli by the Hughes brothers.  Obviously their new movie isn’t going to go much of anywhere, simply because Avatar has become the only movie that exists for many people. Kind of its own End Times thing. But The Book of Eli does have the odd distinction of being the first African-American entry in the post-apocalyptic genre, heightened by the odd way the Hughes brothers attempt to revamp the genre into a post-modernist African-American folklore structure (Is it just me, or does the narrative to this movie sound like a sci-fi version of an Elijah Pierce wood sculpture?).

I’m emphasizing this as an indicator of the genuine cultural divide that still lurks within American society. In truth, a lot of white Americans haven’t a clue when it comes to black Americans, even though African-American culture makes up a huge whopping chunk of American culture, period. It’s all one and the same, though a lot of people still can’t seem to grasp that basic fact.

As for mainstream movies, get out of here. I still remember the time when a newspaper columnist approached me with a movie question. He was writing a piece on the Native American athlete Jim Thorpe and had heard a rumor that when they made the movie Jim Thorpe – All American, the studio originally wanted a black actor to play Thorpe. According to this rumor, Thorpe was racist toward blacks and wouldn’t let them. I was able to answer the reporter’s question without even having to think about it; the movie was made in 1951, and no Hollywood studio was going to cast a black man in any kind of major role, no matter what. Besides, Thorpe was an Indian. That meant he would have to be played by an Italian-American actor (standard Hollywood procedure). So the rumor the columnist heard was utterly ridiculous.

And this curious mindset really hasn’t changed all that much. For example, it’s extremely nice that such excellent actors as American Indian Wes Studi and Guyanese-American CCH Pounder got work in Avatar. They’re great in their “body capture” performances as the senior leaders of an oppressed indigenous race. Good thing they’re tall, willowy and blue, too. I don’t think this movie would have gone as far if they were actually playing “themselves,” if you know what I mean.

On the other hand, the real “indigenous” people are still struggling to not only make movies, but to get anybody beyond the reservation to actually go watch them. Despite some critical attention, such movies as Powwow Highway and Smoke Signals are still not that well known or viewed by most American film-goers. Heck, if it weren’t for those adaptations of the Tony Hillerman novels that Robert Redford did for PBS, most people wouldn’t even know that there was some kind of Native American Indian film movement (and by the way, why isn’t Redford doing any more of those mysteries? I liked them!).

Hispanic movies fare no better, especially when they attempt to travel out of the protective zone of the Southwest. Last year, the film Sin Nombre received major critical acclaim and numerous festival spots as well as a good distributor, but its US release was very limited, and it has mostly been available in this country via DVD. Unfortunately, that means it was a Hispanic film that did really well. Most of the rest are titles you’ll never hear a thing about.

So yes, things are changing and in some respects, changing for the better. But it’s a pretty slow process, and the one thing that’s certain is that the change is not going to be coming from Hollywood. It will come from everywhere else. That’s another reason why you have the independent cinema.

Truth be told, there is no logic to admission prices. The last time the cost of seeing a movie had any relationship to anything rational was back in the days of the nickelodeon (and that had to do with the cost of the average amusement park vending machine). The rest is simply based on what the public will put up with.

Which is why this person’s second question (I didn’t really flee in time) is also extremely provocative: Would it make sense for theaters to charge less for low-budget independent movies than they do for the big budget boys? To that question I can plant my feet and firmly answer: Yes and no.

So let’s go back for a second to the first question. Unlike many other businesses, there has never been a real relationship between admission price and the cost of manufacturing and presenting a movie. This is a good thing. If admission prices were determined by this cost relationship, no one could ever afford to go to the movies. The industry has always been upfront about keeping ticket prices artificially low. In fact, the price is totally illusory; it’s just a number somebody made up.

But this made-up number is supposed to relate to a few basic economic issues concerning the audience. The key issue is what the audience is willing (and able) to afford. This has always been the magic figure that theater owners try to second guess. They don’t want to cheat themselves any more than they want to price themselves out of business.

Which is exactly why theater owners actually have more flexibility in ticket prices than most seem to realize. In fact, they could charge variable rates depending on the budget, publicity, and audience interest in particular films. They could easily charge $15 to $20 dollars for Transformers Part 35 and $1.50 for an indie film by Hal Hartley.

However, this will not happen. For the most part, theater owners do not do math, and they prefer a single fixed price. Anything beyond that gets complicated, and they don’t do complex accounting (though the modern ticketing system would easily facilitate this process). Besides, most of them still cling to the MPAA myth that movies are the cheapest form of entertainment around. That claim isn’t exactly true, but it is deeply embedded in their psyche.

More importantly, the distributors for major, budget-bloated Hollywood films would not want a bunch of small-budgeted indie movies undercutting the ticket price. This is ironic, because no matter what they charge for Transformers Part 35, millions of teenage boys will still go see it on the opening weekend, while even at a $1.50, only a couple of dozen die-hards will go to anything by Hal Hartley. Yet the average Hollywood producer ends up feeling threatened by this prospect. The threat is obviously irrational. Unfortunately, so is much of the film business, and feeling takes weight over reality.

It would be great to see theaters apply a broader range of variation in their ticket prices. It may or may not make a critical difference to the box office potential of indie movies, but it would make a difference to the theaters. Whether the industry knows it or not, the current pricing system is not sustainable.

Remember what I said about the relationship between ticket prices and what the audience is willing and able to afford. Some months back, I argued that we were already entering an economic depression, and that the real unemployment figure was closer to 16 percent. In a recent study, Leo Hindery, Jr. presents a strong argument that the real unemployment figure is closer to 18.8 percent. In response to this report, the conservative historian Michael Lind argues in a recent op-ed piece that the real figure might easily reach 20 percent. Suddenly, my previous projection of 16 percent looks like a smiley face on an obit notice.

Likewise, movie attendance is already down. Forget the claim that there has been a 5 percent increase this year. As I previously argued, that claim is bogus. If anything, business is off by more than 5 percent and declining. Attendance will continue to drop (and drop sharply) well into the first quarter of 2010. Meanwhile, the mighty heads of Hollywood are totally convinced that the average American is just chomping at the bit to pay $15 dollars or more a pop to see movies in digital 3-D. This thinking is completely irrational. It is even delusional.  In fact, it is utterly insane. But this is the current direction of Hollywood.

So come to think of it, I suspect greater variations in ticket prices would be a truly swell idea. Now, let’s negotiate the prices at the concession stand….