Those of you wondering how the global financial crisis is going to affect football might be asking the wrong question. It may not simply be a case of football clubs being affected by the Wall Street collapse. What if they are being run just like failed and failing lending institutions and Wall Street firms – with, at best, scant concern for shareholders and consumers, and sometimes outright incompetence?
The boom years that allowed anybody to get easy credit because lenders couldn’t imagine that the housing market would ever fall again, saw huge overspending and inflated home prices. As businesses with potentially large profits (like housing in a rising market), football clubs shifted their emphasis from means-based spending, to overspending based on projected revenues. But if the market predictions of mortgage lenders, Wall Street firms and the US Federal Reserve could be so far off, why should we think that the projections of the biggest football clubs’ ownership have been any better?
Did it occur to clubs that a shift towards heavy borrowing based on predicted future profits might leave them vulnerable to the same kind of financial difficulties that lenders faced in the US when homeowners saw gas prices go up and their jobs lost, and they could no longer afford to make their payments? That official club shirts and other merchandise are discretionary spending items? That there might be a financial downturn one day, and that, when it comes to choosing between making a mortgage payment and buying a season ticket, a family’s home might just come first?
There is one big club whose buyer funded his purchase by taking out a huge loan, based on high risk debt notes, backed by three US hedge funds. Yes, hedge funds. You may have heard that some of those aren’t doing so well right now. Currently, the debt’s interest payments alone are huge, and the onus for making those payments has, in effect, been passed on to the consumer by large increases in ticket prices.
At least one big English club has a creaking stadium, too small to create the revenue it wants, and is trying to borrow huge amounts of money to finance a new stadium that will make all its dreams come true. Assuming a sufficient loan is secured, is there any guarantee that the money won’t disappear half-way through construction? What if future revenue from success on the pitch, ticket sales, and TV and sponsorship deals don’t match up to projections? Ask Leeds United fans what division their team is currently in – and their club made its mistakes in far less difficult times, economically speaking.
There are clubs run by rich men with little actual interest in football. Sometimes a billionaire drops his toy after he finds a shinier one to play with. Ask Oxford United fans how they like life in the Conference, if you think that won’t happen.
The free market says that a house is worth precisely what a buyer is prepared to pay for it. That’s just as true in a down market. If a club’s having a fire sale, and needs to shift a player and his £5 million/year contract, and all the other clubs in the land are downsizing and economizing in the face of financial difficulties, even if the selling club can find a taker for him, that buyer won’t care how well he’s playing, or how much he was last bought for. If the club needs the money to stay afloat, his value is whatever they can get for him.
Are there any positives? Who, if anyone, will not only survive, but prosper? If you’ve been moaning that your team’s owners lack ambition, don’t buy success in the transfer market, and are thus keeping the club from regaining its “rightful place” among the big boys, stop complaining. Suddenly, running your company with a fiscally conservative business model doesn’t look quite so foolish. Give it a couple of years. If the big boys fall, the meek might be about to inherit the League.