The original Terminator 2 was produced by Carolco Pictures, notorious in Hollywood for lavish waste. Not only did Arnold Schwarzenegger land Hollywood's first fifteen million dollar flat salary on that project, it also became the first Hollywood film with a production budget exceeding one hundred million.
In Simon's memory, Terminator 2 printed more than a million feet of film, yet less than one percent of that footage made it into the final cut. That alone said everything about how extravagantly it was made.
A million feet of film meant a staggering amount of money burned just to capture those shots. Once a crew goes into production, daily costs easily run into tens or even hundreds of thousands. A sequence that should have taken three days stretches to six, and the budget naturally doubles.
From The Abyss to Terminator 2 to the later, famously colossal Titanic, James Cameron's films never finished on schedule. That was the real reason his movies devoured money far more than other directors' did.
After talking it through with Joe Roth, Simon simply confirmed that Fox would keep in contact with Cameron. They could sweeten the deal by letting him come on as a producer on top of his work as writer, but Cameron directing would be the last resort, only if they had no other choice. At the same time, until everything was locked down, the project would not be publicly listed as part of the ten film plan, to keep the key creatives from jacking up their prices.
Once that was settled, Simon returned to the Daenerys Pictures headquarters in Santa Monica, where Amy Pascal was already waiting with another man, a bespectacled middle aged figure in his forties.
At Simon's instruction, Amy had spent this period scouting heads for Daenerys International and Daenerys Home Entertainment.
Daenerys International had already been confirmed. Mark Belford, promoted from within, would serve as president.
Mark Belford was about the same age as Amy. In his early thirties, he had never attended college. After graduating high school at eighteen, he relied on some family connections to scrape his way through Hollywood.
He joined Daenerys Pictures last year and happened to catch Simon's eye. After turning in strong performances on the distribution side for films like Scream, he was quickly promoted.
Hollywood media had mixed feelings about Mark Belford's rocket like rise. Some praised Simon for daring to use people boldly, while others criticized him for being too rash, and even inside Daenerys Pictures there were inevitably murmurs.
But less than a month into the job, Mark Belford swiftly took over Daenerys Pictures's overseas business and had basically been a nonstop flyer between countries ever since.
During the dispute between Daenerys Pictures and Arista Records, the suspension of The Bodyguard soundtrack sales not only failed to hurt the film's overseas release, it actually pushed its box office and buzz upward in major foreign markets. That had a lot to do with the marketing push Mark Belford had rolled out over the past month.
That alone convinced Simon he had chosen correctly.
With the head of Daenerys International settled, the person Simon was meeting today was the head of Daenerys Home Entertainment.
Maurice Korman, in his forties, slightly overweight, wearing rimless glasses. He had nothing to do with Hollywood B movie king Roger Corman. He had previously worked at Columbia Pictures as vice president of marketing.
After Sony completed its acquisition of Columbia, it had been making move after move: buying the former MGM lot in Culver City, merging with Peter Guber and Jon Peters' Guber Peters Company, purchasing all remaining shares of its subsidiary TriStar Pictures, partnering with Daenerys Pictures, selling off television station assets, and more.
At the same time, Columbia's original management team was also on Sony's chopping block.
Maurice Korman resigned under those circumstances, and after several weeks of talks with Daenerys Entertainment, formally joined as president of Daenerys Home Entertainment. He would mainly oversee distribution through channels like VHS and television rights for films produced under Daenerys Entertainment's two labels, Daenerys Pictures and New World Pictures.
With the leadership of Daenerys International and Daenerys Home Entertainment set, it also meant the authority that had belonged to Robert Rehme was being split three ways. For the next two years, Robert Rehme would continue handling domestic theatrical distribution for films produced by Daenerys Pictures and New World Pictures.
The rift between them had grown deep, and Simon did not discuss it much with Robert Rehme. He had not fired him because Rehme had contributed a great deal to Daenerys Entertainment over the past year, and Simon was not the type to discard someone the moment the millstone work was done.
But that was on the condition that Robert Rehme fulfilled his duties conscientiously over the next two years. If Rehme grew resentful over his power being diluted and even deliberately sabotaged Daenerys Entertainment's film projects, Simon would not hesitate to show him the door.
In fact, once Simon confirmed the three way split, he told Amy to shift her focus toward the company's distribution department.
After the meeting with Maurice Korman, Simon and Amy discussed Ira Deutchman.
Ira Deutchman's one year trial period was about to end. Although Highgate Pictures reported directly to Simon personally, it was still Amy who would handle discussions with Deutchman about his compensation package after becoming a full hire.
After several rounds of negotiation, they roughly confirmed that Ira Deutchman's formal contract would run for five years, with a base annual salary of three hundred thousand. In addition, Deutchman would receive a bonus equal to five percent of Highgate Pictures' annual net profit. Based on his performance over the past year, the signing bonus Simon had promised her last year was also finalized at two million.
Deutchman's five percent net profit share looked the same as Amy's on paper, but in practice the difference was like a share of a film's box office net profit versus a share of full channel net profit. And Deutchman's terms did not involve any equity incentives.
Before he knew it, another busy day had slipped by.
At six in the evening, just as Simon was about to head out, Nancy Brill came into his office.
She set a box of game cartridges on his desk and sat down across from him. "The game team adjusted a few details again. Simon, playtest it one more time and see if there's anything else that needs improving."
Blizzard Studio had been officially founded in February. It had now been eight months.
In this era, a normal video game development cycle was three to five months. A title like E.T that had been slapped together in six weeks had been pure recklessness, sure, but Blizzard taking eight months to polish one game made Simon feel as if he had picked the wrong name.
The real Blizzard was famous for delays, after all.
And the Teenage Mutant Ninja Turtles game project had originally been split into two: an action RPG and a versus fighting game. The cartridge Nancy brought this time was still the action RPG, similar to the Konami version Simon remembered. The fighting game had spent three months just on early design and was still in development.
Delays naturally meant budget overruns.
Each of the two games had originally been budgeted at five hundred thousand. Now, just this action RPG version was pushing a million. The fighting game, if it launched early next year, would cost at least 1.2 million. Both had more than doubled.
Because they had confirmed an early November release for the action RPG version, Nancy Brill had also been working on marketing recently. She planned to launch in both Japan and North America, and under Nintendo's royalty system, Daenerys Entertainment would also have to cover the manufacturing costs of the cartridges.
All told, Daenerys Entertainment's total investment in a single game had already exceeded two million dollars, and that did not even include Blizzard Studio's other expenses.
If Simon had not confirmed through multiple playtests that both games were genuinely excellent, he would have called the whole thing off long ago.
He had spent the past few months serving as a lab rat more times than he could count. Seeing Nancy bring yet another cartridge that clearly would not change much, Simon immediately shook his head. "It releases in three weeks. Can we even change anything now?"
"The first batch of one hundred thousand cartridges is locked, sure, but the later runs can still be improved."
Simon gestured casually. "Honestly, you should be testing with the target audience, not me."
"Of course I am. Eight to twenty two is my test range. And hey, you're twenty one."
Simon cut in, "How old are you?"
"How rude," Nancy shot him a look. She stood up and nudged the cartridge box toward him. "Anyway, try it again. I'm heading out."
Simon watched her leave, tucked the cartridge box into his briefcase, and left his office as well.
Over the next few days, Simon kept running nonstop for various projects, while the undercurrents in the American junk bond market grew more turbulent by the hour.
October 13, Friday.
At one in the afternoon, United Airlines held a press conference and announced that due to cash flow constraints, the company could not repay a corporate bond issue worth 1.5 billion on schedule. Management was urgently discussing every possible financing option and would do everything it could to protect investors' interests.
The market, of course, did not believe United's soothing boilerplate. Everyone rushed to dump United Airlines stock and bonds, triggering a chain reaction.
The long simmering crisis in the American junk bond market finally exploded.
Compared to the sudden Black Monday of 1987, this Black Friday mini crash had been preceded by far too many warning signs.
Starting in the first half of the year, Drexel Burnham Lambert, the firm once home to junk bond king Michael Milken, had already begun sliding into crisis.
This Wall Street giant, which had issued more than 80 billion in junk bonds over the past decade, was badly wounded by a slew of insider trading scandals tied to Milken. That in turn meant many corporate groups that had long relied on Drexel's lifeline could no longer sustain operations through the poison cure of rolling junk bond financing.
At the same time, investor enthusiasm for junk bonds had cooled sharply after the 1987 crash, and federal oversight of junk bond financing had tightened over the past two years. All of these factors were pushing the junk bond market toward its ultimate collapse.
After United's announcement, during the final two hours of trading that Friday, stock prices across the American market plunged. The Dow Jones index alone fell 217 points in those two hours, the biggest single day drop since the 508 point plunge on October 19, 1987.
The S and P 500 index followed the market's collapse, dropping 32 points in the same two hour window. Compared to the day's opening level of 286, that was an eleven percent fall. It directly triggered the Chicago Mercantile Exchange's ten percent limit down for S and P 500 index futures.
By the close, United Airlines, at the center of the storm, had crashed twenty one percent in just two hours. United's bond prices fell even harder, down twenty seven percent.
In addition, the stocks and bonds of many other companies, banks, and institutions that had issued or held large amounts of junk debt also plunged.
Drexel was hit first. Its shares, already sliding for half a year, sank another nineteen percent in two hours. Columbia Savings and Loan, long closely tied to Drexel, dropped sixteen percent.
Gillett Holdings, American Newspaper Group, Integrated Resources, Unocal, and Reynolds Nabisco, which had just set a record for leveraged buyout scale earlier this year, along with a long list of other major American corporations, all saw their shares hammered hard enough to make countless investors break out in a cold sweat.
Everyone thought another stock market crash had arrived.
The only relief was that it was Friday.
They had two days to debate how to respond.
But compared to two years ago, the federal government's rescue posture this time was clearly not as forceful. The faint hope United's executives had clung to, believing they might secure emergency funding under such a crisis, was extinguished almost immediately by the Treasury Secretary's statement that the federal government would not bail out highly leveraged companies.
Meanwhile, over the weekend, even more negative news about the junk bond market surfaced.
The Wall Street Journal ran a comprehensive statistical report on its Saturday front page. The article noted that over the past decade, the total return on junk bond investments had grown only 145 percent, while the American stock market's return had climbed 207 percent. Even U S Treasury bonds had returned 177 percent over the same period.
Not only that, among one hundred randomly selected North American companies that had issued junk bonds over the past ten years, twenty four had gone bankrupt or, like United, become unable to meet repayment obligations. That failure rate was five times higher than for other companies.
The article concluded that Michael Milken's decade long insistence on junk bonds as high risk high return was simply wrong.
In reality, junk bonds had no investment value. Many companies had only maintained a veneer of prosperity through repeated refinancing, like a Ponzi scheme. United Airlines' default was merely the opening act of the junk bond market's collapse after ten years of boom. In the months ahead, more companies and institutions would be dragged under by mountains of worthless junk debt.
Beyond the Wall Street Journal's bleak outlook on the market as a whole, a flood of negative reports targeting specific issuers and holders of junk bonds also broke.
The New York Times revealed that Drexel's cash flow had fallen from 1.5 billion at the start of the year to less than 300 million. This Wall Street giant, holding large amounts of junk bonds and requiring substantial working capital, could collapse at any moment.
The New York Post reported that Columbia Savings and Loan held as much as one billion dollars in United Airlines bonds, making it United's largest creditor. As United's crisis continued, the value of that bond position was conservatively expected to shrink by more than fifty percent, and in the worst case could be wiped out entirely.
The Washington Post aimed its fire at Reynolds Nabisco.
After the record breaking 25 billion merger earlier this year, Reynolds Nabisco's stock not only failed to surge as expected, it had fallen thirty three percent compared to its level at the time of the merger. Its market share in tobacco had also shrunk sharply, down eight percent in less than a year.
Worse still, after the merger, Reynolds and Nabisco, both previously profitable, now faced an estimated loss of more than one billion dollars this year alone. Over the past few months the company had laid off 2,300 employees to cut costs, and had been forced to sell off high quality assets at bargain prices under the weight of its debt.
In short, the Reynolds Nabisco merger was a complete disaster. Only the financial firms that brokered it had walked away with enormous profits. The deal paid more than 1.5 billion in fees to KKR, Drexel, Merrill Lynch, and other Wall Street firms.
There was no shortage of voices defending the junk bond market, but under the barrage of coverage, all those negative reports battered the already shaky confidence of countless investors.
After the weekend, the media storm continued, and when the American stock market opened on October 16, it dropped again.
The market also seemed to sense where this crisis was aimed. The federal government was not entirely inactive. So while the stocks and bonds of companies like United Airlines continued to slide, the overall market stabilized.
And so United Airlines, Drexel, Columbia Savings and Loan, and other firms became like frail stragglers cast out from the herd. Cersei Capital, along with other capital forces following in the shadows after months of positioning, began to harvest the spoils in earnest.
Simon knew this mini crash would not last long, so he instructed Janet to immediately close out Cersei Capital's index futures positions.
Over the next week, just unwinding more than 32,000 S and P 500 index futures contracts brought Cersei Capital over five hundred million in profit. The gains from settling the large number of other equity and bond short positions climbed as high as 1.1 billion.
And even that short exposure represented less than half of Cersei Capital's total positions.
In the months ahead, as the domino effect in the American junk bond market continued to spread, Cersei Capital would keep pulling in even richer profits.