From the monthly archives:

October 2011

CBA Talk: Where the Threat Lies

by Tim Donahue on October 28, 2011 at 11:28 am · 0 comments

What a difference a week makes.

Last Friday saw an explosion of anger as the talks fell apart. This time it was the owners, rightly or wrongly personified by Paul Allen’s awkward silence and Peter Holt’s easy Texas manner, who derailed the negotiations. With David Stern out of the room – for reasons either innocent or engineered – the owners put the cart before the horse by reportedly insisting the players accept a 50/50 split of BRI before negotiations on the system could proceed.

It was a profoundly foolish ultimatum, and it brought predictable results.

So, a week ago, we began the countdown to the cancellation of Christmas (at least for the NBA). It was already less than 30 days to the first day of remaining schedule games, and it was practically impossible to get those games in even with almost immediate agreement. Announcement of cancellations, perhaps even an indefinite postponement to the start of the season, was imminent.

But it never came.

Instead, the two sides teleconferenced on Monday, and the owners held another meeting on Tuesday to discuss revenue sharing. These led to the meetings of the last two days. And now, as NBA.com’s Steve Aschburner writes, optimism abounds:

Wait, no snarky “Or not” qualifier? Nope. If only for a night, the content and tone of the key negotiators’ comments to reporters after another seven-plus hours of collective bargaining talks deserved to stand on their own. As did the fact that, as Hunter and union president Derek Fisher spoke publicly first at the end of this session, Stern was seated in the back of the room. He was smiling, he was acknowledged a couple of times by Hunter and he even answered a question for the union chief, who had been asked when the difficult moves in this labor dance would get made.

“Tomorrow,” the commissioner said.

Stern and Hunter both dropped big doses of optimism on NBA fans and followers, suggesting that the lockout, as long and damaging as it has been, might not see its fifth month.

“There are no guarantees that we’ll get it done, but we’re going to give it one heck of a shot,” Stern said.

Said Hunter: “I think we’re within striking distance of getting a deal.”

However, as Stern said in the wee hours Thursday morning, “Until we have an overall deal, we don’t have a deal about anything.”

Though we lack details, we can guess that both sides are close to agreement on a system, and the range where the BRI split will fall has been discussed ad nauseum. If this was just a deal between two guys – between David Stern and Billy Hunter – agreement today would be a certainty.

But it’s not. This is an agreement between 29 owners on one side and 400-some-odd players on the other.  And, since this is an agreement that has been/will be shaped by these disparate parties, it will not make everyone happy. In his interview with Steve Aschburner, NBPA Economist Kevin Murphy said this:

 ”If there’s a deal here, it’s going to be a deal that nobody likes. That’s what deals are. Nobody walks out feeling like they got a complete victory. That’s initially. But then you get back to playing and you realize, geez, I can live with this.”

So, today (and the days that follow), the hope lies in finalizing a deal that the two sides can “live with.” However, even such a deal is certain to leave some feeling left out. And that is where the threat lies – within the people who see no value in agreeing.

The threat is greater from the owner’s side, but that’s largely a function of numbers. It’s just easier in a smaller group. And if you want to see how much it still exists, simply look past what Stern is saying, and watch Adam Silver in last night’s press conference.

However, there is still a tough sell on the player’s side. While the agents have been portrayed as the wolves here, the people who are “left out” are really the super stars – LeBron James, Dwight Howard, Dwyane Wade. With the advent of max contracts, these players have seen their earning potential cut significantly – and they know it.

For all of the attention paid to the BRI split by the media, it’s the stars (and their attached agents) who are really the only BRI warriors in the fight. They can see the direct impact of each point of split on their paychecks, and the system issues don’t mean all that much to them. They are the wild cards from the union, but fortunately, as illustrated by the ESPN’s recent #NBARank project, they are wildly outnumbered.

If talks break down today, it will be framed around BRI. The most likely scenario will be the owners refusing to go past 50, and the players standing firm at 52. Though this will prompt howls of “$80 million ?!?!?!”, it won’t really be about those two points. It will be about the fringes on the two sides not liking the deal as a whole, and using that difference as as excuse.

To keep this from happening, David Stern and Billy Hunter will have to earn all of their money. It seems apparent that these two men are ready to make a deal. Now is the first time in this process that the two sides may be in position for one man on each side to push them together. The task, however, remains herculean.

Five years ago…hell, five months ago…I would have had absolute confidence that the deal would be done once Stern and Hunter started rowing in the same direction. However, neither has ever looked less in control than they have over the course of this lockout. For both, this is almost certainly their last go-round.

Let’s hope they both have one more good day in them.

 

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CBA Talk: Words from the Genius

by Jared Wade on October 27, 2011 at 11:24 am · 0 comments

The smartest economist working for the NBA players’ union is a genius. As in, University of Chicago economist Kevin Murphy has received a genius grant. Furthermore, Freakonomics economist Steven Levitt has called him the smartest person in the field. He knows a thing or two about some things, basically. (Here’s a great profile on Kevin Murphy from if you’re interested in reading more about him.)

He sat down yesterday for an interview — his first during the lockout — with NBA.com’s Steve Aschburner. Obviously, we need to keep in mind that he works for the union and is clearly going to highlight the points that the players want highlighted. But in discussing the supposed contention over the league’s financial (something that has been overblown … both sides had auditors sign off on the figures), he raised some interesting points. Or, perhaps more accurately, he articulated the positions the league has been discussing since July in a better way than anyone else has.

An excerpt:

NBA.com: Even at this late date, from interviews given by Hunter, Fisher and others on the players’ side, there seems to be skepticism of the league’s financial numbers, as if the audited figures aren’t to be believed.

KM: I would say the primary disagreement is not over the accounting numbers. It’s what you include and how you interpret the numbers. For example, the accounting picture of the NBA isn’t very different from what it was five years ago or 10 years ago in terms of ratio of revenues to costs and all the rest — it’s changed very little. Which immediately tells you, wait a minute, if the underlying financial picture is similar today to what it was five years ago or 10 years ago, and people are paying $400 million or whatever for franchises, and you’re telling me that these things lose money every year, something’s missing, right? These people aren’t stupid, right? These guys are worth billions of dollars. So why did they pay all this money for franchises that, it looks like, lose money?

Well, the answer is pretty clear. There are a couple of things that are really attractive. One is, historically, you’ve seen franchises appreciate in value and that appreciation has more than outstripped any cash-flow losses that you’ve had. And if you’re in the right tax position, it’s actually pretty good because you’ve got a tax loss annually on your operating and you’ve got a capital gain at the end that you accumulate untaxed until you sell it and then pay at a lower rate. So you get a deferred tax treatment on the gains and an immediate tax treatment on the losses, that’s not a bad deal.

Let’s say the NBA is a $4 billion revenue business — that’s not exactly right but it’s close enough. Then let’s say you lose $200 million. That’s 5 percent. OK, my franchises are worth — let’s make it simple, 2½ times revenue, which is well below Forbes [valuations] — that’s $10 billion. Now let’s say it’s appreciating at 4 percent a year. I’m getting $400 million in appreciation even though I only have $200 million in losses. I’m getting better tax treatment on the $400 million that I’m making, and I deduct at a higher rate the $200 million that I’m losing. Suddenly this picture doesn’t look so crazy any more.

Secondly, it’s a lot of fun to own an NBA franchise…

NBA.com: The “psychic benefits” Malcolm Gladwell touts.

KM: The psychic benefits are not trivial. Third, there are benefits outside basketball. Like who got a casino? Who got a land deal? Who got real estate? You start looking around, you say, ‘There’s a lot of benefits to being an NBA owner.” You put all those pieces together, it explains why those people spent all that money for those franchises.

What I keep coming back to as an economist is, “Look, you tell me this is a lousy investment. The No. 1 way to tell if something’s a lousy investment, it ain’t worth anything.” There are a lot of firms that are losing money and are going to go bankrupt, look at what their stock is worth — it’s not worth nothin’. But when you tell me these things aren’t worth a lot of money and they don’t make money, you immediately hold onto your wallet. You say, “There’s a disconnect here. Smart guys, a lot of money — well, why are you buying it? Why are you buying something that loses money every year?”

NBA.com: The owners will say there’s been a franchise bubble not unlike the housing bubble. A number of them bought high and don’t think they’ll see the equity growth.

KM: The fact is, guys have not done well over the last few years as asset prices generally have gone down. I don’t doubt that. But to say that you lost money in the worst asset crash in memory — and franchises haven’t gone down nearly as much as many assets have gone down — that’s not telling you you need concessions going forward.

If you go back before the last 3-5 years, these guys did incredibly well. Their franchises weren’t going up by 4 or 5 percent, they were going up by 8 or 9 percent a year. They were making money hand over fist. Should [the players] get credit for that? Should we get that money back? Now those are different people in some cases. They need to go get their money from the guys they bought the franchises from. That’s the guy who has all your money. Not us.

But who bought anything in ’07 that they’re happy with the price they paid? If you bought a house in ’07, if you bought stocks in ’07, if you bought bonds in ’07 — I don’t care what you bought, you’re not happy with the price you paid. When you buy at the top, you don’t make your money. That’s not unique to the NBA, that’s everywhere in life. But by and large, NBA franchise ownership has been a good investment. You can’t base long-run projections on how you did in the biggest financial downturn of the last 50 years. On that basis, there are no good investments out there. But we know that’s not true.

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George Hill on His Recent Exhibition Games, Workouts

by Jared Wade on October 25, 2011 at 12:50 pm · 0 comments

The fellas from Project Spurs recently conducted an interview with George Hill on the exhibition games he played with the ABA’s Texas Fuel. He also talks about the recent workout Hill and Hibbert took part in that was coordinated by Tim Duncan. Those went so well that Roy is headed back for more even.

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Jeff Foster Is Frugal and Shrewd With His Finances

by Jared Wade on October 24, 2011 at 4:36 pm · 2 comments

Bloomberg Businessweek recently put out a sports-themed issues that included an article about the frugal lifestyle of Jeff Foster. With a headline of “Jeff Foster, the Buffett of Basketball,” I was expecting a little more info about him being uber-savvy with investments that have paid great returns. But instead the focus is about how risk averse Foster has been. Which is also fine, I suppose.

Indeed, compared to his car-buying, entourage-supporting peers, Jeff is downright frugal.

At 34, he hasn’t achieved the fame of the league’s stars. Look him up onYouTube and you find this: “Amare Stoudemire dunks Jeff Foster to the ground!” and “Shaquille O’Neal alley-oop dunk over Jeff Foster.” Nonetheless, Foster has played in the NBA for 12 years and earned more than $47 million, and he’s done something extraordinary: He’s saved about three-quarters of his take-home pay. “Jeff’s an example of a pro athlete who’s done it right,” says Doug Raetz, co-founder of True Capital Management, a San Francisco-based wealth management firm that represents Foster and about 150 professional basketball, football, and baseball players.

The article even breaks down his investment portfolio.

“As I learned in my finance classes in college, when you’re in your twenties you invest heavily in the market, and as you get older, you become a lot less aggressive,” says Foster. His initial forays into investing coincided with the peak of the Internet bubble. “I was extremely aggressive investing early on. I put a lot of money into an Internet fund. I watched it go up about 20 percent in the first couple of months, but then it just vanished.”

Foster now considers himself fortunate for having learned an early lesson. By the time he signed his second deal with the Pacers in 2002—six years for $30 million—he had become a much more conservative investor. Today, while he still actively buys and sells stocks, only 13 percent of his portfolio is invested in the stock market. Although Foster and his advisers declined to provide the exact amount of his savings, they did provide a breakdown, by percentage, of his portfolio. The biggest portion—33 percent—is in fixed income, largely municipal bonds. Eleven percent is invested in managed real estate—apartment buildings and student housing that provide Foster with monthly income and tax breaks without the headache of personally overseeing properties and tenants. Eight percent is allotted to private equity; 7 percent is in private investments that aren’t supervised by True Capital Management.

Foster keeps 28 percent of his savings in cash. He says he normally has 5 percent to 10 percent of his portfolio in cash, “but I’m scared of the market now, though I think at some point there’s going to be an opportunity to invest and get a great return.”

It’s a good little piece heralding a guy who hasn’t been heralded as much as he should have been during his career. It could have used a line mentioning that Jeff is one of the best offensive rebounders of all time. But I did learn that he wanted to be a journalist back before he believed he could play basketball professionally, which I find interesting since it’s the exact opposite of my story.

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