Sunday, July 03, 2011

Counterparty Risk Arises Where You Wouldn't Expect It

There's an interesting lesson from the current drama playing out between Frank McCourt, owner of the Los Angeles Dodgers, MLB, and the courts.

Buried near the end of a recent Wall Street Journal editorial discussing the situation, Holman Jenkins mentioned that among the creditors of the Dodger organization are two retired players who are each owed several million dollars. Together, I believe they are at risk for about $20MM+.

Reading that caused me to wonder what on earth their agents were thinking when they allowed this to occur.

According to what I've read, McCourt was in violation of MLB funding requirements when he bought the Dodgers, and has more or less used the enterprise as a piggy-bank for his and his soon-to-be-ex-wife's lavish lifestyles.

Knowing that baseball franchises can become financially imperiled, you'd think that any player's agent worth his 10% would demand that a team buy an annuity or similar funding instrument, if not escrow the funds, in order to assure payment of their client's long term monies to be paid out in the future.

As it is now, the two players are unlikely to be able to get J.G. Wentworth of any of its competitors to pay a lump sum to them in exchange for accepting the at-risk time payments on their contracts.

I guess it shows, once again, how sports agents fail their clients when they, well, fail to understand and take steps to limit or hedge risks like this.

Counterparty risk. Once again, it rears its ugly head and demonstrates how the most seemingly-safe transactions can fall prey to this nasty source of unwanted financial surprise.

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