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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