Austerity has been spanning the globe for over a year. Europe has the PIIGS. The US has California, Illinois, and Wisconsin. Lesser known, but significant in their own way, pro sports have the DHMs: the Dodgers, Hornets, and Mets.
All are teams that have had substantial financial difficulties since the financial crisis. The NBA took ownership of the Hornets
in December after their struggles with building a fan base in New Orleans. The Mets have been scrambling for loans
after the Wilpon ownership team got caught up in the Bernie Madoff scandal. And over the weekend, it was reported that Frank McCourt, owner of the Dodgers, took a personal loan
from Fox to meet payroll expenses as he and his wife go through a messy and public divorce.
While the troubles of all three teams may be different, the results are the same. Money has dried up, the teams are going through liquidity crises, and in response they're scrambling for short-term loans and looking to cut payroll in order to maintain solvency. This may look like a simple case of billionaire owners getting in over their heads, but it's actually representative of problems facing wide swaths of society right now.
The McCourts' purchase of the Dodgers in many ways represents the worst of America over the past decade. Lacking adequate capital, they leveraged up to buy the team at an inflated value, borrowing more than the purchase price of the team to complete the deal. It was the first subprime pro sports team sale in history. Bud Selig and the other MLB owners loved it -- the juiced purchase price increased the value of their own teams, and since the McCourts would have to pay so much in debt servicing costs as a result of their loans, they couldn't go all Mark Cuban and overpay for players. Higher team values, lower payrolls -- if you're an MLB team owner, who needs a salary cap when you've got Frank McCourt?
Like a subprime homeowner, they used borrowed money to fix up the house. Dodger Stadium got new LED video displays and brand new seats for the entire park.
But now that the money has dried up, it appears that revenues aren't enough to service the debt. However, owning the LA Dodgers and Dodger Stadium isn't the same as owning a condo in Las Vegas -- you can't just rent an equivalent unit for half price a block away. So instead, our analogy shifts from a subprime homeowner to the government of a country like Greece or Ireland.
With no good options but desperate to hold onto power, the McCourts have been looking to cut costs and obtain short-term loans. However, this hasn't worked for Greece, and it likely won't work for the Dodgers -- cutting costs means a less competitive product, which means lower revenues. Zombie Dodgers, anyone? And in a still-struggling economy, MLB isn't eager to force a sale of a team if it's going to get a bad price -- this would lower values for all the other teams. It's no different than a bank that didn't want to sell its toxic assets so instead it looked to get regulators to suspend mark-to-market accounting.
And while nobody should feel terribly sorry for multi-millionaire players who are going to have to take pay cuts, we could see a situation analogous to Europe where overindebted countries, instead of defaulting, look to get short-term loans to ride out the pain and force all the painful adjustments on the backs of their employees. And if this were widespread enough, it seems like the kind of thing that'd be on the table in a collective bargaining agreement. Why should players be forced to take pay cuts when forced sales or debt defaults by ownership would relieve this financial burden on teams, passing the losses onto other banks and owners, and allowing players to get their true market wage?
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