LA Dodgers Latest Victim of Financial Crisis

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The recent financial crisis, brought about largely by a lethal mixture of negligently lax lending standards and often less-than-candid borrowers, has claimed another victim – the venerable Los Angeles Dodgers baseball franchise and the team’s legions of fans.

At the same time, add Frank and Jamie McCourt, the Dodgers’ deeply tanned and high-living owners, to the list of notorious villains that have slunk from the ruins.

In about the time it takes to play an old-fashioned double header, the McCourts journeyed from newly-minted toasts of Los Angeles to joining the ranks of disgraced Wall Street executives like former Lehman Brothers CEO Richard Fuld and Angelo Mozilo, the founder of mortgage giant Countrywide Financial.

The reasons are fairly simple and entirely symptomatic of an era in which everyone seemed determined to believe that real estate prices would never fall.

In short, the McCourts, erstwhile Boston real estate developers, took advantage of a reckless lending environment to obtain a giant loan that left them so deeply leveraged it has apparently pushed them to the brink of default.

Sound familiar? It should.

It’s the same thing countless Americans did last decade, using sketchy credit information to obtain mortgages for houses they couldn’t afford, and then using the paper equity in those homes to fund lifestyles they also couldn’t afford. Meanwhile, they were leveraging themselves into deeper and deeper holes.

Millions of them have lost their homes to foreclosure. Fuld and Mozilo lost their companies to bankruptcy and a fire sale, respectively. Now the McCourts, currently embroiled in a nasty divorce, could very well lose their team.

Last week Major League Baseball moved to seize control of the Dodgers, appointing a trustee to oversee day-to-day operations of a franchise believed to be carrying more than $430 million in long-term debt, according to court records.

“I have taken this action because of my deep concerns regarding the finances and operations of the Dodgers and to protect the best interest of the club, its great fans and all of Major League Baseball,” commissioner Bud Selig said in a statement.

The arrangement reportedly requires baseball to approve any Dodger expenditure above $5,000.

It was a shocking turn of events for the storied franchise, the same organization which under the stewardship of the O’Malley family in 1947 tore down the racial barrier in baseball and, a decade later, brought big-time professional sports to the West Coast.

Ironically, when the McCourts purchased the team from News Corp.’s (NASDAQ: NWSA) FOX division in 2004, many in Los Angeles were relieved to see the team pass from corporate ownership back into the hands of a family-run business: the McCourts would be the new O’Malleys, it was hoped.

But that dream has turned into a nightmare, not least because the McCourts didn’t remain a family for long. In fact, it was their vicious divorce battle – essentially a battle for control of ownership of the team -- that revealed to the team’s horrified fans the harsh reality that the couple were essentially using the Dodger brand to fund an exceedingly extravagant lifestyle.

Michael D’Antonio, author of Forever Blue, a book on Walter O’Malley’s Dodgers, said the difference between the O’Malleys and the McCourts is that the former saw the team as an investment and the latter as “an ATM.”

“Walter built the team as a sports enterprise and a business enterprise. He clearly recognized that, besides the product he put on the field, good will was his major asset,” said D’Antonio.

“Even more than any business I can imagine, sports teams thrive based on their relationship with their customer. You need to have people love you,” he said.

For decades, Los Angeles fans loved their team and loved the team’s owner.

“It’s what’s known as ‘the Dodger way’ and it means fair but all out play. It also stands for the best in everything – whether it’s a spring training facility or the Dodger Dogs sold at Dodger Stadium. The idea was to give Los Angeles something that was first class in every respect. That was the product O’Malley delivered,” D’Antonio said.

In hindsight, the current mess might have been predicted given the circumstances surrounding the sale of the team to the McCourts in 2004 for $430 million.

A lawyer representing Frank McCourt in the divorce proceedings once referred to the purchase as “one of the most highly leveraged acquisitions in the history of major league baseball,” adding that McCourt himself had “put not a penny of cash” into the deal.

According to the Los Angeles Times, McCourt had to borrow $145 million from FOX to get the deal done. His only collateral was a handful of parking lots in Boston.

The team actually flourished under the new ownership, taking on a high profile manager in Joe Torre and making a string of playoff runs led by the flamboyant and wildly popular outfielder Manny Ramirez.

“McCourt got a good product onto the field, but the relationship between the entity called the Dodgers and the community of Los Angeles deteriorated under his ownership,” said D’Antonio. “I think fans sensed a different style. Fans experienced the ballpark and team management as less accessible, less committed to the community, less devoted to doing everything right.”

In 2009, just days after the team was eliminated from the playoffs, the McCourts announced they were separating. After that all hell broke loose. McCourt promptly fired his wife, whom he had installed as the team’s CEO in happier days, and it’s only gotten uglier since then.

As has been widely reported in Los Angeles media, the bitter divorce proceedings have revealed that the couple used the team as their personal piggy bank. Frank drew a $5 million salary and paid Jamie $2 million. A couple of their kids were on the payroll as well, pulling down six figure salaries. Two Malibu homes were purchased, side by side and reportedly valued at $46 million.

Meanwhile, ticket and concession prices rose each year, making it more difficult for fans to attend the games.

“Where the McCourts fell down was in their approach to the team as an LA institution,” said D’Antonio. “I think people feel that. People feel they were too focused on the revenue streams and not enough on what the Dodgers meant to their fans and the city.”

It seems Dodger fans may not have to suffer the McCourts much longer.