Chapter 299: Crisis Erupts

The original production company of "Terminator 2" was known in Hollywood for its extravagant waste, Carlock Pictures. Arnold Schwarzenegger not only received Hollywood's first $15 million high fixed remuneration for this project, but the film also became Hollywood's first movie with a production cost exceeding $100 million.

In memory, "Terminator 2" used over one million feet of film just for prints, yet less than 1% of that material was actually utilized, showcasing the film's wastefulness.

The use of over one million feet of film meant huge expenditures for the film shooting team. Once a movie crew starts working, the daily costs can easily amount to tens or even hundreds of thousands of dollars. If a scene that could have been completed in three days takes six days instead, the budget naturally doubles.

From "The Abyss" to "Terminator 2" and later the famous "Titanic," James Cameron's series of films have never been completed on time. This is fundamentally why Cameron's films are more expensive to produce compared to other directors.

After discussing with Joe Roth, it was decided that Fox would continue to maintain contact with Cameron, offering him the role of producer on top of being a screenwriter as an added incentive, with directing as a last resort. Meanwhile, this project would not be included in the 10-movie plan until all aspects were finalized, to prevent the main creative team from holding out for higher compensation.

After concluding their discussion, Simon returned to the Daenerys Entertainment headquarters in Santa Monica, where Amy Pascal and a middle-aged man in his forties wearing glasses were waiting for him.

Under Simon's direction, Amy had been searching for heads for Daenerys International Company and Daenerys Family Entertainment.

Mark Belfort from within the company had been confirmed as the president of Daenerys International Company.

In his early thirties and without a college education, Mark Belfort started working in Hollywood right after high school, thanks to some family connections. Having joined Daenerys Entertainment last year, he quickly caught Simon's attention and was promoted after performing exceptionally well in the distribution of films like "Scream."

Hollywood media had mixed reactions to Belfort's rapid promotion. Some praised Simon's boldness in choosing his team, while others criticized him for being reckless. There were also whispers of discontent within Daenerys Entertainment.

However, less than a month into his new role, Belfort had swiftly taken over Daenerys Entertainment's overseas operations, spending most of his time traveling between countries.

Daenerys Entertainment's dispute with Alister Records and the suspension of "The Bodyguard" soundtrack did not impact the film's overseas distribution. On the contrary, the movie's box office and popularity in various countries even increased, thanks in part to Belfort's marketing efforts over the past month.

This success confirmed Simon's decision was correct.

With the head of Daenerys International Company in place, Simon was meeting the prospective head of Daenerys Family Entertainment.

Morris Koman, in his forties, slightly overweight, and wearing rimless glasses, had no relation to the B-movie king Roger Corman. He had previously worked at Columbia Pictures as Vice President of Marketing.

After Sony's acquisition of Columbia Pictures, the company made several bold moves, including purchasing the original MGM Studios in Culver City, merging with the Guber-Peters production company, buying out TriStar Pictures' shares, collaborating with Daenerys Entertainment, and selling TV assets.

Amid these changes, the original management of Columbia Pictures was also replaced.

Morris Koman left in this context and officially joined Daenerys Entertainment after weeks of negotiation. He was appointed president of Daenerys Family Entertainment, mainly responsible for the distribution of films produced by Daenerys Pictures and New World Pictures through video and television broadcasts.

The appointments of the heads of Daenerys International Company and Daenerys Family Entertainment meant the division of Robert Rem's authority into three parts. Rem would continue to be responsible for the domestic theatrical distribution of films produced by Daenerys Pictures and New World Pictures for the next two years.

Given the deep-seated rift between them, Simon did not communicate much with Rem about this decision. He didn't fire Rem, considering his contributions to Daenerys Entertainment over the past year, as Simon isn't one to dispose of those who have served their purpose.

However, this was contingent on Rem fulfilling his duties for the next two years. If Rem acted out of resentment or intentionally sabotaged Daenerys Entertainment's movie projects, Simon would not hesitate to act decisively.

In fact, after deciding to divide Rem's powers, Simon instructed Amy to focus resources on the company's distribution department.

After meeting with Morris Koman, Simon and Amy discussed Ella Doichman's situation.

Ella Doichman's one-year probation period was nearly over. Though Highgate Films reported directly to Simon, Amy handled the negotiations regarding Doichman's official salary after her probation. After several discussions, it was agreed that Doichman's contract would last for five years, with a base annual salary of $300,000. Additionally, Doichman would receive 5% of Highgate Films' net profit annually as a bonus. Based on Doichman's performance over the past year, the $2 million signing bonus Simon promised was also confirmed.

Doichman's 5% net profit share from Highgate Films seemed similar to Amy's, but the difference was akin to that between sharing net box office profits and sharing all net profits. Moreover, Doichman's terms did not include equity rewards.

After another busy day, at six o'clock in the evening, Simon was about to leave work when Nancy Brill came into his office.

Placing a box of game cartridges on Simon's desk, Nancy sat down opposite him and said, "The game team made some adjustments to the details. Simon, please play it again and see if there's anything else that needs improvement."

Blizzard Studios was officially established in February of that year, and it had been eight months since.

The normal development time for a video game in this era was three to five months. The rushed six-week development of the "E.T. the Extra-Terrestrial" game was an anomaly. However, Blizzard Studios' eight-month development time for a single game made Simon feel like they had chosen the wrong name.

The original Blizzard was known for its delays.

Moreover, the initially divided "Teenage Mutant Ninja Turtles" game development plan included one action role-playing game and one fighting game. The cartridge Nancy brought was similar to the action role-playing game version from Konami that Simon remembered, while the development of the fighting game had taken three months just for the initial settings and was still ongoing.

Delays naturally meant budget overruns.

The original budget for both games was $500,000 each. Now, just the production budget for the action role-playing "Teenage Mutant Ninja Turtles" game had approached $1 million, and the budget for the fighting game, if released early next year, would be at least $1.2 million, exceeding the original by more than double.

With the action role-playing version set for release in early November, Nancy Brill had been promoting it recently, planning to launch it simultaneously in Japan and North America. According to Nintendo's royalty system, Daenerys Entertainment would also need to bear the cost of game cartridge production.

In total,

 Daenerys Entertainment's investment in a single game had already exceeded $2 million, not including other expenses for Blizzard Studios.

If it weren't for the high quality of both games confirmed through several playtests, Simon would have halted the project.

Having been a "guinea pig" for playtests several times in recent months, Simon quickly shook his head when Nancy brought another cartridge that likely had no significant changes, saying, "There's only three weeks left until release. Can we still make changes?"

"The first batch of 100,000 cartridges can't be changed, but subsequent ones can still be improved," Nancy replied.

Simon gestured, "Actually, you should be getting people from the game's target demographic to playtest, not me."

"Of course, the potential consumer group aged 8 to 22 years is within my test range. Look, you're 21."

Simon interjected, "How old are you?"

"Rude," Nancy gave Simon a glance, pushed the cartridge towards him, and said, "Anyway, try it out. I'm heading off."

Watching Nancy leave, Simon packed the game cartridge in his briefcase and left the office.

In the following days, Simon remained busy with various projects, and the undercurrents of the American junk bond market grew increasingly turbulent.

On October 13th, Friday, at one o'clock in the afternoon, United Airlines held a press conference announcing that due to a cash flow shortage, the company could not timely repay a $1.5 billion corporate bond. The management was urgently discussing all possible financing options to ensure investors' interests to the greatest extent.

The financial market, of course, did not believe United Airlines' assurances about protecting investors' interests. Investors rushed to sell the company's stocks and bonds, triggering a series of chain reactions.

The long-accumulating crisis in the American junk bond market officially erupted.

Compared to the sudden Black Monday of 1987, this Black Friday's "minor crash" had too many prior warnings.

Since the beginning of the year, Drexel Burnham Lambert, the company once associated with "Junk Bond King" Michael Milken, began facing a crisis.

This Wall Street financial giant, which had issued over $80 billion in junk bonds in the previous decade, was severely weakened due to various insider trading scandals linked to Milken. Many companies closely cooperating with Drexel could no longer sustain their operations through repeated junk bond financings.

Additionally, the market's enthusiasm for junk bonds cooled significantly after the 1987 stock market crash, and federal regulation of junk bond financing became stricter over the past two years. All these factors contributed to the final collapse of the junk bond market.

After United Airlines' announcement, the North American stock market saw a sharp decline in many companies' stock prices during the last two hours of trading on Friday. The Dow Jones Industrial Average plummeted 217 points within two hours, marking the second-largest single-day drop since the 508-point crash on October 19, 1987.

The S&P 500 Index also crashed by 32 points in the following two hours, from its opening at 286 points, resulting in an 11% drop. This triggered the Chicago Mercantile Exchange's 10% stop-limit on S&P 500 index futures.

By the end of the day, United Airlines' stock price had plummeted 21% within two hours, and the price of its bonds fell by 27%.

Additionally, the stock and bond prices of many other companies and banks that issued or held a large number of junk bonds also plummeted.

Drexel Burnham Lambert was hit hardest, with its already declining stock price plummeting 19% in just two hours. Columbia Savings and Loan, closely associated with Drexel, saw its stock price drop significantly by 16%.

The stock prices of notable American companies such as Gillette Holdings, American Newspaper Group, Integrated Resources, United Petroleum Gas, and the recently record-breaking leveraged buyout of RJR Nabisco, all tumbled, causing panic among investors.

Everyone felt another stock market crash was imminent.

Fortunately, it was Friday, giving everyone two days to discuss strategies.

However, compared to two years ago, the federal government's market rescue efforts were not as forceful. United Airlines' executives' hopes of securing emergency funds were dashed by the Treasury Secretary's statement that the federal government would not bail out highly indebted companies.

Over the weekend, more negative news about the junk bond market emerged.

The Wall Street Journal's Saturday front page featured a comprehensive statistical report on the junk bond market, pointing out that the compound annual growth rate of junk bond investments over the past decade was only 145%, while the North American stock market's return was 207%. Even U.S. Treasury bonds saw a compound annual growth rate of 177% in the same period.

Moreover, among 100 randomly selected North American companies that issued junk bonds in the past decade, 24 filed for bankruptcy or, like United Airlines, could not fulfill their repayment obligations, a ratio five times higher than other companies.

The article concluded that Michael Milken's decade-long high-risk, high-return junk bond theory was fundamentally flawed.

Junk bonds, therefore, had no investment value, and many companies were merely maintaining a façade of prosperity through Ponzi scheme-like repeated financings. United Airlines' debt default was just the beginning of the junk bond market's collapse after a decade of prosperity. In the coming months, more companies and institutions would be dragged down by worthless junk bonds.

Besides The Wall Street Journal's pessimistic market overview, many negative news stories targeting issuers or holders of large amounts of junk bonds also surfaced.

The New York Times revealed that Drexel Burnham Lambert's cash flow had dropped from $1.5 billion at the beginning of the year to less than $300 million. This Wall Street financial giant, already burdened with a large amount of junk bonds and in need of high capital turnover, could collapse at any moment.

Columbia Savings and Loan was exposed by the New York Post for holding up to $1 billion in United Airlines bonds, making it the airline's largest creditor. As the crisis continued, this bond asset was conservatively estimated to shrink by more than 50%, and in the worst case, could become worthless.

The Washington Post targeted RJR Nabisco.

Following the record-breaking $25 billion merger at the beginning of the year, RJR Nabisco's stock price did not experience the anticipated surge but instead fell 33% compared to the merger price. The company's market share in the tobacco industry also declined sharply, losing 8% in less than a year.

Moreover, Reynolds and Nabisco, both profitable before the merger, were expected to incur losses exceeding $1 billion this year. To save costs, the company had laid off 2,300 employees in recent months and sold off some of its valuable assets at low prices due to debt pressure.

In summary, the RJR Nabisco merger was a complete disaster, benefiting only the financial firms involved in orchestrating it. The total commission paid to firms like KKR, Drexel Burnham Lambert, and Merrill Lynch exceeded $1.5 billion.

Despite some support for the junk bond market, the barrage of negative media coverage severely damaged investors' already shaky confidence.

After the weekend, the media continued its uproar, and the North American stock market fell again upon opening on October 16th.

Sensing the crisis's direction, the federal government was not entirely inactive. Except for the continuing decline

 in stock and bond prices of companies like United Airlines, the overall situation in the U.S. stock market stabilized.

United Airlines, Drexel Burnham Lambert, Columbia Savings and Loan, and other companies became like the weak and sick left behind by the herd. After months of preparation, Cersei Capital and other capital forces behind the scenes began to reap their hunting rewards.

Simon knew this minor crash would not last long, so he instructed Janet to liquidate Cersei Capital's stock index futures contracts immediately.

In the following week, the liquidation of just over 32,000 S&P 500 index futures contracts brought Cersei Capital more than $500 million in profits, with other large stock and bond short positions delivering earnings of up to $1.1 billion.

And this batch of short positions was less than half of Cersei Capital's total holdings.

In the coming months, as the domino effect of the North American junk bond market continued, Cersei Capital would reap even more substantial profits.

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