The Credibility Crunch: The Professional Athlete Asset Bubble

I think it’s time we discuss the true asset bubble of our generation: professional athletes, a problem best understood by comparing it to the recent financial crisis.

The similarities are initially astounding, but instead incriminate animal spirits that are pervasive in all aspects of human society, whether it is an investment bank selling overvalued packaged bundles of leftover scraps or Carson Palmer .

The story always begins the same. A talented, young athlete receives national attention. He wins a big game or a championship for our team, so we love him and inflate his character.

Kids and adults alike look up to him; the public wants a role model, so the media inflates his value and more people buy into him. We trust his inflated value and character.

Marketers realize this and use him to sell products to us; as Andrew Ross Sorkin recently noted that if there is a demand on Wall Street, a supply will inevitably arise , the same principle applies to the athletic world.

We begin to trust him even more and before we know it, there is a full-fledged asset bubble on our hands.

Like CDO-squareds and tech companies during the turn of the millennium (and China now?), every couple of years we come across an athlete who is supposed to be the greatest thing since sliced bread.

Advertising sponsors and agents, much like the rating agencies, ooze of moral hazard. They are supposed to inform us how valuable athletes are, but stand to gain from artificially high perceptions of the values of their clients.

Unless the athlete has already been marked as a distressed asset in which case they sell it short (see Iverson, Allen), ESPN, Drew Rosenhaus, Scott Boras, Gillette and any other commercial entity involved lie through their teeth to get you to believe in an artificial construction and value of an athlete.

My favorite is the crossover between the two worlds that occurred when Jim Cramer got in on the action, pumping the now-defunct "financial whiz-kid" Lenny Dykstra like he does every other investment possible (see what happens to nat gas in a couple years).

At some point in time, we stopped caring about the athletes we idealize. I can think of no greater example of this than when a football player incurs a serious injury and everyone’s first thoughts are about how the injury affects his or her fantasy football roster.

Our focus has shifted from person to production and we don’t actually examine the athletes/role models that we place such immense faith in. Like the financial firms, we stopped doing our due diligence and began to trust the face value credibility ratings issued by agents, teams and media, who have every incentive to convince of an artificially high value.

This is how Dwight Howard goes from Dwight Howard, apostle to the NBA to Dwight Howard, “I won’t let the team cheerleader, who is the mother of my illegitimate child, say my name.”

In this obviously sensationalized ESPN expose he says, “I’m Dwight Howard and this is my story.”

No, it’s not; this is the story that you, ESPN and much of the public want to believe. In truth, this is just the part of your story that is convenient for all members involved.

Like the complex derivatives of the crash, inflated athlete values are predicated upon flawed models that remain completely oblivious to lessons learned mere years before.

However, this problem is worse in the cases of professional athletes because of the human qualities of the assets themselves.

These often-malignant athletic assets are incentivized to convince us that they are AAA-rated. Imagine the damage that would have been done had CDO-squareds been able to further convince investors that their artificial prices were justified?

Idealization of professional athletes is not inherently wrong or dangerous. But we often forget that just like MBS and CDO-squareds were not miraculously exempt from the risks of typical investment vehicles, athletes are just as prone to making mistakes as we are; the only difference is that they have a greater incentive to do so.

Perhaps we want to believe there are people who are perfect; maybe we think that they need to be role models for the children that look up to them; maybe we just do it so we can relish their inevitable falls from grace.

Regardless, what effectively results is a system of reinforcing institutions that accelerates the idealization of athletes.

Along with the increased revenue from playing the role model image comes increased temptation; and for most athletes with outrageous egos they delude themselves into thinking they can have their cake and eat it too.

Take Shaquille O’Neal as an example. Here is an athlete who has created dissent and imposed himself on every team that he has been on. From “Kobe how does my ass taste? ” to his recently revealed affair with the live-in wife and baby mother of none other than Gilbert Arenas , Shaq’s hyper-egotistical nature has been immaculately documented (ESPN aired short clips about Shaq’s disregard for rules a little while ago).

It is refreshing to see athletes that can remain humble despite all we give them; however for the overwhelming majority of them, they can only be told, “You are great” so many times before they actually begin to believe they are great (Former Texas Tech Football Head Coach, Mike Leach highlights potential sources of this phenomenon with unparalleled insight). They can get away with murder .

Ultimately, the bubble bursts. There is not enough liquidity to cover the difference between the marked values and the market values and we realize they’re not who we thought they were . And somehow it blows our minds.

Could anyone have possibly suspected Marvin Harrison’s hand-eye coordination could also be used to unload firearms on other human beings while he was catching passes and setting records?

They have no choice but to default because unlike in the finance world, there is no bailout. There is no TARP, stimulus, counter-party bailout or TGLP for them. Many do file for Chapter 11 and restructure to salvage their reputation to some degree.

However, this very rarely has tremendous success. The athlete’s value depreciates severely; no sponsor wants to align itself with the athlete; the cycle reverses in the opposite direction; our former hero is now our goat.