Thursday, January 10, 2008

Credit Crunch Without a Parachute

For those not in the entertainment industry, the shuddering of Axium International has not been news for most. Basically, they had a loan with a hedge fund they defaulted on and the hedge fund swept in and took all the money they had in the bank.

The employees of Axium lost their jobs without notice or their final paycheck. Freelance people who work with companies like mine are now holding roughly $15 million in paychecks that are worthless. Small companies like mine now have to devout manpower to get those people paid again.

Other companies and small film makers not affected by the writer's strike are likely to have lost their money deposited with Axium to cover payrolls, which will cost more jobs in the production world if that money cannot be recouped. And tens of millions of dollars in taxes were not paid to the IRS. The LA Times has a good story about the issue here which highlights the very real situation faced by Axium employees:
"I live paycheck to paycheck and I don't get child support," she said. "We didn't get our paycheck today, so I'll be evicted. I'm out here with no family, no money for food, no money for gas to get my kids to school. I don't know what I'm going to do."

There is a serious issue where, without warning, a creditor of a business can come in and cause thousands of paychecks worth millions of dollars to bounce. This is a classic case where people like Representative Scott Garrett saying the market will deal with the credit crunch misses the point: The damage to people's lives is already done.

Those that believe strongly in the trickle down theory have to acknowledge the fact this impacts everyone who would have been receiving funds from those who lost them. How does that effect people down the line? What about the people after them?

The bigger issue is how many other companies are in the same boat? How many companies received loans from hedge funds who are in jeopardy? Roughly $15 million was sucked out of the economy in one swoop. What's our economy's total exposure to risk like this? Hundreds of millions?Maybe billions? Trillions?

While I doubt Garrett would push the Financial Services committee he sits on to have a hearing on this, one has to hope Representative Barney Frank might. I have a horrible feeling Axium was not the only company to operate as they did, and their funders were not the only ones to make loans like this. This could be a very big issue and it's one we must demand Garrett actually look at.

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