Tuesday, September 23, 2008

What to do now

We are in a recession, this much is obvious. Now I am aware that there are those of you out there that still cling to the technical definition of a recession and until you see two successive quarters of contracting GDP you will loudly proclaim that we are not in a recession…but I don’t want to get into all the “maybe this…maybe that” that is economic forecasting and analysis. I want to talk about how this applies to you as a filmmaker.
Whether or not you stay glued to your financial screens, whether or not you can name commentators on CNBC and Bloomberg is irrelevant because we, as an industry, are indelibly linked to the financial industry. I say this because nothing is greenlit without financing and many of those from whom we solicit funds are either direct beneficiaries of, or directly affected by, the status of the financial markets.
Yes, I know… you didn’t go to business school. Most of you are probably not even sure what the Federal Reserve bank does and why it has two rates, but that’s ok (actually it’s not you really need to educate yourself but for the purposes of this discussion it’s…kind of ok) I don’t require you to be able to explain the dual mandate of The Fed. or why the dollar cannot rally in the present environment. What I want to underscore is how this is affecting your desire to have starlets do bumps of coke off your cock.
I, like you, am looking for funds to shoot. I have two options – find someone with access to financing (production company with a fund, studio with a line of credit, entertainment lending institution) or find someone with the cash money and the requisite lack of judgment to give a good chunk of it to a filmmaker. Either way you go, you will encounter persons and entities that are constrained by the credit crunch.
But I think I’m going to quickly… so let’s go over the basics:
1) Mortgages: When a person gets a mortgage on a house that they wish to purchase, their monthly mortgage payments are combined with other monthly mortgage payments to create a stream of cash flows. How you ask? Well, several million people are taking out mortgages each year (in a normal market). That’s several million people paying down on interest and principal on a monthly basis to a bank. Since mortgages come in few varietites (30yr, 15yr, ect.) the length of the payments (amount of time the homeowner will be cutting checks) and the size of the payments is quite predictable. Therefore all these payments can be grouped and sold as a bond. There are different levels for different qualities of mortgages, we call the tranches. The Upper tranche has no prepayment risk and no default risk (well that’s how it’s supposed to work)

An investor can then purchase a bond or a Assest backed security at whatever risk level they want and receive monthly interest on the bond…which is really the monthly mortgage payment that passes through the investment back (deducting fee’s and transaction costs) and then back to the end investor. This Mortgage pass-through vehicle is a cornerstone of our economy.
The subprime problem was that a number of these mortgages were written to people who don’t have the income to cover the rapid increase in their interest rate (a typical ARM can be readjusted 200 basis points (2 percent) per annum)…this causes a cashflow problem.
Due to the cashflow problem, banks won’t take the mortgages as collateral and banks won’t admit how much of their mortgage portfolio’s contain this bad mortgage debt.

2) No Lending means no Liquidity: Liquidity can be thought of as excess funds. If your car drops its transmission – and you have ample liquidity in your checking account or other investments – you can cover the temporary increase in expenditures without paying your rent or carpayment late.
Now… how does this effect entertainment lending? Well there is this thing called a reserve requirement, this is the portion of funds depostited in a bank that must physically be on the premises at any given time. What happens is that a panic sweeps through the financial markets, people want to see and hold their money, but if more than 10% of the depostiors try to withdraw funds on a single day…the bank would become insolvent.
So, banks call in their lines of credit because the need the excess reserves and as a result there is less money in circulation and less money available to lend and the money that is being lent, is being done so at much higher rates.

What does this mean to you? Well, all the slick motherfuckers that have these lines of credit in the film industry have received letters and phone calls informing them that the size of the line of credit (and in some cases the entire thing) has been severely reduced and the cost to use what remains has significantly increased. So we now see an entertainment lending environment where less risk is desirable. Companies can still make films, but they will shoot few films and try to reign in the budgets to further reduce the risk.
So, why make a $50M action vehicle that may be in post production for several months, when you can shoot a $2M romantic comedy with a B-list actor and take your chances at the box office. Maybe that example is a little absurd (not really) but that’s the environment that we are facing.
If you haven’t noticed, there is a whole bunch of nothing going on. Now is a good time to write a script, develop an addiction, go back to school or go to a writers retreat…because things will be slow for while.

What am I doing? I’m looking for small and medium sized production companies that have scaled down their production schedule or producing all together…and trying to see if I can do some freelancing.
What is in demand right now is skilled shooters. If you are a mini-DV hack with little understanding of how films are funded and distributed then you present a serious liability for anyone who works with you. This is not a time to be experimental (not that I ever think you should stop thinking outside the box) this is a time to be practical. If you can bring a project in – ontime and under budget without all the primadonna shit that normally accompanies principal photography you will find yourself busy. If you have a multi-hyphenate designation (writer-Director, DP-director, Director-editor) you are extremely valuable right now.

Flight to quality: The term “flight to quality” is what we in finance refer to as a large movement of funds from corporate bonds and riskier issues to Treasury bonds – which give less of a return but are guaranteed against default. Similarly if you were to sell all your shares in Mom-and-Pop-Ltd. And use the proceeds to buy shares of a reasonably large blue chip stock with strong fundamentals (cash flow, sales growth, ect.) that would also be termed as a flight to quality.
We also have a flight to quality in film. It is really not in a production company’s best interest to make wild bets on unproven talent with scripts in genres and visual territory that most of America is not familiar with. Sure, you could have a break out hit – but the chances are few in such an environment and the downside (an unwillingness to back your ideas in the future) is quite considerable.
Now listen to me, I’m not telling you to start writing scripts about little girls who cry and just wish they had a better relationship with their Daddy…I’m telling you to circle your wagons and focus on your strengths. When this blows over there will be a scramble like we haven’t seen in quite some time. When the trust and the financing returns everyone cannot continue to make “safe” films because the market will have reached a saturation point.
Your job is to maximize the return (financial, artistic, critical or otherwise) for a given budget and script in the hopes that when they are ready to get a little “racier” that you will be the obvious choice.

Ok.. I have a script to write you bitches….

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