The Multimillionaires Who Need Your Money

April 4, 2012

This post ran in slightly different form (well, vastly different form) on Investopedia a few months ago. If you can’t get enough of us here, we’re all over Investopedia. 

Estimated net worth, $1.48 billion. In dire need of a handout. Or a hand up. Either is fine.

 

The Miami (né Florida) Marlins moved into a new ballpark this week. Total cost to taxpayers: obscene. But it’s justified, because a business location that size is far too large to be built with the owner’s own money. Besides, the stadium itself is an economic catalyst. With it, neighborhood businesses (“bars and restaurants” is the catchphrase we’re obligated to use here) see increased activity, and everyone wins.

Which is falsehood on a colossal scale. By the same logic, you can argue that taxpayers ought to foot the bill for every gas station, supermarket, movie theater and hardware store. Of course those businesses don’t get taxpayer funding, nor will they ever. And why not? Because politicians and blind fans have “civic pride” or something in their sports teams, but not their small businesses.

The Marlins play in a climate so conducive to baseball that major league teams from cold-weather cities have been training in it since decades before the Marlins were founded in 1993. Yet the Marlins routinely draw fewer fans than any other team, despite winning 2 world championships in their brief history. And the new park has a (retractable) roof on it. The Marlins estimate they’ll play only 11 or so open-air home games a year.

But because the Marlins used to play in a stadium they shared with a football team, they were losing money. They really had no choice. Now, the new park will enable cash flow, profits, and more importantly, a permanent presence in South Florida. The fans, such as they are, won’t have to worry about the Marlins moving to Indianapolis or San Antonio or some other city that’s big enough to house a major league team but that doesn’t have a stadium.

Is that true? Were the Marlins really losing money? Or any other team, for that matter? The official word is that most major league teams do operate in the red, which makes you wonder why the people who own the teams don’t bail out with their dignity and a few remaining dollars intact. But of course, this is all conjecture. You’d have to get your hands on a team’s financial statements to confirm. No pro sports team has been publicly traded since the Boston Celtics were, in the late ‘90s, so the documents are mostly unavailable to us.

Or were, until a few months ago when an anonymous source forwarded Deadspin the financial statements of several major league baseball teams. (Deadspin did the lion’s share of work for this post, but here’s full attribution.)

The statements included those of one of the perennially sorriest teams in sports, the Pittsburgh Pirates. They’re about to embark on their 20th consecutive losing season, by far the longest such streak in the history of North American pro sports. The Pirates moved into a new $216 million park in the middle of that streak, built courtesy of their generous friends the taxpayers. Did the new park boost attendance?

No. Ahead of the Marlins, the Pirates have drawn the second-fewest fans in the league in each of the last 7 years. (We told you they were consistent.) So the Pirates must be losing money hand over fist, right? Owner Bob Nutting has to be desperate to sell. Heck, if you’ve got a few bucks in the bank and a good credit history, you could probably name your price.

In 2008, a year in which the Pirates’ payroll was slightly more than the $45,047,000 it’s since been whittled down to, they lost 95 games and turned a $14,465,406 profit. On which they paid $57,157 in taxes. Or .4%.

Ticket revenue was $32,129,368, far too little to cover salaries. So how did the Pirates pay their players?

They didn’t. The other teams did. The biggest item in the Pirates’ revenue column is the $39,046,312 they received in transfer payments (“revenue sharing”). With that money, the Pirates could meet 77% of payroll. Fortunately for their opponents, the Pirates didn’t get “their” money’s worth.

A similar item, “Major League Central Fund receivable”, dwarfs all the Pirates’ other current assets. With it, the team’s partners’ equity thus totals $83,536,192. As major professional sports teams go, that figure is in National Hockey League/Arena Football territory. The Pirates’ value is to the Dallas Cowboys’ as the Cowboys’ is to Raytheon’s. Which is hardly big business, but it’s very healthy business: the Pirates enjoy a 17.3% profit margin. Then again, it’s easy to turn a profit when your competitors are covering all your losses and then some.

The unorthodox thing about owning a sports team, as opposed to just about any other enterprise, is that with the former you have an additional objective beyond the standard economic one. Every other business wants to maximize its profits. A sports team wants to maximize profits and, presumably, win. By slashing expenses, and thus relying on the largesse of his fellow owners, Nutting can put a consistently atrocious product on the field and not only turn a profit, but watch the value of his team increase.

Combine a perpetually irrational clientele (“This is our year! It’ll be just like 1979!”) with compliant opponents who agree to share revenue, and the Pirates have little incentive to ever improve. Otherwise, they’d end up with a $200 million payroll like the New York Yankees have, and would be net donors to the general fund, not net recipients.

Nutting’s case is hardly unusual. The Los Angeles Clippers are the NBA equivalent of the Pirates, albeit with one winning season in the past 19 rather than zero. Clippers owner Donald Sterling is notorious for his stinginess, one example of thousands being the time he fired the team’s trainer and asked the head coach to tape the players’ ankles. (Mercifully, NBA bylaws now stipulate what should have been unwritten, that each team must hire a trainer. And pay him.)

Yet the market value of the Clippers has increased considerably since Sterling bought the team for $13.5 million in 1982, even though Sterling himself didn’t do a thing to increase said value. We’re pretty sure that this wasn’t what JFK had in mind when he said that a rising tide lifts all boats. Enjoy the games, everyone.

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Goldman Sachs, and why should I give a damn?

May 2, 2010

Lloyd Blankfein, exhibiting the kind of manicure most of us can only dream of.

If you work for a living, especially if you do anything that gets your fingers calloused or makes you sweat, it’s easy to wonder what a financial services firm does aside from employ well-dressed people to shuffle paper.

Goldman Sachs is a financial services firm, one of the world’s biggest. An investment bank, if you want a slightly more limiting but descriptive term.

You have a neighborhood bank – e.g. Chase, SunTrust, BB&T. You deposit your paychecks there, withdraw cash, earn interest, maybe borrow money to buy a house or start a business. The bank makes money by charging more interest on its loans than it pays out to its accountholders.

Investment banks such as Goldman Sachs have better, more lucrative ways to occupy their time. Say a medium-to-large firm wants to buy another, or sell itself or a piece. The firm hires an investment bank to value the assets and liabilities involved, help with pricing and look for contingencies that the parties involved in the transaction might have missed (e.g. determining the rightful owner of certain assets, making sure that a legal transgression doesn’t render a transaction void.)

Investment banks do more than that, too. You probably know that some companies issue bonds to raise money – in other words, they borrow it from whoever’s willing to lend it. You can buy a bond issued by Johnson & Johnson for a little over $100, and receive 4.061% annually until the bond matures 13 years from now. It’s an investment bank that underwrites that issue of bonds – figuring out how much Johnson & Johnson should borrow and what rate to offer, then selling the bonds to brokerage houses that will in turn sell said bonds to their clients. The same goes for issuing stock, only in that case the investment bank helps determine the initial market price and the volume of the issue. After that point market forces (and in 2010 America, governmental suasion) take over.

Banks like Goldman Sachs also exchange currencies, millions of dollars (or pounds or pesos) worth at a time, to keep their clients liquid and protect them from inflation in whichever nation they happen to be conducting business. Of course, said banks take a cut. An investment bank’s clients also trust it to buy equities, bonds and commodities on its behalf, putting the clients’ assets to (presumably) efficient use instead of just having them sit around in cash that doesn’t earn interest.

Investment banks also create and manage mutual funds and pension funds, pooling different investments to create a meta-investment that you can buy into and hopefully preserve your assets in. Investment banks also manage assets for foundations, colleges and universities, and rich individuals and families. And occasionally, an investment bank will invest in a business itself. In Goldman Sachs’ case, everything from Las Vegas casinos to Chinese meat processing.

So while what investment banks do isn’t as tangible as what engineering firms or agribusinesses do, investment banks still serve a clear purpose that helps resources find their most efficient use, which is the whole point of capitalism and progress. This takes skill and experience. You wouldn’t hire a bunch of teenagers and pay them minimum wage to underwrite your next bond issue.

Investment banking is intellectually challenging, risky, and should offer commensurate rewards. And when the bankers make the wrong decisions – charging too low a rate of interest, buying a security whose price then tailspins – they should eat the losses.

Should.

In 2007 Goldman Sachs made huge profits on mortgage-backed securities, the investments made up of mortgage debt pooled and sold with the promise of interest. Lots of people defaulted on their mortgages, which made the mortgage-backed securities lose money. A couple of Goldman Sachs employees predicted this, sold short all the mortgage-backed securities they could find, and the company profited while other Wall Street firms got burned. However, Goldman Sachs created securities of its own that were dubious and difficult to value – including several whose underlying investment was home equity loans, which are always at a relatively high risk of default. Goldman Sachs stock went from a high of $234 in October of 2007 to $52 in November of 2008.

Around the same time, you helped out by buying $10 billion worth of Goldman Sachs stock. Because it’s your federal government’s job to keep investment banks viable, for some reason.

Greece is bankrupt, or close to it. For 11 years Goldman Sachs helped the Greek government fudge its numbers, allowing the nation to pile up debt that it now has to refinance to the tune of $11,500 per citizen. In 2009, Goldman Sachs received cash from U.S. government ward AIG in return for even more dubious securities. That’s cash that originated with American taxpayers. Goldman Sachs sold further securities (collateralized debt obligations) to investors, then bet short against them, the equivalent of Los Angeles Lakers owner Jerry Buss wagering on the Utah Jazz in their current NBA playoff series against the Lakers (which would pay 17/4 had he wagered before the series began.)

It’s those collateralized debt obligations that are the primary reason why Goldman Sachs is in the news. Goldman Sachs hired an independent firm (ACA) to review them, but allegedly never informed ACA about a hedge fund (Paulson) that wanted to short the collateralized debt obligations. Which would be fine, except Paulson helped select the underlying mortgages. Continuing with the Jerry Buss analogy, it’d be as if Buss hired a new general manager to release his entire starting 5 of Kobe Bryant, Pau Gasol, Ron Artest, Derek Fisher and Andrew Bynum, then signed 5 random New Jersey Nets to replace them.

The 2 Dutch firms on the other side of what became a billion-dollar loss are understandably miffed, and have taken their case to the Securities and Exchange Commission. Goldman Sachs argues that hey, we just bring buyers and sellers together and what happens after that is up to the market.

In a completely unrelated and independent development, Goldman Sachs employees and family members contributed more money to the president’s election campaign than any firm but one. Goldman Sachs CEO Lloyd Blankfein has visited the White House 4 times, which is 4 times more than you. Enjoy your work week.

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