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The Dodgers sale is being financed by people’s insurance money. Is this a problem?

Apr 10, 2012, 12:03 PM EST

Image (1) dodgers%20logo.jpg for post 3955

Over at the New York Times’ Deal Book blog, Andrew Ross Sorkin notes that the sale of the Dodgers to the group led by Magic Johnson — but really controlled by Guggenheim Partners’ Mark Walter — is being financed with insurance policy dough:

In addition to their own cash, Mr. Walter plans to use money from Guggenheim subsidiaries that are insurance companies — some state-regulated — to pay for a big chunk of his purchase of the Dodgers. Guggenheim controls Guggenheim Life, a life insurer, and Security Benefit, which manages some $30 billion, among others.

Using insurance money — which is typically supposed to be invested in simple, safe assets — to buy a baseball team, the ultimate toy for the ultrarich, seems like a lawsuit waiting to happen.

Sorkin explains that this is especially problematic given what seemed to be a significant overpay for the team and given that Walter has said that he’s not too concerned about immediate profitability. What of the fiduciary duties to the policy holders, he wonders.

While Sorkin seems pretty alarmed by this, he later makes mention of the fact that long-term holdings are not unheard of for insurance-backed investments.  And this is where I think the alarm should stop. Remember: the Dodgers nearly quintupled in value during the McCourt years, despite historic mismanagement by Frank McCourt.

While I appreciate that there is a bubble element to elevating franchise values in any given short period of time, sports teams have proven to be a safer investment than just about anything over the past, well, forever.  It’s like a license to print money.

  1. b7p19 - Apr 10, 2012 at 12:13 PM

    I don’t care if it’s being financed by the Devil himself! Just finish this damn sale!

  2. Gordon - Apr 10, 2012 at 12:25 PM

    Is the team being bought by Mark Walter or by Guggenheim Partners? If its the firm, then I could see how this would be allowed. If it’s Walter, then it sounds like commingling personal & company assets, which might arise in a lawsuit.

  3. Marty - Apr 10, 2012 at 12:27 PM

    While I appreciate that there is a bubble element to [home] values in any given short period of time, [real estate has] proven to be a safer investment than just about anything over the past, well, forever.  It’s like a license to print money.

    There, corrected that for you. Feel better about the veracity of that statement?

  4. yankeesfanlen - Apr 10, 2012 at 12:30 PM

    Varies by state standards but reserves for policyholders must be done by actuarial formulas. They’re risking P&L part of the premiums and the rest is just the same as any other investment. No harm done- or allowed to be- here.

  5. badmamainphilliesjamas - Apr 10, 2012 at 12:31 PM

    This makes for a great headline, but is probably much ado about nothing.

    It’s unclear from the article just how much of the revenue from the insurance business is even being used to fund the purchase. The insurance companies must meet the reserve requirements set by state regulators. Beyond that, companies routinely finance large-scale real estate developments, arguably more speculative than major sports franchises.

  6. dowhatifeellike - Apr 10, 2012 at 12:37 PM

    Buffett made his billions by investing the float from his insurance operations. As long as it’s done responsibly, I don’t see a problem.

  7. sportsdrenched.com - Apr 10, 2012 at 12:53 PM

    which is typically supposed to be invested in simple, safe assets — to buy a baseball team, the ultimate toy for the ultrarich, seems like a lawsuit waiting to happen.

    Craig eventually got to this in his comments, but upon reading this the first time my first thought was “What is more safe than a baseball team right now?”

    I also like this little snub:

    Guggenheim subsidiaries that are insurance companies — some state-regulated

    Like getting through several states regulatory agencies is easier than getting through ONE federal one.

    This just screams of “no one has written about this angle yet, so I will even though it doesn’t really exist.”

  8. lanflfan - Apr 10, 2012 at 1:21 PM

    I’m not sure I understand why this has any relevance. Other companies own sports teams, and presumably they also have a duty to their stockholders. While the rules governing insurance investments may be different, stockholders can be a demanding group. Guggenheim appears to have solid financial and baseball minds in the Partnership, far more than I can say of the soon to be former Dodger owner, or current Mets ownership (and also hopefully soon to be former).

    Would Mr. Sorkin prefer an owner who treats his team like a personal ATM, then declares bankruptcy and cashes in big time? Or perhaps ownership that invested with a scumbag who defrauded people and left them penniless in illegal Ponzi schemes? Both cases are 20/20 hindsight, but both teams need to move on for the good of MLB and their respective fans. Clean up your mess $elig.

  9. stex52 - Apr 10, 2012 at 1:43 PM

    I commented last week (two weeks?) that the amount seemed to be a pretty serious overpay vs. the Forbes estimate of a value of 1.4 B$. At the time we were then directed to an informal analysis that said that the cash flow from the broadcast contract would be so spectacularly ginormous (just had to use that word) that the Dodgers would be swimming in oceans of money and could buy any player in the MLB if they wanted to.

    I am not really interested enough to do an in-depth analysis, but if you assume Forbes has any idea of what they are talking about then it will take a while for the capital value to catch up. But that may not matter if the huge cash flows are really there. The insurance business lives on liquidity and looks for long term investment. It would seem to me a large-market baseball team is exactly what one consider as prudent investment if those are the criteria. If they structure the investment (debt vs. equity) so a steady money transfusion comes out, then they probably have what they were looking for.

  10. cup0pizza - Apr 10, 2012 at 2:18 PM

    Worst. Nightmare. Ever. Thanks, Bud Selig. Destroyed a flagship MLB franchise.

  11. buffalomafia - Apr 10, 2012 at 4:00 PM

    Do I hear Brooklyn Dodgers?

    • Jeff M. - Apr 10, 2012 at 8:52 PM

      Nope. You really don’t. That was 50 years ago, man. They’ve been the LA Dodgers for longer than they were ever the Brooklyn Dodgers. The dream is over. Let it go.

  12. jkaflagg - Apr 11, 2012 at 9:10 PM

    Good stuff…..as you point out, a reasonable investment for an insurance company; I guess it’s just a little strange to hear Walter talk about it as though the investment was made for his granddaughter to enjoy in the future, as opposed to a great investment for the company…..

    The other great point was the consistent increase of value in sports franchises, even before TV rights exploded in the last few years……Where were all the rich guys back in 2004, when everyone was swimming in money from the Bush tax cuts ? How did the team virtually get forced onto a guy with no cash ? Still don’t understand that…..

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