The Max Keiser U-turn

By Felix Salmon
May 25, 2010
interview to Trader Daily's Robert LaFranco, wistfully talking about what might have been.

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In 1995, Shearson Lehman options trader Max Keiser had a dream — a dream of creating a futures exchange based on movie box-office grosses. It was a dream which lasted at least through 2007, when he gave an interview to Trader Daily’s Robert LaFranco, wistfully talking about what might have been.

“We were going to change the way Hollywood worked,” says Keiser today. “It was an industry ready for change.” …

“I suddenly looked at the movie industry like Michael Milken viewed the bond market. The original business plan of HSX was an exchange for predictive products that would lead to re-monetizing the industry and breaking up the Hollywood cartel. Using this platform we would allow many, many, many more people to have access to funds.”

LaFranco explains some of the history of the Hollywood Stock Exchange, going back to 1999:

Although Keiser and Burns were still enamored of the notion of building a real futures exchange, their new investors dismissed the idea outright; they were, instead, eyeing an IPO. HSX built up a staff of about 100, more than a third of them in public relations and marketing, and the company went to great lengths to generate awareness, drive traffic and boost ad dollars — the favored revenue model of the day.

“I was outvoted,” Keiser grumbles today. “It was gut-wrenching. The board bailed on me and my vision.”

You can imagine my surprise, then, when I saw Keiser’s vision being eviscerated in The Big Money by… none other than Keiser himself!

Hollywood is based on hype, and a derivative of hype is zero, Keiser argues. “This could be the Enron of 2011 or 2012,” Keiser warns. He adds with sarcasm, “Let’s take the fantasy of Hollywood and mix it with the fraud of Wall Street. That’s a winner. You’re mating two species of egomaniacs.” …

Keiser points to the popular phrase “Hollywood accounting,” a euphemism for the opaque and often dishonest ways of keeping the books to maximize studio profits. “They’re going to take an industry famous for its false accounting, and create a derivative on that!” Keiser said.

So here’s a question for Heidi Moore, the author of the TBM piece: what accounts for Keiser’s astonishing volte-face? (And, what on earth does “a derivative of hype is zero” mean?)

Moore’s article, with Keiser’s interview at its core, is scathing about the pretty benign prospect of box-office futures, asking silly questions like this:

Why does anyone think we can effectively regulate movie star futures if we had to bail out AIG?

The point, of course, is that we don’t need to effectively regulate movie star futures, since they’ll be traded on an exchange and will pose no systemic risk. Heidi finishes her piece with an open question, asking if we should be scared by this nascent market — a market, incidentally, which will almost certainly be killed by the financial-reform legislation. (Blanche Lincoln, whose sister is a Hollywood film director opposed to box-office futures, added movie grosses to onions as the two things that futures can’t be traded on.) The fact is that there’s really nothing to be scared of at all: if you don’t play in the market, no harm can befall you.

But I really do wonder why Keiser has now turned so vehemently on his former business model.

Update: Lots of reactions to this! Max Keiser himself came first, pointing to a YouTube video in which he says, while sporting a bad facelift in front of a picture of palm trees and the Hollywood sign, that what changed was the Commodity Futures Modernization Act and the repeal of Glass-Steagal. But both of those came long before 2007, when he gave his interview to Robert LaFranco.

Cynic, in the comments, speculates that what really changed was that Keiser’s investment in HSX went to zero and that he founded a new company, Kinooga, which would compete with these new contracts for business.

And Heidi responds at TBM, saying that bespoke derivatives caused lots of problems, and ignoring the fact that exchange-traded derivatives caused no problems at all. Putting derivatives on exchanges doesn’t stop people from losing lots of money on those exchanges — but it does insulate any systemic effects of those losses, which are borne by the bettor and not by society more generally.

The fact is that box-office futures are no more a financial innovation than onion futures would be. Futures markets  have been around for millennia, there’s nothing innovative about them. They’re just very handy and useful things to have.

Update 2: In the wake of a more-heat-than-light tweetfight last night, Heidi has left another comment here.


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A little informed speculation?

What seems to have excited Keiser about a futures exchange was its potential to democratize movie finance – not its power as a prediction market. After a brief stint as a high-flying entrepreneur during the tech bubble, he was sidelined, and then outvoted as his own creation was sold off to Cantor. Adding injury to insult, Cantor paid with eSpeed stock, which subsequently became worthless, leaving Keiser with nothing for his troubles.

Keiser is now working on a new business,, which promises to fulfill his original vision, by selling off shares in independent movie projects to interested investors in exchange for a portion of the proceeds. So he’s both sour on HSX for pursuing predictions instead of IPOs, and has every incentive to bad-mouth the three possible movie markets as potential rivals to his new business.

He hasn’t, in other words, soured on the idea of democratizing movie finance and breaking up the Hollywood cartel, as he sees it. His original vision was a Hollywood Stock Exchange, a public market for raising capital, and not a Hollywood Futures Exchange, a betting market for hedging risk. He pursued that latter model for a while, but only as a means to keep the original dream alive. And now that he’s found a different route to that goal, he’s turned on HSX with a vengeance. It’s not pretty, but I don’t think it’s inconsistent.

Posted by Cynic | Report as abusive

> (And, what on earth does “a derivative of hype is zero” mean?)

I suppose it means hype is a constant. No doubt true.

(In seriousness, you’re right; it’s exactly the sort of utterance that makes me think the speaker has no idea what he’s talking about.)

Posted by dWj | Report as abusive

> (And, what on earth does “a derivative of hype is zero” mean?)

Might the reference be directed at the ‘movie industries’, habit of appling more hype to lesser investment quality movies and vis versa?

Come to think of it .. sounds like an ideal opportunity to fleece more ‘mug punters’.

Posted by tonydd | Report as abusive

It looks like Max is getting “Maddow’d”.

Posted by nunyurbznes | Report as abusive

That phrase you picked upon about the “derivative of hype” came from the interviewer. It wasn’t a verbatim quote from Max Keiser, whom it seems you may have misunderstood.

Yes, entertainment media is an inexact science. Yes, much of it’s based on hype – pure hype, if there is such a thing. And yes, a lot of it’s monopolized by subhuman ogre corporations. Taken at face value, that would make the movie industry as ugly and synthetic as a sunny day on Wall Street.

Fun can be blasted out of any business more easily than good stuff transfused into an anaemic corporate bloodstream. Movies, again, are no exception to this general rule.

On top of corporate media-specific pressure from within comes the external saccharine, smothering piety one comes to expect from the MPAA. That’s not tough love, it’s domestic abuse. Tag-teamed between RIAA and MPAA, the American media industry’s in bad shape. An affliction of futures trading might be our final coup de grace.

So, you might say movies are no exception in a world where regulation affects everything that gets made and everyone actually making the stuff – all except the “people” (for lack of a better word) pulling the pseudo-financial pursestrings who are, or might as well be, on Wall Street.

Metaphors aside, Enron itself literally tried to invade both TV and film industries a couple of short years before they choked on their own derivative hype. It was a huge campaign, and it’d have been a horror show if they had succeeded. Like an eerily bad movie you can’t switch off, I saw those little Enron creeps coming. Was I sorry or surprised at how their story ended? No. It was like the original Wall Street.

Enron never quite made the big dent they meant to on the moonscape of Hollywood, but not for any lack of ability to run on fumes. Too bad those other sectors they corrupted never recovered. Too bad some bad people actually made big money on the outcome: thousands and thousands of Americans being sent to the poorhouse (owned) by Enron and its Wall Street brethren.

If there’s a 3-D American blockbuster about actual, real-life devastation carnage caused by bubble speculators it definitely hasn’t played in Peoria. Chances of this (or anything else original or interesting) happening tend to recede, the more closely Hollywood resembles Wall Street. I say it’s close enough now. As in every other walk of life in America we could all use a bit more distance from the way Wall Street works.

Even the movie sequel to Wall Street looks too much like Wall Street the way Wall Street likes being seen. What’s up with that, and can things get any worse? Maybe you seriously believe that derivatives can’t make things worse than they already are in Hollywood, but I disagree.

Max Keiser makes good points: why finance matters (not just in Hollywood), why a more dynamic market (not just any old parasite pseudo futures market) should decide what gets made, resold or seen after it’s made, and why – though you may find this hard to believe – derivatives really are worse than Dreamworks Animation.

I bet Max is right.

Posted by HBC | Report as abusive

‘Hype is a derivative of zero’ perhaps makes more sense. Just like a CDO based on my ability to pay my credit card debt.

Know nothing of Kinooga, Keiser’s latest attempt to democratise movie finance is call

Posted by JPDF | Report as abusive

Well the first comment posted by @Cynic seems to have explained the major points you are missing @Felix, other comments fill in nicely too. So just to say that the Keiser comments you quoted from 2007 he is using the past tense, so it is clear to the intelligent reader that you are attempting to change the context.

“We were going to change…”
“I … looked at….”
“The original business plan of HSX was ….”

Isn’t it rather interesting that the take-over of HSX moved it into a different direction anyway? Wouldn’t that change in direction be like staging a hostile take-over of, say, Zopa and turning into an investment bank that becomes highly leveraged?

Posted by Nic77 | Report as abusive

I once again feel a need to correct some misperceptions.

On the much-discussed line, “(And, what on earth does “a derivative of hype is zero” mean?)” it is actually simple, although it might have worked better to say “a derivative of hype is worth nothing.” The key point is that box-office futures are based on movie opening weekend receipts. Those receipts, in turn, are a function of Hollywood marketing budgets: the bigger the marketing budget, the bigger the open, and vice versa. The budgets are the “hype” and the box-office futures are like a derivative based on hype – which is worth nothing, in the end.

Felix, you write, “[Heidi is] saying that bespoke derivatives caused lots of problems, and ignoring the fact that exchange-traded derivatives caused no problems at all.”

Allow me to correct the misquote here: I’m not saying that bespoke derivatives caused lots of problems, nor did I “ignore” the fact that exchange-traded derivatives caused no problems at all. In fact, I addressed it by pointing out that simply trading something on an exchange is absolutely no real protection against the possibility of manipulation, insider trading or fraud. One need only look at the stock exchanges, for instance, to see that this is true. Public companies are required to meet very high standards of disclosure about their securities (stocks) and yet we reliably have Enrons and insider trading scandals regularly. “Transparency” is not the same as “compliance,” “fraud prevention,” or “risk mitigation,” which is the real problem that experts predict with these futures.

And we don’t actually know if exchange-traded derivatives have caused any trouble; we only know that we haven’t heard about it. Since they exist in a small, insular world of big investors with lots to gain by hiding any losses – or evidence that they’ve been fooled or lost money – the mere lack of widespread coverage is not proof that the industry is safe.

But so, there have indeed been public scandals in exchange-traded derivatives. Remember MF Global’s run-in with unauthorized trading of wheat futures in 2008? 0601103&sid=agIGcMuuPIDo&refer=news

As for the systemic effects, the real danger here is that box-office futures will eventually encompass some leverage. That will easily magnify their effect beyond the bettors, as it has done in the past.

Felix, you also say, “The fact is that box-office futures are no more a financial innovation than onion futures would be.”

This strikes me as a bit disingenuous as a way to resolve Felix’s opposition to innovation last year and his embrace of box-office futures now. I think anyone in finance would agree that basing a type of future on a new type of asset -especially on box-office receipts, something that *wasn’t even considered a real asset* just a few years ago – is certainly an innovation. One of the companies designing box-office futures is even proposing an entirely new exchange for the activity. It’s fair to call it innovation. The only question is: is it a good innovation. And that’s where we differ.

Posted by HeidiNMoore | Report as abusive


You repeatedly attempt to support your original contention that there is “systemic risk” with these products by promoting a vision of “future leverage” that has never been discussed or promoted in regards to these products by anyone other than yourself.

The fact remains that the product specifications submitted to the CFTC are for fully collateralized (margined), exchange traded, federally-regulated, centrally-cleared instruments.

As a former financial writer for WSJ, you should be aware that current financial reform legislation is attempting to move the OTC markets to this exact model. Yet you publicly support the same misinformed, imflammatory rhetoric regarding market manipulation, systemic risk, and the potential destruction of the entertainment industry that is being spewed by the MPAA in their aggressive campaign to fight any attempt at transparency into their industry.

If these companies apply in the future to modify their contract specifications to introduce a leverage component, then maybe your arguments have validity. Until then, perhaps you should try sticking with the facts?

Regarding these products, they are based on an actual economic number (box office receipts) widely accepted within the industry, and used contractually in support of many revenue streams (theater revenue from distributors, merchandising, PPV, cable, DVD and blue ray sales, international distribution, talent compensation, etc.).

They are designed to allow those who have an equity stake in a movie release (film financiers, studio distribution and advertising efforts, theater chains, promotion and merchandising partnerships, downstream distribution revenue like PPV, cable, DVD and blue-ray sales) an opportunity to “hedge” their movie exposure in an exchange-traded, centrally-cleared, federally-regulated, transparent marketplace.

Or would you prefer the current world, where someone like Michael Iger from DreamWorks hedges his “risk” in a movie by selling 400,000 shares of his stock, subsequently driving his company stock down 8%, right before the movie “How To Train Your Dragon” opened at the box office to less than predicted results?

Posted by moviegeek23 | Report as abusive

It’s correct to consider the underlying assets and the economic stakeholders of those assets.

Currently, these stakeholders include just those in the movie pipeline who benefit from box office earnings – movie studios, theaters, etc. These derivatives will allow them to hedge out risk that an unforeseen event – a snow storm for example – will negatively affect their cash flows and thus their ability to monetize their product.

Considering that it takes around 2 years for a movie studio to see a return on their investment, it would be of no surprise to me if Investment Banks start offering to finance these assets. Imagine if, just in the same way that the mortgage bond industry blossomed, banks starting enabling institutional investors to purchase these box office cash flows in advance, providing movie studios with their invested capital plus return on investment much sooner. This would enable studios to produce more movies, growing the movie industry at an exponential pace in just the way the mortgage industry grew.

At that point, a rather concentrated industry starts to appear more ‘systemic’, and the loss of cash flows or the abuse of information in trading the derivatives starts to affect more individuals.

Now, despite my comparison to the growth of the mortgage business and it’s penetration of our economy (thus considerably ‘systemic’), these box office assets are, from a risk perspective, incomparable to mortgage assets. Mortgages usually have incredibly high durations – 20 to 30 years – and their cash flows (and the potential loss of those cash flows) can span then entire life of an investment portfolio. Movie investments have a duration of 1-2 years per movie (longer, I suppose, to make a Lord of the Rings trilogy). As such, a crash in the movie industry – think Popcorn Plague or a large scale power outage on memorial day weekend – will work itself through the investment pipeline quickly. Thus, even if it’s systemic, it’s not going to last the summer. And even in a recession consumers are willing to take their kids to see the latest Pixar flick.

Posted by senorkip | Report as abusive