A New Shade of Awesome

Last Thursday was a day, wasn't it? The trade dust finally settled. The Bulls traded their former future (Tyrus Thomas) for a new one (the salary-cap void he left behind). They also traded two saviors, both Thomas, who was once on some next-level can't-miss shit, and John Salmons, who arrived last year in time to scare Boston and conjure a false vision of the future. The Suns hung onto Amare now that he's been scared straight (no George Bluth). The Rockets got Kevin Martin. The Blazers got the current Marcus Camby while they wait for the better one to get healthy. The Bucks might have made the playoffs. The Celtics united the world's best shooter with its best dunker. The Mavs and Cavs basked in the glow that comes from helping the Wizards destroy themselves and effectively exile anyone ever infected with Gilbertitis.

And, of course, the Knicks completed their science project. After careful consideration, so many ingredients thrown around, and a concluding bang, the smoke in the lab cleared and the Knicks had actually managed to get two-star far enough under the salary cap.

It took Donnie Walsh 22 months to sell off and swap out the assets he was left to administer after the franchise entered existential bankruptcy under Isiah Thomas. The Knicks sent Darko Milicic to Minnesota for Brian Cardinal. Then, they traded Nate Robinson for a player somehow even more grating and circus-worthy, Eddie House, along with two expiring contracts from prep heroes J.R. Giddens and Bill Walker. After that, things got crazy. As you know, the Brickers wound up with Tracy McGrady, a personal victory because never before has my favorite team employed my favorite player. New York also acquired Sergio Rodriguez. The cost was bizarre: Houston got Jared Jeffries, Jordan Hill, a Top-1 protected draft pick in 2011 (Houston can swap picks with New York), and a top-5 protected pick in 2012. Appending New York's McGrady acquisition to the Kevin Martin trade meant that Rodriguez and Larry Hughes swapped roster spots.

About the cost: When Isiah signed Jared Jeffries to a bad contract, I threw up in my mouth. When New York drafted Jordan Hill, I threw my phone against a fence. I wasn't upset to see either leave, though I don't understand why any team wants Jeffries. (Shoals claims that he fits in with Houston's phalanx of longer wing defenders, falling in line behind Battier and Ariza.) Trading Hill so early into his career might seem shortsighted, or tantamount to an embarrassing admission of error, but the latter is a good thing. The Knicks should, indeed, be ashamed as they start Chris Duhon but read about Brandon Jennings and Tywon Lawson. Marinate in that failure. Never forget! The 2011 draft pick "protection" is goofy. Retaining the rights to the top overall selection is like having the pick protected against alien invasion, which seems only slightly less likely than New York winning the right to draft Hassan Whiteside or Harrison Barnes. The 2012 protection is aspirational--it's not even full-on lottery protected because the Knicks anticipate annual playoff trips resuming by then.

About the benefit: TMac, motherfuckers! TMac! He might not drive or elevate as he once did, but he remains lovable, sympathetic, exciting Tracy. He improves the Knicks and makes them far more interesting, even if only for about 30 games.

About the real benefit, and the path forward: As you've perhaps read and heard, Tracy's contract expires at the end of the season. (This is a little-known fact.) When McGrady's terms of employment are taken in concert with the odd bottom line that only Wilson Chandler, Danilo Gallinari, Eddy Curry, and Toney Douglas are affirmatively under contract for next year, the Brickers anticipate having more than $30 million in cap room. Perhaps you've also been made privy to the plan to sign two of the top-shelf free agents: LeBron, Dwyane, Bosh, and so forth. The best-case scenario for New York envisions LeBron and Wade or LeBron and some big man signing with the Knicks and the roster being filled in with minimum-compensation players. That's also the problem.

Why would any premier player want to join a team with so little money for anyone outside of the rotation's top 6? "Rotation" should be in quotation marks because Eddy Curry doesn't play, even when physically capable. Why play alongside so few proven commodities? Bereft of recent success or any rational path toward a title? Teams with two star players that haven't won championships have had stronger supporting casts. To be honest, it is a real problem. No marketing gimmicks or promised media exposure will improve Gallinari's defense or conjure a shot blocker.

Rather, it was a real problem. Last week's events have made clear that the Knicks should forgo a common basketball solution and instead make history: The Knicks should become a bank holding company, the first NBA team to ever undertake such a conversion. Problem solved. Put the champagne on ice, and read the FAQ about this obvious solution should the logic behind it elude you upon first glance.

A bank? What? What is a bank holding company, anyway?
Let's leave the economic nitty gritty to the finance guys and deal in basic terms. Pursuant to the Bank Holding Company Act of 1956, such organizations are those that exercise control over a bank. By investing in so many toxic assets over the years (Curry and Jeffries, Allan Houston's degenerating knees, Stephon Marbury, etc.), leveraging those unreliable bets to prop up short-term viability at the expense of systemic health, and effectively issuing awful loans (paying salaries to so many foreseeable losers who could not deliver the expected return), the Knicks have surely earned technical, if not actual, distinction as the kind of bank that America loves. So this conversion shouldn't be too difficult from a financial standpoint.

The gift and the curse of being a bank holding company is that you must register with the Federal Reserve and comply with Fed regulations. This can elevate regulatory scrutiny, but it also gives bank holding companies access to the Fed's discount window and makes raising capital much easier. Fed loans, stock sales, stock repurchasing--it's all easier as a holding company.

Prominent examples of bank holding companies include Goldman Sachs, CIT, GMAC, and American Express. Look how varied that group is--they weren't even all commercial or investment banks before converting. More importantly, what's the one sort of entity logically missing from that set of peer institutions? A reckless financial concern with a focus on entertainment and sports. A basketball team. Synergy!

Does this mean that the Knicks will have to leave the NBA?
Have to? The Knicks should want to.

First--yes, it's unlikely that the league and the other NBA teams would sit by and allow one of its members to become a bank holding company. There would be complicated legal questions about financial regulation, antitrust, and labor laws. There would be confusion about whether the Knicks control a bank, and about whether a financial-sector holding company could own an NBA team. Unless David Stern and the other owners amend the bylaws to allow for bank holding companies to compete as members, the Knicks probably can't stay in the NBA.

But the Knicks shouldn't want to stay. This conversion is all about capital and artificial ceilings. The NBA's salary cap is too restrictive for a team like the Knicks, which is situated in the most populous city, is supported by fabulously wealthy people, is about to have no problem raising huge sums of cash, and is using a basketball model predicated on outspending and outglitzing everyone. Replacing the stymying regulation of the NBA with the more commodious oversight of the Fed will allow the Knicks to--pun alert--break the bank this summer. If the team opts out of the NBA and converts to a bank holding company, it will be able to sign James, Wade, Bosh, and Joe Johnson. There will be no cap. New York could probably sign John Wall after convincing him to not enter the draft and simply leave college for a unique opportunity. There really would be no limits on what New York could spend.*

Suddenly, a team with a prospective roster of Johnson, Bosh, the four Knick holdovers, and a bunch of league-minimum journeymen would transform into an All-NBA First Team supplemented by an elite bench. The Knicks could even re-sign David Lee under this model. The Fed discount window would provide the Knicks with low-cost capital. Similarly, the team could more easily issue equity if it felt that diversifying its ownership were a worthwhile cost of quickly raising money for operations, payroll, and investments.

*See below in the TARP section for one potential limit.

Doesn't leaving the NBA frustrate all attempts to win an NBA championship, the entire purpose of signing free agents in the first place?
It does, but the question is myopic. The Knicks would leave the NBA and become a barnstorming team. Barnstorming, the Knicks could play anyone, anywhere, anytime. It goes without saying that it would schedule an annual July best-of-seven series against the NBA champion to determine the true world champion. Emphasis on world. Think about the possibilities:

- New York could play challenge-match exhibitions against holdover NBA teams. For example, it could play the Bulls in the United Center during a Chicago home stand on an off day between pedestrian Bulls games against the Bucks and the Nets. Or it could host the Lakers as the team killed time on the East Coast between games against the Celtics and the Sixers.

- New York could play against a non-NCAA-sanctioned college all-star team in a "pickup" game that "just happens" to take shape at some point. So long as the college kids weren't paid, they probably could remain eligible after the ensuing NCAA investigation.

- New York could do a European tour, visiting Josh Childress and competing against league champions from each country. It could be called the Transatlantic Invitational. And, without any scheduling obligations imposed by an entity like the NBA, the Knicks could generate big ticket sales and media exposure by playing specialty games. Just consider the intrigue on Twitter and UStream when the Knicks face their old friend and nemesis by playing whichever Italian league team hires Stephon Marbury.

- New York, with its superstars, could continue to cultivate the Chinese basketball market while opening up markets in other countries where the lead-footed NBA has yet to establish infrastructure and regular presence.

(It seems fair to assume that New York also would enter and dominate some kind of intramural league for bankers and lawyers. You know, something akin to one of those proverbial "lawyer's games" where people like Barack Obama and Eric Holder would be found were they not running the country.)

See the opportunities? The Fed has no scheduling rules. Were the Knicks to compete against the best teams from around the world and to then defeat the reigning NBA champion, would anyone really look down upon the accomplishments? Perhaps the strength of the Knicks' schedule would be questioned. However, enough NBA exhibitions, enough games against national teams, and enough games against champions from strong leagues across Europe, plus all that travel, should assuage concerns.

The Knicks would lose out on 82 NBA games a year and a chance to play in the league's playoff system. The Brickers would also leave behind their history, to some degree. No one would ever fail to associate New York with Willis Reed or Patrick Ewing, but the franchise's legacy would be altered by converting to a bank holding company. However "altered" doesn't mean "diminished," and the conversion not only would create a new business and basketball model, but also would create so much novelty buzz that the organization's standing could be enhanced. Its reputation could be restored through innovation and relentless focus on worldwide basketball supremacy.

What will the Knicks do instead?
See above.

Would the Knicks receive TARP money? Is the TARP program even still going on? Isn't that taxpayer money?
As a bank holding company, the Knicks would be TARP eligible. Though the organization has done an admirable job mitigating its exposure to troubled assets with incalculable values, and though it didn't have as much mortgage liability as some of its soon-to-be-peer institutions, it nonetheless still faces losing gambles (Curry's contract) and environmental difficulty (the NBA's economic model is failing). The Knicks could use the cash flow, as could the NBA. Though the Knicks will be leaving the league upon conversion, the team will remain a competitor in the basketball-talent market place. The sooner that a team like the Knicks gets back to spending lavishly on top-end players, the sooner the basketball capital markets will thaw. More money in circulation will ensure that top talent stays in the industry and that basketball--either produced by the NBA or by the Knicks--continues to fuel the American entertainment economy. That's something all taxpayers should support.

Is TARP even still a thing? Well, TARP money issued to other financial institutions has been repaid, mostly. (AIG, Chrysler, Discover, and a few other firms remain outstanding public investments.) But the program has not been fully extinguished. Further, it was so amorphously constructed, so hastily implemented, and so haphazardly supervised that the Knicks can surely find a way to participate. Never underestimate the extent to which Timothy Geithner will be willing to help a bank.

One consideration that would likely influence the Knicks' decision about whether to participate in TARP is that TARP money has come with limits on executive compensation. Though no one is proposing that James Dolan or Donnie Walsh receive an exorbitant salary, the principle behind concerns about excessive compensation surely would be implicated by paying players such high salaries. Someone like LeBron could probably command $40 or $50 million a year. However, this complication might be overstated. TARP's limits on executive compensation were motivated by populist anger directed toward bank executives who appeared to be profiting from the financial ruin which they helped to create in the first place. There are no such concerns here, and the likelihood of the Knicks turning a profit as the team conquered the basketball world makes New York's conversion into a bank holding company an attractive safe harbor for public funds.

What else will happen if the Knicks convert into a bank holding company?
This conversion will allow the Knicks to begin originating mortgages, something the team has always wanted to do. Now, the team can sponsor Hamptons Night, Columbia County Night, Florida Keys Night, Harlem Renaissance Night, Section 8 Night, Co-Op Conversion Night, and other promotions during which fans can come enjoy basketball and sign the paperwork needed for a dream home, or to finally secure that ideal fourth property on the water. This grows the financial pie at the Knicks' disposal, and it allows for the unique circumstance in which someone like LeBron James also could be the Real Estate King of New York. Try to match that, Akron. Serving as a mortgage broker will allow the Knicks to diversify their revenue streams and (hopefully--fingers crossed) tap into the eventual real estate rebound that Knick insiders forecast as taking hold in early Q3 of FY 2011.

The Knicks also will be offering competitive-rate CDs and free pens.

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At 2/24/2010 3:46 AM, Blogger ugly baller said...

"The internal contradictions within the NBA will cause the league to collapse upon itself, mate." -- Marks, Sean, Capital, pt 3, ch 15.

At 2/24/2010 10:15 AM, Blogger Patrick said...

Nice write-up. Like your style.

At 2/24/2010 11:24 AM, Blogger andrew zebulon said...

this is amazing.

though i would like to point out that Starbury is currently playing for the Shanxi Brave Dragons--although this mythical Knicks-of-the-future would clearly crush them...

At 2/24/2010 11:50 AM, Blogger ArmHead said...

This is the type of writing it takes for a Knicks fan to stay sane. Good lookin' out.

At 2/24/2010 12:40 PM, Blogger walrusoflove said...

then they team up with goldman's and extort the brooklyn site from the nets for 5 cents on the dollar....the russian gets pissed and has putin sell more hardware to the iranians so they can start lobbing nukes

hope james dolan knows the banker playbook...

At 2/24/2010 12:41 PM, Blogger walrusoflove said...

then they team up with goldman's and extort the brooklyn site from the nets for 5 cents on the dollar....the russian gets pissed and has putin sell more hardware to the iranians so they can start lobbing nukes

hope james dolan knows the banker playbook...

At 2/24/2010 12:57 PM, Blogger d said...

Awesome. Pure FD!

At 2/24/2010 8:57 PM, Blogger subtitle said...

amazing read. thank you.

At 2/25/2010 2:36 PM, Blogger Kyle said...

Amazing work Joey.

Please continue to post, possibly some commentary on what the Owners and the NBAPA can learn from the discussions at Blair House or vice versa?

At 3/01/2010 5:16 AM, Blogger Three's Company said...

I'm totally ignorant about bank holding and the like (and thus left behind in reading further), but was initially geeked about your explanation of T-Mac's arrival and Jared's leaving.

Tracy will fool around and get the mid-level exception, if he keeps it up!

At 3/01/2010 6:06 PM, Blogger Bhel Atlantic said...

This was very clever. I think it raises some good questions about whether the standardized, collusive, cartelization of pro hoops is good for the game. (In other sports, there's always Arena Football, minor-league baseball, and AHL, if you don't like the pricey stuff.) NBA teams may be "competing" on the hardwood but they essentially act as a single business entity. ... And if the fans don't like the roster rules and economic culture inherent in the CBA, too bad, the fans are screwed for 6 years. ... That is, until the Euroleague is readily available on US cable TV systems.

At 3/02/2010 1:54 AM, Blogger Joey said...

@bhel--the sports-law writer and teach michael mccann has a forthcoming law journal article that argues the nba, not the nfl, is a better candidate to be considered a single entity. it's not your identical point, but i'd bet he'll explore some of what you're saying.

@everyone--i had a thought today: once the knicks convert to a bank holding company at the end of the regular season, the team should also secure credit default swaps that hedge against the bet that new york can actually sign a good free agent or two. if the team could collateralize its potential failure--and i think there's a good chance it won't get bosh, lebron, or wade--that would create a no-lose financial windfall.


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