7 lessons from the baseball team's high-profile bankruptcy
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In a dramatic twist befitting a baseball team that plays five miles from Hollywood, the Los Angeles Dodgers filed for Chapter 11 bankruptcy Monday. Bankruptcy is usually associated with near-worthless companies, but the estimated value of the Dodgers ranges from $800 million to more than $1 billion, and the team owes more than $700 million in debt and pending financing.
Lawyers for team owner Frank McCourt have said that the filing is needed because of a short-term cash crunch; the Dodgers are unable to pay team salaries and money owed to a subsidiary. Many suspect another motive: To regain control of the team. In the bizarre world of baseball management, the league commissioner can trump owner decisions. Last week Commissioner Bud Selig did just that, blocking a 17-year, $2.7 billion media deal between the Dodgers and Fox Sports, claiming McCourt was making a hasty deal in order to use part of the cash for personal reasons. McCourt and his wife have in the past spent lavishly using loans against the Dodgers. In bankruptcy, McCourt is hoping a judge will restore his ability to make deals to raise cash.
Frank McCourt isn't poor. "He's someone who has gone from being extremely wealthy to moderately wealthy," says Josh Fisher, creator of DodgerDiviorce.com, a blog that focuses on the break-up and other team intrigue. If there are lessons ordinary savers and investors can gain from the rise of the rich, there are lessons in the stumbles, too. To that end, here's an L.A. Dodgers guide to personal finance.
1. Don't trade productive assets for idle or costly ones.
In the 1970s, McCourt bought 24 acres in Boston from a bankrupt railroad and turned it into a parking lot so lucrative that he was known locally as "parking lot king." After a failed attempt to buy the Boston Red Sox he bought the Dodgers in 2004 from News Corp (NYSE: NWS - News). (News Corp. owns SmartMoney.com.) The deal was financed with debt with the parking lot as collateral. Later, McCourt forfeited the parking lot in exchange for debt forgiveness.
Baseball teams aren't necessarily bad investments, says J.C. Bradbury, author of "The Baseball Economist" and "Hot Stove Economics" (the latter referring to off-season deals made for players). They tend to do well when the economy is growing. But McCourt spent hundreds of millions of dollars on player salaries and stadium improvements, while pulling vast sums out of the company to buy residential real estate for personal use, including neighboring properties in both Holmby Hills and Malibu and standalone properties in Vail and Cabo.
In other words, McCourt used the Dodgers as a middle man to trade his parking lots for posh homes. (McCourt did not respond to SmartMoney.com's requests for comment.) On the spectrum of investments that throw off income, lavish single-family homes are the opposite of parking lots.
2. Try to keep work and personal life separate.
"They put no walls between the business and their family life," says Fisher. "There was virtually uninterrupted commingling of Dodgers money and personal money." The McCourts reportedly drew more than $100 million from the Dodgers for personal expenses. The business also took its toll on the relationship, according to Fisher. "She always wanted to own a baseball team, and she ended up very involved in running it," he says. "Buying the houses was also her idea. She viewed them as a hedge against the risk of owning the Dodgers."
The McCourts, who met as college freshmen at Georgetown University and have been married for more than 30 years, are now locked in a vitriolic divorce. Mrs. McCourt, a former family lawyer, has said half the team is rightfully hers, even though Mr. McCourt is listed as the owner. California is a community property state and so tends toward splitting marital property equally. (Mrs. McCourt did not respond to SmartMoney.com's requests for comment.)
3. Don't let a divorce go to court.
Divorces tend to destroy wealth, but ones that go to court can do so on a massive scale. "The reality is, if they had settled this thing when they realized they were going to get divorced, they wouldn't have bled cash paying lawyers and everything else for two years," says Fisher. They would have also kept private details private. For example, there's the fact that the couple hasn't paid federal or state income taxes since 2004 because they structured their payments from the Dodgers as loans. Or that the Dodgers paid two McCourt sons salaries totaling $600,000 a year, even though one had a full-time job elsewhere and the other was in graduate school. Those details don't help when the L.A. Times is already reporting that a team charity paid one-quarter of its yearly operating budget to a Dodgers senior executive. (The Dodgers did not respond to SmartMoney.com's requests for comment.) Or that the McCourts allegedly paid a 71-year-old Russian healer more than $100,000 to send positive energy to their Boston home.
4. Don't pay healers, Russian or otherwise, more than $100,000 for positive energy.
5. Go easy on debt.
Debt has made plenty of real estate developers rich, but it provides little room for flexibility when the economy tanks. True, finance nerds will argue that debt makes mathematical sense when used strategically, but it also has a way of tempting buyers to overpay. For deeply indebted consumers, the terms can worsen at just the wrong time. Before you know it you're looking at Chase MasterCard advance offers with 4% service fees. Or in McCourt's case, you're having your lawyers ask a bankruptcy judge to approve $150 million in financing from a JP Morgan Chase hedge find at 10% interest plus a $4.5 million fee.
6. Shop for quality, not image.
It's not for nothing that the Dodgers' top creditors are players, including big hitter Manny Ramirez, now retired, who is owed $21 million. The Dodgers focused far more on luring high-price stars than nurturing young talent. "They went out and signed a slugger who's old and kind of a flake--and I'm a fan of his," says Bradbury, who ranks the Dodgers near the bottom of baseball teams in terms of how wisely they spend money on players.
7. Look for opportunity in adversity.
It's too early to say whether the McCourts will make the best of a bad turn. In the meanwhile, fans have ordered customized Dodgers jerseys with the name "Chapter" across the shoulders and the number 11 on the back. MLB.com, which sells the jerseys, has since blocked the ability to do so, but those enterprising fans had the right idea. Here's hoping they make a killing on eBay.
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