Capital Gains - Why the Lockout Is Stupid

[LooseCannon]

In 2010, Chris Cohan sold the Golden State Warriors for a reported $450 million.  In 1995, he bought the team for $119 million.  So, he made $331 million on the sale.

David Stern threw out the ridiculous number of $400 million for what NBA teams would collectively lose in 2009-2010.  That's more than $10 million per team.

Now, let's imagine Chris Cohan lost $10 million/year in operating costs.  He still made $181 million despite operating at a deficit.  That still seems like a fine profit.  And it's even better because capital gains are taxed at a lower rate than other income.  Professional sports teams sometimes act as tax shelters for billionaires who want to indulge in a hobby of owning a team.

The problem isn't that teams are losing money on operating costs.  The problem is that a bunch of super-rich owners can no longer subsidize annual operating losses while waiting to realize monstrous capital gains when they get around to selling the franchise because they lost money on arcane financial trickery peddled by investment banks (or in some cases, they were the bankers).

In analyzing doctors' malpractice insurance, there's something known as the insurance cycle; malpractice insurance price increases are dictated by the state of the economy, not the payouts in malpractice cases.  The insurance companies don't make money by bringing in more money in premiums than they pay out in damage awards;  they make money by receiving what amounts to a no-interest loan in the time between receiving a premium payment and paying out an award and uses that money for market investments.  When their investments go south, they try to make up for it by charging doctors higher premiums (and blaming the increases on frivolous lawsuits).

The same principle is at work in the NBA.  With the economy in the tank, some of the owners aren't as able to maintain the operating costs for their long-term investment in owning a sports franchise due to their bad investments.  Their response is to try and squeeze the workers.

[Fafnir]

Your analysis assumes that all NBA owners are looking upon their team as an investment that they want to sell sometime in the relative short term. For a lot of owners that isn't the case. These are the owners that are likely to be around long term, thus they are the one's Stern is likely to listen too.

[bdm860]

Where the NBA has gone from the 90's to the present makes it apples and oranges.

Let's look at it like this.  Bob Johnson bought the Bobcats for $300M in 2003 and just sold it to Jordan for $275M in 2010.

http://www.nytimes.com/2010/03/19/sports/basketball/19jordan.html

With his $275 million purchase approved by the N.B.A. on Wednesday, Michael Jordan has become the new face of the Charlotte Bobcats....Robert L. Johnson, the founder of Black Entertainment Television, who paid $300 million for the expansion franchise in 2003...He lost as much as $100 million on the franchise.

[Fafnir]

Where the NBA has gone from the 90's to the present makes it apples and oranges.

Let's look at it like this.  Bob Johnson bought the Bobcats for $300M in 2003 and just sold it to Jordan for $275M in 2010.

http://www.nytimes.com/2010/03/19/sports/basketball/19jordan.html

With his $275 million purchase approved by the N.B.A. on Wednesday, Michael Jordan has become the new face of the Charlotte Bobcats....Robert L. Johnson, the founder of Black Entertainment Television, who paid $300 million for the expansion franchise in 2003...He lost as much as $100 million on the franchise.

This shows you exactly how it doesn't always work out.

Furthermore your analysis assumes an infinite supply of ever increasing wealthy owners buying out the old owners. At some point a franchise won't be valuable as a holding if it never makes money.

[LooseCannon]

Sports franchise values may be a bit of a bubble.  The owners are probably paying themselves fat salaries while asking the players to bail them out.

[Fafnir]

Sports franchise values may be a bit of a bubble.  The owners are probably paying themselves fat salaries while asking the players to bail them out.

I doubt they're paying themselves all too much, my guess is that they let their underlings and other non-basketball expenses get way out of control.

[BballTim]

In 2010, Chris Cohan sold the Golden State Warriors for a reported $450 million.  In 1995, he bought the team for $119 million.  So, he made $331 million on the sale.

David Stern threw out the ridiculous number of $400 million for what NBA teams would collectively lose in 2009-2010.  That's more than $10 million per team.

Now, let's imagine Chris Cohan lost $10 million/year in operating costs.  He still made $181 million despite operating at a deficit.  That still seems like a fine profit.  And it's even better because capital gains are taxed at a lower rate than other income.  Professional sports teams sometimes act as tax shelters for billionaires who want to indulge in a hobby of owning a team.

The problem isn't that teams are losing money on operating costs.  The problem is that a bunch of super-rich owners can no longer subsidize annual operating losses while waiting to realize monstrous capital gains when they get around to selling the franchise because they lost money on arcane financial trickery peddled by investment banks (or in some cases, they were the bankers).

In analyzing doctors' malpractice insurance, there's something known as the insurance cycle; malpractice insurance price increases are dictated by the state of the economy, not the payouts in malpractice cases.  The insurance companies don't make money by bringing in more money in premiums than they pay out in damage awards;  they make money by receiving what amounts to a no-interest loan in the time between receiving a premium payment and paying out an award and uses that money for market investments.  When their investments go south, they try to make up for it by charging doctors higher premiums (and blaming the increases on frivolous lawsuits).

The same principle is at work in the NBA.  With the economy in the tank, some of the owners aren't as able to maintain the operating costs for their long-term investment in owning a sports franchise due to their bad investments.  Their response is to try and squeeze the workers.

  I don't think that the lockout is related to the economy as much as it is to salary issues. Too many players are overpaid with long term guaranteed contracts.

[wdleehi]

My hope is that the owner see how hard it is to dig yourself out of a bad team with the setup as it is now. 


They want more flexibility to dump players that do not earn their contract value.

[wdleehi]

My hope is that the owner see how hard it is to dig yourself out of a bad team with the setup as it is now. 


They want more flexibility to dump players that do not earn their contract value.

Because losing teams lose money.  Especially if it is year after year.