Rangers Become MLB’s Version of Citi and BofA

Multiple sources report that Tom Hicks has borrowed at least $15mm from MLB to cover operational expenses this year. Though Hicks has tried to position it as essentially short-term revolving credit, given the dreary state of Hicks’ personal finances, plus the amount he has tied up in illiquid assets (mainly other sports franchises), this loan is unlikely to be enough. Sound familiar? Think Phoenix Coyotes and the NHL – though the NHL mangled the ownership situation, which magnified that problem. Better yet, it’s not too dissimilar from the US government funding large banks to keep them solvent and protect the industry from the ramifications of bankruptcy – obviously at a much smaller, and less critical scale.

Similar to how the government began imposing restriction on salaries, bonuses, and operations of banks that it took equity in, MLB now has a say in business matters for the Texas Rangers. The team made no substantial trades at the deadline to boost their playoff chances and failed to sign its first round draft pick. This creates a conundrum – on one hand the team obviously does not have the resources to increase expenses so MLB is right in not letting them spend. On the other not investing in the team, especially with increased fan interest from the pennant race, punishes the fan base and could lead to lower revenue (decreased ticket sales, merchandise, etc.), effectively increasing financial losses.

Hicks dug his own hole – starting with the egregious A-Rod and Chan Ho Park contracts, right through the enormous investment in EPL soccer. Other MLB owners should not have to cover Hicks’ mistakes. If so, it would incentivize teams to spend beyond their means and assume good old MLB will make everything better. Clearly, not feasible. The consequences of letting it fail come from many angles – how to find 50 new jobs to appease the MLBPA, stadium lease issues, a deserted fan base, a full minor league system of players and affiliates, and that’s without even getting to the legal bankruptcy issues.

The situation has no right answer to appease all parties. MLB’s best protection against this is to prevent it in the first place. Teams should be required to show evidence of liquid funds in excess of opening day payroll before the season starts. Further, when major free agent contracts players are added during the season, the team should again post evidence it can afford the payments. If MLB intends to operate as a financial support system, financial reporting must become more transparent. Maybe it already is within the closely held MLB offices, but this situation should never arise in season unless substantiating circumstances occur. Baseball should not allow owners to field a team without funding lined up to make payroll for the entire season. If they can’t, auction the team, or force new equity partners upon them. However, unlike the NHL, put regulations around the process to prevent the Coyotes situation.

This topic probably warrants a full-length report, but the short summary is that MLB (and all pro leagues) need to prevent teams from reaching this situation in mid-season. Whether that means approving each contract above a certain value, or providing proof of finances to fund payroll, it needs to happen. Akin to applying for a mortgage or apartment rental – the buyer needs to show proof of income to get the keys. Baseball needs to require proof for teams to get the players.