- The revenue sharing model that the NBA employs is a big part of what ails the league's financial structure.
- A revamped model is necessary to increase the overall level of competition across the board, so that the "haves" and "have-nots" are not so far apart.
- The NFL should be used as a template, and the NBA needs an owner like the Giants' Wellington Mara to help bring the sides together.
- Mark Cuban could be that kind of guy.
- The federal government, furthering the idea that homeownership is the cornerstone of success, came up with the brilliant idea that if home ownership was so great for the individual and the economy, then more people should be homeowners.
- The government accomplished this discovery of iron logic by forcing lending institutions to lower their borrowing standards. More loans = more home owners = profits for everyone! (Not a far cry from the Underpants Gnome Theory of Economics) The lenders then split up and sold off these mortgages to other institutions that were willing to accept the risk. Ergo, the lenders were able to write massive loans and bear none of the risk.
- Millions of people were now in very large mortgages that they could never before afford; as long as the economy continued to grow, they could continue to afford the mortgage payments, watch their net worth grow, and the upward trend could continue.
- Fast forward to 2008. The economy stopped growing.
- The tidal wave of all of these risky loans force people into delinquency and foreclosure. Freddie and Fannie fall apart and some of the nation's biggest banks face the fear of going under. Century old banks such as Bear, Stearns and Lehman Brothers did.
- Government to the rescue! In the form of the Troubled Asset Relief Program (TARP), the government used taxpayer money to bolster the failing banks. Banks that played the game conservatively are penalized while banks that played the game recklessly were rewarded.
- The giant banks and the government were duly chastened, and began to tighten the reins on the mortgage market.
- Just kidding.
- FHA loans take the place of Freddie and Fannie, reverting back to the risky lending practices that helped sink the market before. Once again, here come the high risk NINJA loans (No Income, No Job or Assets).
- People who can get these loans do get these loans, and the parties who have skirted the capitalist system of risk and reward continue playing the game, knowing that someone else is bearing the risk while they profit.
My purpose for rehashing the real estate meltdown is to hone in on what actually enabled it - a concept called moral hazard. What is this strange term?
3. The Revenue Sharing Proposal
Now that we can see that moral hazard exists on some level in the NBA, the logical question is, "So what? Isn't it good that poor teams get better players? Won't it make poor teams better?"
5. Revenue Sharing and Moral Hazard
Let's try to bring this mess back together. Based on above analysis, we can conclude that moral hazard is the enemy of good decision making, be it in real estate or in an NBA draft. We can also question the premise that a redistribution of wealth would automatically equate to more wins and more competitiveness, because there doesn't seem to be any correlation between a team's profit margin and how many wins they put on the board.
Can we take this in the opposite direction? Given the confluence of the two natures of moral hazard and revenue sharing, can an argument be made that not only would revenue sharing not help the league, but could it actually hurt the league?
Remember, moral hazard is what happens when decision-makers decide how much risk to take, but other people bear the cost if their decision doesn't pan out. As long as their insurance against bad judgment is in place, the decision-maker is not going to be motivated to care either way. A perfect example of this mindset is the Clippers' owner Donald Sterling. His insurance isn't revenue sharing, but is actually the fact that he had the good fortune to buy a team in Los Angeles. His team's financial success doesn't have anything to do with Sterling's ability to hire good executives, develop young talent, or bring good free agents to the team. In fact, those activities are purely incidental to his business approach. Put simply, Sterling is a real estate speculator and the franchise is his revenue stream. He will always be insulated from bad decision-making because his insurance policy, the Los Angeles market, will always be available to absorb the costs when his decisions fail. In fact, he actually has an impetus to NOT change the way he approaches things. If he were to take on additional risk by, for example, pursuing top flight coaches and free agents and they didn't pan out, these bad decisions would hurt his bottom line. Ergo, he will not change the way he does his business.
My biggest fear is, just like the negative consequences of the draft described above, revenue sharing would create moral hazard for poorly run teams, reinforcing their bad patterns of poor decision-making. If they can stay where they are but turn a profit because more successful teams are forced to subsidize them, they are effectively being rewarded for failure. As Gladwell pointed out above, you can never award someone for losing.
6. A Better Question
First, an anecdote: LeBron James, the #1 pick in 2004, carried the Cavaliers to the playoffs five out of the seven years he was there. In 2011, the Cavs will once again be competing for a lottery draft pick, and I'd be willing to wager, the year after that as well. We can conclude two basic things: 1) LeBron James is a once in a generation franchise-altering talent; and 2) the Cavs organization learned essentially nothing as for how to build a successful franchise even as they existed AS a successful franchise.