9.25.2008

FD Guest Lecture: Dribble Down Economics



A very timely guest lecture, courtesy of Atticus Van Zandt.

A bad NBA player with a large contract is basically bad debt. It's an asset that's worth significantly less on the open market that what you paid for, and it sits on the books restricting your ability to manage your organization. Zach Randolph is, essentially, an illiquid asset, and there’s not much that separates NBA franchises from investment banks. During the past decade, the NBA saw an explosion of bad debt. The arms race of contracts made the competition for free agents explode and suddenly even mediocre players were getting contracts far greater than their actual worth. While such contracts had always been present in the system, during this time, they threatened to overwhelm it.

Everybody makes mistakes. It’s when everybody makes mistakes at the same time that you get gridlock (and unintended pregnancies).Sometimes this gridlock can be resolved by somebody simply taking a step back so that somebody else can step forward. You admit your mistake, pay your penance and somebody who made better decisions benefits.

Most NBA fans understand the mechanism through which bad contracts are typically resolved is trade. However, when a large number of franchises are burdened with the same kinds of albatross contracts, trade is suppressed. I can't trade you my Antoine Walker (even if I sweeten it with a David Lee) if you've already got a Big Country Reeves on your payroll. The system breaks down, nobody gets resolution and otherwise healthy franchises whither. To whom do you pay penance when everybody has sinned equally?

In exceptional times of collective mass lapse in decision making– when you can’t take a step back because the guy behind you followed right into the same mistake– resolution is much more complex. You need a central figure to facilitate progress. Sometimes it takes a hero. But just as often, it takes a goat. Someone who’ll not only eat everybody else’s trash, but do it willingly, because that’s what he was made to do. When extrapolated to a larger scenario, that goat takes on an almost messianic quality.



What you need is one place where everybody can dump their bad debt, even if it's just for pennies on the dollar, to get it off their backs. With all the troubled assets collected in one place, you have one severely struggling entity, but the overall community actually improves. That’s where the goat steps in. And since at least 2003, there’s been no bigger goat in the NBA than Isiah Thomas and the New York Knicks. Steve Francis, Starbury, Eddie Curry, Jalen Rose, Penny Hardaway. Jerome Williams. Not only did they take on contracts that nobody else would (or could) touch, they re-signed depreciating talents to new contracts, thereby keeping them off the market indefinitely. You don’t think somebody else would’ve signed Allen Houston if the Knicks hadn’t re-upped him? Maybe nobody else would have paid quite the same premium, but he would’ve become a drag on a payroll nonetheless. The same goes for Jerome James.

Hank Paulson is obviously an NBA fan in the midst of bringing the Knick theory to the financial world. Essentially, what the Treasury is proposing is the creation of a government-sponsored Fail Corporation—a financial markets version of the Thomas Knicks, who's job it is to collect all the bad debt from the open market so that the otherwise healthy organizations can get their illiquid assets off the books and continue to operate and trade with each other. The Treasury will play the role of James Dolan—a pocketbook that’s limits are matched only by its tolerance for under-performance. It’s unclear who will play the role of Isiah, who in a brilliant stroke of irony has himself turned into a bad contract sitting on a balance sheet.

However, the real lesson of the exercise is to rewrite the legacy of Isiah in the NBA. Had he not come along, would the league have suffered the same crisis as the credit markets? Would troubled franchises like the Hornets or Trailblazers have ever seen the relatively quick recovery they’re now enjoying? Where will the Zach Randolphs go now in an Isiah-less league after even the Grizzlies and Chris Wallace have turned up their nose?



Just as the collective greed of the American banker hasn’t increased significantly in time leading up to the credit crunch, neither has the intelligence of the NBA general manager leading up to this time of prosperity in the age of Isiah. There are still going to be marginal players signed to contracts far in excess of the actual value of their ability that will clog payrolls for years to come. The question is, how will the league manage this bad debt in the future? Instead of one huge debt dump, you might see a smaller collection of mini-Knicks spring up to fill the void, but such a four-quarters for a dollar approach would surely lack the efficiency of one central institution. You could even see a slight shift in regulatory controls, such as we have already seen the NBA move toward with the limited contract forgiveness.

However, the role of Isiah may have been little more than an anomaly that helped to prop up a fundamentally untenable system in need of a drastic change to its structure. The Knicks, like the government bailout, may be a disservice by merely delaying the inevitable collapse needed before a real cure can be found. As the Steve Francises of the future accumulate across payrolls, the league will stumble inevitably along to stagnation. Without an Isiah to relieve the pressure, the NBA will be forced into places that would previously be unthinkable. Other leagues have seen such desperate times before, and that’s why NFL players don’t have guaranteed contracts.

Men are generally praised most for actions that are against their instincts- by doing the things they know will cause them harm, but will benefit others. The difference between a goat and a grenade jumper is that the jumper has to overcome his basic wiring to perform his task. That’s the action of a hero. The goat’s action is actually driven by his instincts and performs his task the same way he breathes air. While it may not be heroic, there should still be some appreciation for something that simply functions the way it was intended– like Rain Man watching the dryer spin. And it’s in that simple appreciation, that Isiah should find his legacy. In the meantime, the financial world, and the country as a whole, unknowingly waits for a goat to perhaps save them from the real, painful change they need.

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20 Comments:

At 9/25/2008 4:43 PM, Blogger #44 said...

I have read this site for close to two years. Love it. Nothing had provoked a "comment". I work in finance. I am a Knicks fan. This is the most brilliant piece I have read in my entire life.

Including Kundera.

 
At 9/25/2008 5:09 PM, Blogger TheGreatPumpkin said...

This essay was awesome.

There's an interesting parallel here. Where did Isiah/Dolan get all that money to spend? Well, from Wall Street bankers & lawyers paying top dollar for luxury boxes and courtside seats. Thus the Knickerbockers bailed out l’equipes all throughout Main Street USA. But the bill must come due and the piper must be paid, proving why Kant was right: now those bankers are hungry and Joe Sports Fan must bail them out.

 
At 9/25/2008 5:20 PM, Blogger Louie Bones said...

I think I just figured out what Theo Ratliff can give to us before he leaves this realm:

As a child, I was actually profoundly affected when Michael Irvin lay on the ground with a broken neck. Upon this realization, the crowd in Philly began to cheer the end of his career.

Perhaps Stephon will go up for one of his silly, flashy layups, and Theo can play the role of Tim Hauck, and end this national nightmare. Then the roar of the crowd begins, and Stephon can move on to a hilarious and lucrative broadcasting career.

/see you in hell

 
At 9/25/2008 5:34 PM, Blogger jawaan oldham said...

People, people, people. As intelligent, well-written, and entertaining as this post was, it misses the real truth: the Knicks are an ongoing experiment in sporting altruism, with the motto "We suck, so you don't have to." This is the designing principle. Stop overcomplicating things.

 
At 9/25/2008 6:47 PM, Blogger Sweat of Ewing said...

And thus He decided to take the sins of the world on His shoulders so that we might gain forgiveness for our sins and a new and righteous relationship with the One True God through Jesus Christ our Savior. Amen Isiah.

 
At 9/25/2008 11:01 PM, Blogger berts said...

Really a beautiful post, just as I was getting tired of all the electioneering.

 
At 9/26/2008 12:58 AM, Blogger Kareem said...

May I also draw another allusion: will Donnie Walsh-the embattled and tested manager of the old guard- or D'Antoni-the maverick of the new league-really address the underlying causes that led to such a calamity that has been the Knicks. Neither had much to do with the initial collapse, but both were mostly complacent as disaster loomed. Now they are called to clean up the mess, when neither really has a solution that addresses the real reasons of the equity failure.

Nice article.

 
At 9/26/2008 3:54 AM, Blogger Derek Harper said...

Anyone who saw my comment yesterday probably realizes I'm an ardent Isiah apologist. Rather than simply insult me, can someone please explain exactly what makes JYD and his spiritual heir Renaldo Balkman dead weight? I loved watching them play, they are electric every minute they spend on the floor, making wild shit happen and generally clipping electrodes to the team's balls and revving the engine. Is FD not FD in blue and orange? (and not in Charlotte) Why do some bad teams get play here while a group of phenomenal athletes with a poisoned mindstate get constant Palin treatment? Plenty of players in the Association don't have jump shots. Few finish with the ferocity of a Jerome or much more forcefully, a Renaldo. Seriously, am I crazy? Do you guys have a need for dunk or a lazy eye fetish? Why is T Mac a Greek hero and Steph a spoiled athlete? (PS Isiah was a terrible free agent GM, but in this New Yorkers opinion that is more a result of the vicious NY media machine and the need to produce headlines immediately then a procurement of bad debt. In an attempt to turn your metaphor, what does this crisis say about the market?)

 
At 9/26/2008 5:57 AM, Blogger D.J. Foster said...

Stephon is a well documented money grubbing, delusional, selfish, coach fighting, truck party having son of a bitch.

As far as likeability goes, you'd be hard pressed to find too many people who prefer Stephon over T-Mac. At least he seems like he cares about wins and losses- Marbury just wants to get paid.

If you read The Last Shot by Darcy Frey, it portrays Marbury as being pretty nasty and money grubbing as just a young high school freshman. His family isn't much better either.

I can see how people like T-Mac. I can't say the same for Marbury.

 
At 9/26/2008 10:36 AM, Blogger mdesus said...

So pretty much since you started posting about politics this year I've written off most of what you've said. Don't take offense I generally write off anyone who is adamant about a single candidate as representative of a sea change in the current abysmal (universal) state of political machinations. For me barak isn't much better than J-Mc. I mean their policy suggestions both require higher taxes (stupid), and a general scaling back of individual liberties (disastrous). But this move by mccain seems to fit so well with your idea that his whole strategy is based around evasive nothingness. I mean I'm just blown away with how well it predicted (if extrapolated) to what he's currently doing. Well played good sir. Please now predict my future.

 
At 9/26/2008 12:28 PM, Blogger Nate Jones said...

This just made my morning!

 
At 9/26/2008 12:50 PM, Blogger Spencer said...

Fantastic work. That is all.

 
At 9/26/2008 1:45 PM, Blogger Bethlehem Shoals said...

Two days ago, this pitch showed up in the FD inbox out of the blue. And now, it's one of the best things we've ever run. Let that be a lesson to any of you out there with big ideas and nowhere to put them.

Also, just want to add: I think that, as much as the election stuff started as pro-Obama vigor, by the end it was about the way in which this campaign has really replaced strategy with style (as opposed to the usual style-for-substance switch). Especially in the case of McCain. Out with the playbook, in with the non-stop, non-sensical fireworks.

 
At 9/26/2008 1:46 PM, Blogger Bethlehem Shoals said...

And yes, style in all its forms fascinates us.

 
At 9/26/2008 3:45 PM, Blogger stopmikelupica said...

Amazing! Great post. I picked a good day to return back to the US....

 
At 9/27/2008 6:37 AM, Blogger Fat Contradiction said...

This is asinine.

While I applaud FD's halting steps into the world of political economy, I have to point out that none of the theorizing goes anyplace without attention to history. I'm not saying you have to go back to Red Holzman here, but wasn't Scott Layden an absymal GM long before Isiah? And in exactly the same ways?

I'm no Isiah apologist, but I do get sick of the one-note Simmons-like bashing.

And Marbury, for all his faults, is one of the most interesting basketball-related figures of the past half-decade. His interview of Kareem was flat-out fascinating, and his often-maligned sneaker initiative is the best thing to happen to that industry in decades.*

*Okay, well, maybe "happen" should read "be tried and basically fail". Regardless, it's easily as important and provacative as the new Radiohead model for selling records.

-Fat

 
At 9/28/2008 2:36 AM, Blogger Jack Barnett said...

This comment has been removed by the author.

 
At 9/28/2008 4:19 AM, Blogger Zeke said...

This is the best thing I've ever read on freedarko. Hands down.

Regarding Obama: He's not a miracle worker or a Saint. He's not going to be able to do much of what he promises. My own political views are Chomsky-esque in that I believe our government is incredibly corrupt and the two parties agree on a wide range of policies. Obama's not bringing a revolution to the White House.

That said, every day I become more and more impressed with Barack Obama's intelligence, demeanor and innate decency. I consider it an honor to vote for him. I can't think of a politician IN MY LIFE that I've ever felt that way about. I'm actually humbled to have the opportunity to vote for him.

 
At 9/29/2008 11:52 AM, Blogger miguel said...

wow ..this is the first NBA article that i read that I felt warrants a comment. i have never seen the knick's woes in those terms. well done allegory. although I don't think that it's valid ..its still a very interesting post.

kudos!

 
At 4/13/2009 2:01 AM, Blogger 平平 said...

^^Thanks!!

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