What George Clooney got wrong about hedge funds
Third Point's Daniel Loeb doesn't think much of Sony's movie business -- and the movie star clearly doesn't think much of Loeb.
Famously outspoken hedge fund honcho Daniel Loeb apparently doesn't think much of Sony's movie business, or its ability to generate a profit. George Clooney clearly doesn't think much of Dan Loeb.
Loeb, whose Third Point Capital has accumulated a 7% stake in Sony, is putting pressure on the consumer electronics company to spin off its entertainment assets after the high-profile failure of costly summer blockbuster movies like "After Earth" and "White House Down."
That has left Clooney sputtering in outrage. How dare Loeb, he told a Deadline Hollywood reporter, make such an argument? Loeb "knows nothing about our business" and "is the single least qualified person to be making these kinds of judgments, and he is dangerous to our industry."
Dangerous, Clooney says, because he is scaring studios so that they will make only the safest and most conservative decisions about which films to back. Moreover, Clooney added, "hedge funds do not create jobs, and we do."
Sony has rejected Loeb's proposal, but that probably isn't going to end the war of words. (Third Point has said it will continue to "explore further options to create value for shareholders.") After all, Clooney is correct -- but so is Dan Loeb. And Clooney and Loeb both get it wrong, too.
Let's deconstruct some of this hullabaloo, starting with Hollywood's job creation. Clooney pointed out that he and his team "put 300 people to work every day… nice, regular people," and that they hired another 300 people in the town where they shot a recent movie. So far, so good.
Except that many of those 300 people -- and I'm assuming that Clooney is referring to everyone from the wardrobe and makeup folks to electricians and set-builders -- are folks who, if they hadn't been working on his movie, probably would have been working on another one. Yes, when the project was greenlighted, 300 people were put to work. But were 300 new jobs created? (Let's forget about the 300 people in the town where the movie was shot: those jobs are just a particularly exotic or fun kind of temp work.)
Only when Hollywood makes great movies that we all flock to, and when it channels those profits into making 10% more movies the following year, is there net new job creation. Logically, then, Clooney might want to think about Loeb's criticisms: If the high-profile failures of this summer result in fewer movies being made, the fallout could mean fewer jobs for the largely self-employed Hollywood professionals.
Now to the hedge fund side. Like it or not, the hedge fund industry does create jobs. Every hedge fund that launches needs office space and someone to manage it; to the extent they hire traders away from an investment bank, there's a chance the latter will have a vacancy to fill. As the wealth accumulates, the hedge fund managers spend it, creating jobs for landscapers, housekeepers, real estate agents and the hordes of others who make their living catering to the ultra-wealthy.
True, these aren't the same kind of skilled employees for whom moviemakers like Clooney are providing work. But I wouldn't want to get into an argument over who contributes more to society -- a neophyte hedge fund trader or a new Hollywood starlet (although both probably have an inflated sense of their own value in the world). Nor would I want to be the person to tell the just-hired groundsman employed by some hedge fund millionaire to care for his property that this job -- made possible by the hedge fund dude's big trading profits last year -- isn't a "real" job. To him, it is, and it may have made it possible to support his family or save for college.
Then there's the bigger picture. Hedge funds, like it or not, play a role in today's financial system. When they are activists, they shake things up. (Would Michael Dell and Silver Lake Partners have been as willing to make the commitments they did in their bid to take Dell private if Carl Icahn hadn't been lurking in the wings?) If a business is well run, odds are that Loeb and his ilk fail to win support, and slink off into the night. If not, the odds are that it becomes better run. Which means that when looking at blockbusters, perhaps hard questions are asked at the outset about whether it's worth spending $190 million on this particular script and cast?
At a higher level, hedge funds provide both capital and liquidity, without which companies in the entertainment industry can't obtain the funds they need to expand at a reasonable cost. The hard truth is that anyone who plays a role in providing liquidity and capital to the financial system is playing a role, however indirect, in creating jobs. The line may not be a direct one, but it exists.
Ironically, the two men and their respective businesses actually have a lot in common. Loeb acknowledged as much in an interview with Variety. "A more disciplined company with better allocation of capital means less money spent on bureaucracy and more investment in motion pictures," he said. "We are all for intelligent investment in creative content. I believe our interests are aligned in a way [Clooney] probably doesn't realize."
Even the nature of their businesses is uncannily similar. Both hedge funds and movie companies gamble that the strategic decisions and risks that they take today will be repaid down the road in the form of profits. In the case of Sony (and Clooney himself, who takes virtually all his compensation these days in the form of an equity participation in his movie projects), it's all about making movies that they hope will find favor in the eyes of the public. If you're a hedge fund manager, you're betting on your research and a particular investment thesis. In both cases, such leaps of faith don't always pan out.
"It is probably unfair to focus on one or two bad movies, just in the way that Third Point from time to time can have one or two bad months or a bad year," Loeb admitted to Variety, backtracking on his earlier criticisms. "What is important is the overall profitability and margins over a period of time."
Still, Loeb might have questioned whether a studio that misjudges its summer blockbuster projects will do any better in picking which of the smaller projects competing for its attention are worthwhile on either a commercial or artistic basis. Big profits from blockbusters make it possible to fund more adventurous projects, like the $25 million Michael Clayton, in which Clooney starred and which went on to gross nearly $93 million worldwide. Failing to make money makes it tougher for a studio to "create" any jobs, much less keep people employed.
The truth is, this debate should be about whether the risk-takers in both industries are doing a good job. As long as he remains a part-owner in Sony, Loeb has the right to ask questions about whether its managers are making the right calls. Indeed, it's his obligation: The management team work for him and his fellow shareholders and have a fiduciary duty to manage the business prudently.
Perhaps Clooney should have started his critique of Loeb at a higher level: As long as studios are publicly traded entities, they will face similar pressures from their investors. Rather than being distracted by the red herring of a debate over who creates more jobs, we could then sit down and discuss whether the creation of art can or should be separated from the quest for profits that is at the heart of every publicly traded corporation today. And when that's resolved, we can move on to the pesky question of world peace.
Suzanne McGee is a columnist at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.
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