blockbuster_1250The Treasury Department this morning quietly announced a massive bailout of Blockbuster Video.

According to a department spokesperson, the government will be injecting $2 billion into the ailing company in hopes of preventing its closure and saving thousands of jobs.

“We are very concerned that Blockbuster poses a systemic threat to the American economy,” explained Timothy Massad, undersecretary for financial stability, at a press conference in Washington, D.C. “Although its 3,000 employees represent a tiny fraction of the American workforce, complicated derivative deals mean the impact of its failure would be more widely felt.

“Over the past decade Wall Street investment banks including Goldman Sachs structured risky investment products using the income stream from Blockbuster’s late fees. These banks are among Blockbuster’s largest creditors.

“If Blockbuster files for bankruptcy, millions of Americans who rented videos in the 1990s and never paid their late fees could be on the hook. We’re looking at a potential $5 billion drain on the American economy. We can’t let that happen. Blockbuster is simply too big to fail.”

Lehman Moment

Founded in 1985 in Dallas, Texas, Blockbuster grew to become the nation’s largest video rental chain in the 1990s and early 2000s. At its peak in 2004, the company had 60,000 employees at more than 9,000 stores across the country.

Competition from companies such as Netflix and Redbox, however, has decimated Blockbuster’s business in the past decade. Unable to capitalize on the shift to digital video, Blockbuster’s costly brick-and-motor operation quickly became obsolete.

‘There’s no way they’ll ever save the business,” says Olivier Blanchard, chief economist at the International Monetary Fund. “It’s not like people are suddenly going to start renting VHS tapes again. And digital video? Did you even know they had a streaming website that competes with Netflix? I sure didn’t.

“The government will never see this money back. It’s gonna go straight to the investment banks that structured these ridiculous, irresponsible derivatives transactions.¬†Blockbuster’s going to keep paying huge bonuses to their executives. This is the Wall Street collapse all over again.”

Public reaction to the deal so far has been extremely hostile, with a instant phone poll revealing 94 percent of Americans against the bailout, with 2 percent supporting and 4 percent undecided.

“I run a small construction business,” says Brian Schwartz of Dallas, Texas. “If I run my business into the ground, does the government come and bail me out? No. Only the big guys get that kind of special treatment. It’s a real disgrace what this government is doing. Bailing out Blockbuster? Is there any stupider use of my tax dollars?”

The Treasury Department, however, is standing by its decision, saying that like in the case of AIG and large investment banks like Bank of America and Citigroup, it simply has no alternative.

“Unfortunately these derivatives deals leave us no choice,” argues Massad. “Can you imagine millions of Americans getting notices in the mail saying they owe Blockbuster $70, $80 or $100? We have to save the company. And to save the company we need to pay Goldman Sachs billions of dollars. I wish there was another way, I really do.”


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