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Thursday, June 05, 2014

The Economist: A singularly team-friendly deal

The magazine’s sports blog argues that human-capital contracts are the solution to the imbalance in bargaining leverage demonstrated by Jon Singleton’s team-friendly deal.

If players like Mr Singleton are willing to offer such generous deals to their employers to lock in a few million, presumably they would give outside investors similarly advantageous terms. With today’s low interest rates, a well-heeled speculator could surely have achieved an expected return far above the market average by giving Mr Singleton a few million dollars, even accounting for the high risk premium associated with the future cash flows of a player with no experience in MLB. Investors could do even better by buying a portfolio of young players, balancing out their individual risks just as insurers do while still pocketing the same profit. The lack of correlation between baseball players’ performances and the gyrations of financial markets is a further selling point.

David Concepcion de la Desviacion Estandar (Dan R) Posted: June 05, 2014 at 02:50 AM | 18 comment(s) Login to Bookmark
  Tags: economics, marvin miller

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   1. Hank G. Posted: June 05, 2014 at 08:50 AM (#4719475)
Well, they offer it as one solution. The other solution would be for the union not to throw pre-free agent players and minor leaguers to the wolves.
   2. catomi01 Posted: June 05, 2014 at 09:02 AM (#4719485)
Well, they offer it as one solution. The other solution would be for the union not to throw pre-free agent players and minor leaguers to the wolves.


Minor leaguers agreed - but pre-FA major leaguers aren't exactly in the poor house. The MLB minimum is 500 K right now and has risen $200 K in the last decade or so. I would happily take that for 3 seasons and the chance to make much more over 3 years of arbitration and then eventual free agency in exchange for being locked into one team for 6 years. Also in the players spot, I would probably accept almost any long term deal offered that didn't buy out more than 2 years of FA - the risk of flameout is just too high to pass up guaranteed money even at below market rates - if you succeed during that contract, the massive payout can more than make up for any earlier years sacrifice.

There are an awful lot more Drew Hensons and Matt Bushes out there than their are Evan Longorias and Mike Trouts - take the money while someone is offering it.
   3. Dock Ellis on Acid Posted: June 05, 2014 at 09:22 AM (#4719497)
but pre-FA major leaguers aren't exactly in the poor house.

The lifetime of health care may be worth more than the 1.5M they get pre-arb. Plus the pension after a mere 43 days of service time (if my google is correct).
   4. catomi01 Posted: June 05, 2014 at 09:34 AM (#4719509)
The lifetime of health care may be worth more than the 1.5M they get pre-arb. Plus the pension after a mere 43 days of service time (if my google is correct).


Definitely...for some reason 10 years service time sticks as an important marker for some of the long-term benefits, but I don't remember the details at all.
   5. Randy Jones Posted: June 05, 2014 at 10:04 AM (#4719534)
10 years of service time is when the pension caps out, but it vests at 43 days(something like $12k/yr at 43 days up to $180k/yr at 10 years service time). It came up recently in another thread.
   6. Tricky Dick Posted: June 05, 2014 at 10:09 AM (#4719538)
Singleton obviously put a high value on getting the guaranteed money up front. That's not an irrational preference, as the article notes. And, I think people don't give enough consideration to pre-MLB prospects' bust rates (typically 40% - 50%, even for very high level prospects). Singleton may believe in himself, but I think it's his agent's responsibility to make sure he knows the odds. Some kind of hedge financial instrument would be an alternative approach to Singleton's preference. If the MLBPA didn't want him to sign the contract, they should have investigated how much a financial hedge or insurance policy would have cost. Given the bust rates of prospects, I suspect that the cost would be high--which would help Singleton and the union determine if it is a good or bad contract offer.
   7. Dock Ellis on Acid Posted: June 05, 2014 at 10:11 AM (#4719543)
Ooohh, thanks Randy.
   8. . . . . . . . . . . Posted: June 05, 2014 at 10:16 AM (#4719547)
Dan, there are a TON of legal issues associated with this. I nearly wrote an article about it in LS.
   9. AROM Posted: June 05, 2014 at 10:52 AM (#4719581)
Yeah, a can think of a few issues, and there are probably a ton that I'm not thinking of.

Say an investor pays a player 50 million for his first 10 years earnings. After 3 years, player would go to arbitration for the next 3. After 6 years, investor would control free agency process I assume. Say the player likes his west coast location, would be willing to sign for 5 years, 80 million. Some rich team on the East coast offers 7 years, 140 million. Player doesn't want to move, but he's given away control.

Since long term contracts are assumed to have some dead money at the end (30 year old player will be more productive in first 4 years than last 3 years of contract) I would assume the investor would take the 7/140 offer and counter something like 4/100.

   10. Rennie's Tenet Posted: June 05, 2014 at 11:03 AM (#4719598)
The ignored factor is that players are motivated by girls, not money. Can syndicates be formed to assure prospects a steady supply of nookie, even if they're injured before free agency?
   11. David Concepcion de la Desviacion Estandar (Dan R) Posted: June 05, 2014 at 12:02 PM (#4719651)
No investor would buy 100% of a player's earnings, or probably any more than half, just like insurers of sports contracts make sure that their counterparties keep skin in the game. The control issue comes up in litigation finance as well. Outside investors do not gain control--they simply price the risk that the player will take less than top dollar into the amount they're willing to pay up front.
   12. . . . . . . . . . . Posted: June 05, 2014 at 12:41 PM (#4719687)
Just as an example, there pesky little issues associated with securing the obligation. See, e.g., the 13th amendment. In the end, the "human capital contract" is no different than a personal loan to the player.
   13. David Concepcion de la Desviacion Estandar (Dan R) Posted: June 05, 2014 at 12:56 PM (#4719698)
Of course. If the player doesn't pay, the funder would take him to court, and could push him into bankruptcy if he spent their money like a drunken sailor. That risk would also be priced into the amount investors would offer up front. I imagine they could come up with some rolling collateral scheme in which part of the player's salary that doesn't go straight to the funder is kept in escrow...
   14. . . . . . . . . . . Posted: June 05, 2014 at 01:48 PM (#4719743)
Of course. If the player doesn't pay, the funder would take him to court, and could push him into bankruptcy if he spent their money like a drunken sailor. That risk would also be priced into the amount investors would offer up front. I imagine they could come up with some rolling collateral scheme in which part of the player's salary that doesn't go straight to the funder is kept in escrow...


(a) No, the funder cannot push him into bankruptcy for spending money like a drunken sailor. The player would have to be not paying his debts as they come due. And actually, bankruptcy is the WORST outcome for your lender, because he will not be repaid in full (though how much and in what way he'd be repaid gets into the nitty-gritties of high-net-worth personal bankruptcy, with which I'm not very familiar).

(b) There are state laws limiting wage assignments. Even in the case of a volunatary assignment, in most jurisdictions, a creditor can't just garnish as much wages as the player is willing to assign over. It's considered to be contrary to public policy.

(c) While the player could pledge his accounts to the lender, that doesn't get the lender very far if the player is up to no good, for reasons beyond the scope of this post. The fundamental problem is that if the player defaults, and the lender calls an event of default, the player will hide in bankruptcy (b/c the player would certainly be insolvent once the debt was accelerated) and the lender will get paid cents on the dollar. If its some sort of equity-like scheme, then the investor would be totally ###### if the player declared bankruptcy, which he assuredly should (i.e., its economically rational for the player to spend every penny on models and bottles and then file for bankruptcy some time later).

Basically, this would be akin to a student loan that's dischargable. It would be a total trainwreck, especially since in the rarefied air of compensation that these folks are operating at (where the stakes are in the 8 and 9 figures) its worth the athlete's while to hire professionals to figure out a way to weasel out. Who would want to be the test case for all these issues? How much extra would have to be priced in for some investor to take that risk?

It makes MUCH more sense for the "investor" here to be the team employing the players. They have the most information about the player, and that information mitigates adverse selection risk (as born out by the general success of players signing early deals, like Longoria). They are effectively collateralized, since they only have to pay the player if he performs (in a legal sense) under the contract. There's no way another investor will be able to beat the team's highest and best offer, since the team has HUGE structural advantages. So why bother?
   15. snapper (history's 42nd greatest monster) Posted: June 05, 2014 at 02:31 PM (#4719788)
There's no way another investor will be able to beat the team's highest and best offer, since the team has HUGE structural advantages. So why bother?

Because I-bankers and Hedgies like to take a fat vig for arranging dubious or economically pointless transactions
   16. . . . . . . . . . . Posted: June 05, 2014 at 02:46 PM (#4719800)
Because I-bankers and Hedgies like to take a fat vig for arranging dubious or economically pointless transactions


But only get paid if the transaction is consummated, which it never would be because the third-party investor will always be outbid. Trust me on this one, snapper, the context is preclusive. This has zero chance of working.
   17. Joe Kehoskie Posted: June 05, 2014 at 02:59 PM (#4719821)
But only get paid if the transaction is consummated, which it never would be because the third-party investor will always be outbid. Trust me on this one, snapper, the context is preclusive. This has zero chance of working.

Why would the third-party investor always be outbid? I'd bet there are plenty of rich jock-sniffers who would be willing to invest (or "invest") in minor leaguers whose team has little or no interest in offering anything resembling a Singleton-type contract.

I don't like this idea because it opens a can of worms, but I could see it appealing both to investors and a non-trivial number of players.
   18. . . . . . . . . . . Posted: June 05, 2014 at 03:13 PM (#4719832)
Why would the third-party investor always be outbid? I'd bet there are plenty of rich jock-sniffers who would be willing to invest (or "invest") in minor leaguers whose team has little or no interest in offering anything resembling a Singleton-type contract.


The issue is that it is very difficult, if not impossible, to structure this as anything but a personal loan. And it would require an enormous amount of effort to monitor the borrower-athlete. These loans could happen tomorrow, but personal loans are generally not economic for the reasons set forth in my post above.

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