The Jockstrap Bubble Bursts, and Now Sports-Team Owners Are Paying the Price

Last Updated May 11, 2010 6:23 PM EDT

On the sports field, poor performance usually leads to defeat. In the owners' suites, though, where executives have been overspending on player salaries for decades, it's been a different story. Now, however, it's karmic payback time, as sports economics have finally gotten so bad that several owners have recently sold their franchises at a loss -- the first time that's happened since the 1970s.

The reason is simple. Team owners have been able to live high on the hog thanks to an unprecedented three-decade boom in team values: the Jockstrap Bubble. As the financial exuberance of the 1980s, 1990s and whatever-we're-calling-the-last-decade mounted, hot money, ego and new revenues from sponsorships and luxury boxes combined to kick-start a boom in professional sports-team ownership. And once the notion took hold that teams would perpetually rise in value, it wasn't long before owners began blowing through the new cash in ever more extravagant ways.

For example, private equity mogul Tom Hicks, owner of the Texas Rangers, signed Alex Rodriguez to a $25 million per year contract in 2000. While the Rangers never made the post-season with Rodriguez (he was traded to the Yankees in 2004), Hicks -- whose sports empire is now in shambles -- is trying to arrange a sale of the Rangers that is acceptable to his creditors.

The recent financial crisis, however, brought all that to an end. Bank credit, which helped fuel the acquisition spree, dried up along with buyers. With the escape hatch of a sale to a greater fool firmly shut, some owners started to shudder at the thought of their still-rising costs and decided to get out while they could.

Black Entertainment TV founder Robert Johnson recently sold the Charlotte Bobcats to NBA legend Michael Jordan for $275 million, after paying $300 million for the team in 2003. And former Fidelity Magellan Fund manager Jeff Vinik bought the Tampa Bay Lightning hockey team from Oren Koules and Len Barrie for $110 million -- almost 50 percent less than the $206 million Koules and Barrie paid for it just two years earlier. Even teams that weren't sold on the cheap, such as the Chicago Cubs ($845 million) and the Montreal Canadiens ($550 million), undoubtedly would have fetched far more before the financial crisis.

The carnage isn't over. Experts say several teams may be sold at distressed prices in baseball, basketball and hockey. That includes the storied Los Angeles Dodgers, wracked by a messy divorce between owners Frank and Jamie McCourt.
While some team sales have been hampered by tight conditions in the credit markets -- in particular, banks' unwillingness to finance large team purchases as they did in the past -- mismanagement by owners is a bigger problem. Owners have made many mediocre players (and some coaches/managers) extremely wealthy, while paying little attention to their bottom lines over the past 30 years.

Player salaries represent by far the single biggest ongoing expenditure for owners, accounting for well over 50 percent of their costs. And it is in this area where owners have shown the least amount of discipline. Basketball has a salary cap, but loopholes abound. In baseball, owners whose payroll exceeds an established amount simply pay a luxury tax.

The changed economic environment is forcing owners to adjust their spendthrift ways. In baseball, 14 out of 30 teams cut their payroll total this year. NBA owners hope to trim rookie salaries by nearly 30 percent.

Until 2007, owners had bull markets in a wide variety of assets to bail them out. Those markets made numerous people wealthy enough to pay up for teams. And bull markets helped give banks plenty of cash to use in financing purchases. So there was a slew of willing and able buyers out there. Sports teams were caught up in the same bubble that enveloped financial markets, real estate, art and virtually every other asset that could be exchanged by humans.

Once the credit bubble burst, we could see, to paraphrase Warren Buffett, who was swimming naked. And clearly a lot of sports team owners were skinny dipping.