The Yankees have spent a ridiculous amount of money over the past few days. For those scoring at home, it would be 161 million on Sabathia and 82+ million on Burnett. That’s upwards of 243 million on two pitchers.
Now, my minimal understanding of the current financial crisis is that is started when banks bought up mortgage-backed securities, which worked because of the perception that housing values would always rise. When the value of houses stopped rising, the mortgage backed securities fell apart and lost a lot of value(someone please correct me if I am wrong.)
It seems to me the Yankees are investing in players under the perception that the revenue of baseball will continue to increase.
This is not an unreasonable assumption considering this article. Baseball’s revenue has risen by 50% since 2004, and doubled since 2000. It was over 6 billion in 2008. In the early 90’s they only took in about 1.2 billion. That is about a remarkable 9-10% rise in revenue per year.
I remember reading one of the big problems in the collapse of the housing market was everyone assumed this could keep going, based on past results. What if baseball, like many aspects of the American economy was riding a bubble of revenue increase because Americans had more disposable income as a result of the booming economy?
What happens if people have less disposable income to spend on baseball?
Well it seems the Yankees would have assets(players) that are valued under a faulty assumption and fall apart. Forbes magazine said the Yankees pulled in $301 million of revenue.
The Dow reached a high of 13,563 according to E-trade. It has since fallen to 8630. That’s about 40% loss of value.
What happens to the Yankees if their revenue shrinks by 40% as well? Then they are stuck with a bunch of over-paid players. Or as congress calls, it TARP.
I don’t know if the Yankees will go bankrupt, but I could see a situation where it might happen.
Baseball is the true American sport in that it operates under a free market system. The market should reward the players that are most valuable with a bigger contract. However, a fair contract in a free market system takes into account the value of one player over the rest of the free agent class AND how much money is available to spend. CC’s value is based on his skill against the skill of others AND the available free agent money for teams to spend.
EX: Lets Johan and CC are both worth 5% of the free agent class. Last year Johan made 22 million per year. That means there was $440 million to spend across baseball in the free agent class. If revenue increased by 9.5% then $481 million would be available to spend this year. Then, CC would be worth about 24 million this year, to be equal in terms of the market.
The Yankees effectively increased Johan’s contract last year by 4% in terms of dollars. Is that a smart move? Well if revenue rises by 9%, yes. But if it falls this year they have grossly over paid him.
There is the possibility that the Yankees have paid far above market value on something that is declining in terms of dollar value. Ask AIG and Citi how that works out.
If the Yankees keep spending like they are, they might need a bailout from Congress too.