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Dream makers

American Dreammakers 

Hollyhood has always been the dream maker of the world: its fairy tales may be classic like Snowwhite or modern like the story of Juliet Roberts, a street walker, being picked up by rich guy Richard Gere for a short escort tour and ending up as his wife, but even when depicting fairly realistic story lines, its photography utilizes deceptions as a matter of course, e.g., English country scenes of Emma were actually shot in New Zealand, and lower cost Toronto was often used for generic American city street scenes. A house you see on the screeen actually consists of multiple pieces of cardboard pretending to be the three walls of various rooms (the fourth wall is where the camera sits!)

Once upon a time, Europe and Asia were both active in movie making, (the Rank in the photocopier company Rank Xerox was originally a British movie house.) but today they are insignificant. I am sure the Hollywood movies had great influences on the younger generations, shaping their ideas of romance and of life generally. If you find that your friends (and later, your children) have unrealistic expectations about life, blame it on Hollywood. Another source of people's unrealistic expectations come from advertisements - use this product that girls will queue up to have sex with you... That too used to have major players internationally, but today virtually all the ideas have American origins.

Similarly, there was a time when Japan led the world in electronic games, but even when the manufacturing was still predominently done in Japan, much of the creative work was done by American companies (Sega was started in Hawaii.) The numerous dotcom ideas, most of them unrealistic, that absorbed huge inputs of capital creating a new class of multi-millionaires, originated mostly in the Silicon Valley. The export of American dreams and dream making techniques is a bit hard to quantify in value, but is obviously an important economic factor.

So why are American organizations so much better at dream making? Merely being in USA generates a feeling of freedom: the wide open spaces; the large houses people live in; the freeways; the busy aiports with airlines transporting millions people each day; the colourful tabloid headlines; the stream of TV sports and talk shows; ...  Our thoughts and mouths both get liberated, and children automatically become more active and assertive. In classroom discussions, newly arrived Asians are usually amazed by the apparently knowledgeability of the American students - it is only later that one discovers that what they say have not always been carefully thought out and one can be voluble without being knowledgeable. Similarly, while America ranks much higher than Singapore in press freedom, it ranks lower in reader perceptions of news accuracy (see By Zul Othman, TODAY | Posted: 11 December 2007 1116 hrs )

In recent years, American dream making has been deligently applied in the financial markets. After over investment in commercial real estate in the 70s led to a major banking crisis (the banks were known as savings and loans associations for historical reasons - the depositors and borrowers are the banks' "members"), the Federal National Mortgage Association, a federal government agency which guaranteed the security of housing mortgages, became the owner of a large number of insolvent banks and the creditor of of the banks borrowers - it had the responsibility to recover the depositors' money by collecting the banks' loans. This led to the idea of packaging a group of mortgages as a financial asset: FNMA issued bonds which paid interest to bond subscribers from the interest payments of the mortgages.

Since the bonds can be re-sold more conveniently than the individual mortgages, supply of funding to the mortage market became more liquid. Further, as mortages are long term and usually carry higher interest than short term bonds, there is a good margin of profitability, though also with a certain level of risk: if for some reason the short term fund sources run dry, you may have difficulty repaying the short term bonds from the long term mortage assets. Hence, to be able to take advantage of this profit margin, one either has to be well capitalized, with enough money to repay old bonds even when there is some problem in selling new bonds, or one need to have some form of government guarantee, as does FNMA.

The example of FNMA was so enticing, however, that other organizations were keen to imitage it, and indeed enhanced the scheme with numerous variations, now collectively termed Collateralized Debt Obligations (CDO) and Securitized Debt Instruments (SDI), usually issued by a Special Investment Vehicle (SIV). Various mortage brokers and banks got into the act, and large amounts of such papers were exported, mostly to European banks. (Asian banks are a bit backward.) These were seen as achievements of financial engineering. And the dream exporters seem to have started to believe in their own products. The house buyers with inadequate income did not hesitate in taking our 100% morgtages with interests that jump after 2 years, the mortage companies readily lent the money, believing they can resell the mortgage without difficulty; the US investment banks bought them. For a while at least, the dream seemed real enough.

When the music stopped, it was time to find who is holding which bag containing what amounts of bad debt. Those that emerged mostly unscathed, e.g., Goldman Sachs; Bank of America; Wells Fargo, have the luxury to wonder why others have been so foolish. (The CEO of Wells Fargo quipped "Now why do banks invent new ways to lose money when old ways are already good enough.") They will even be able to profit from the carnage, as government investment funds from middle east and GIC of Singapore have done by providing desperately needed cash injections. In due course, these too will become part of the story of financial engineering. New dreams to be made and sold to others.

Investment as Story

Why would so many people, from shrewd venture capitalists and investment bankers, to salarimen with a few thousand in their 401 accounts, pay ridiculous sums of money for shares in nebulous business plans during the dotcom boom (and might still be doing so today)? Because today's investment climate is as much about buying a story as about buying a business.

If you believe a company's story, and believe others would also believe it and so would buy its shares causing the price to rise, then you would buy the shares; hence, the price would indeed go up and you would be right. In other words, the idea is to find a self-fulfilling story, and some companies are much better at making up such stories than others. Just look at the companies out there with market values of a few hundred billion, when their annual sales are only in 10s of billions, and they pay no dividend. In other words, you are not buying for regular income, and also not buying much of a part of an operation either.  Why do you buy them? because you believe their share price will rise.

A story can stay stubbornly alive, easily able to defy warnings like "Dutch tulips", "South Sea bubbles", or even "irrational excuberance" from the god like figure of Alan Greenspan, as we remember in 1999 when people would in the same breath say "prices are not supported by fundamentals" and "but it is OK because it is new technology/new economics", just as only a few months ago mortgage back securies were wonder produces because (a) they are mortgage back so safe (b) they pay high interest, without anyone pointing out that mortgages are only as good as the borrowers' ability to repay and securities are valuable only when you can find someone to buy them. Stories, after all, are stories and dont have to take in realities you dont want to consider, but they also have the potential of suddenly losing their audience, by which time a new story would come along. .

Right now, Wall Street people are constantly waiting for new data on consumers, employment, deals, etc, but the current story is: if the data are good, market goes up because things are good; if the data are bad, market goes up because Federal Reserve would have to cut interest rates to forestall recession. I am not sure how long this story will last, but if past experience is any guide, it takes a long time for stories to die. The way stories arise, spread from person to person, take hold of whole countries, then suddenly die out one day, is very similar to epidemics - no one knows where SARS originally came from or why it disappeared one day and never came back, though this does not prevent people from making theories and pointing fingers. Bull markets are not that different. I dont think anyone can really explain why Nikkei as 40,000 in 1991 but only 17000 today.

But even when a story is alive, do not forget that there is always the dark side: my little warning above about the need find two fools. In the latest saga, it seems European banks lost much money buying mortgage back securities, Chinese government lost heavily with US bonds because of exchange rate, and Japanese/Australian investors lost with the Yen carry trade (borrowing in low interest Yen to deposit in high interest currencies, e.g., NZ). However, in the complex world financial system, these are so far removed from the main story that people hardly notice them.

where has all the money gone?

I read in the news that Dreamworks is raising new capital from India, in order to be able to leave Paramount when their current production contract ends.

When Dreamworks was formed, the three founders Spielsberg (who made billions from his Jurassic Park and other movies, receiving a percentage of the ticket and disc income), Geffen (who made billions from his music business) and Kaffenberg each put in a few hundred million of capital, and they were backed by additional billions from investors like Paul Allen. Whatever disappointments and studio problems they might have had, they did produce a number of boxoffice successes too. So how come they need more money just to move production base to another studio?