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Subprime Movies to Replace Subprime Mortgages as Worst Business Bets

Nick Baumann of Mother Jones reports that the latest vehicle to try to soak American investors — after Citi’s plans to develop derivatives (a type of insurance product) to allow investors to make money betting on future financial crises — is a movie derivatives market developed by the financial firm Cantor Fitzgerald.

Cantor’s product would allow movie makers and theaters to offset their risks on a project by buying or selling legal bets on a given movie’s take during the first four weeks it is in box offices. Like investors in credit default swaps — who bet that Americans with subprime mortgages would default — movie derivative investors could bet on the success or failure of a given movie. And unlike with credit default swaps, some of the people making bets on movies could be the very people with the decision-making power to help or hurt a given movie’s chance of success.

Economists say that derivatives aren’t supposed to be just legalized gambling, and that Cantor’s movie derivatives are little better than the average sports book.

In that context, Cantor’s plan could be “incredibly dangerous,” [UCLA professor Lynn] Stout says. “Until we fix this legal problem that you can make purely speculative derivative bets, we have to worry that any newly created form of derivative can add risk to the system.”

But with companies like Cantor Fitzgerald lining up to oppose financial sector reforms and the creation of a consumer protection agency for financial services products, we may have to keep worrying.

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