Soccernomics: The Timbers, The Beavers and Paulson

Ross William Hamilton/The Oregonian

The folks that think that the PGE Park makeover for soccer is folly must believe that Merritt Paulson is a naive rube. I think they misunderestimate him. Paulson appears to be a sharp businessperson and, from my small sample of personal interactions with the Timbers front office, he appears to have created an top-class organization, at least on the business end of the deal. I recently purchased my season tickets and had a few questions and concerns was very impressed by the response I got. I even complained recently about the abrupt logo change after buying the boy a t-shirt and got a very professional and courteous response from the company contracted to sell Timbers merchandise.  I think Merritt saw an opportunity in soccer and Portland and has been shrewd in exploiting it and navigating the treacherous waters of local politics.

The news that Paulson is likely selling the Beavers comes as no surprise, with no future in Portland and soccer in the ascendancy, Pauslon's best bet right now is to focus on the Timbers. But don't think he is taking a bath on his Beavers investment: he bought the Beavers and Timbers together in 2007 reportedly for around $16 million and is in negotiations to sell off the Beavers alone for $20 to $25 million. Not bad  for a three year ROI - shrewd indeed.

I, for one, will be sad to see them go and sad at the loss of the lazy summer evenings and afternoons in PGE Park watching baseball.  It is great to know you can walk up, buy a general admission ticket and find a great seat.  But the fact is that PGE Park just doesn't work for baseball in Portland but is great for soccer and soccer is on the rise.  The World Cup ratings bonanza experienced by ESPN and Univision evidences a growing appetite for the sport in the US.  Here is a great recent article from Fortune about the Timbers and Beavers:

FORTUNE -- Portland, Ore. is the city of a thousand nicknames. "Stumptown," perhaps its oldest, harkens back to the region's logging roots. "Beervana," a nod to the city's renowned craft brew scene, is another favorite. Rumor has it, violent protests prompted George H. W. Bush's staff to christen the city "Little Beirut." But if Henry Merritt Paulson III has his way, "Soccer City USA," may become Portland's next big moniker.

The son of former Treasury secretary Henry Paulson, Merritt, who goes by his middle name, bet big on Portland's underserved sports market in 2007, when he convinced his family to buy the AAA baseball Portland Beavers and minor league soccer Portland Timbers for an estimated $16 million. Four years later, the investment may begin paying off when, riding the wave of post-World Cup popularity, the Timbers become Major League Soccer's 18th franchise in 2011, and Paulson, a 37-year-old former NBA and HBO executive, becomes the league's youngest owner.

"The timing is terrific," says Paulson, overlooking the field from his PGE Park office. Tall, thin, and with a collection of baseball and soccer gear strewn about his office, he looks like he could rip off a batting practice session at any moment -- but the constant ding of emails hitting his inbox shows how unlikely that is.

"Anybody who's doubts soccer's relevance need only look at the ratings and the attention that the World Cup has received here in the states," he says. "The awareness and the interest is at a high point."

On the other hand, interest in Portland Beavers baseball couldn't be any lower. Since being named a charter member of the Pacific Coast League in 1903, the team has existed as various franchises under a slew of different owners, and it has been affiliated with an array of major league teams.

Currently, the Beavers are the top farm team for the first place San Diego Padres. But on this day, most of the Beavers' 19,566 seats will sit empty as fewer than 2,500 fans tip the turnstiles to watch the team's ninth inning rally fall short. The Beavers have played in multi-use PGE Park since 1956, and currently share the stadium with the Timbers. But next year, under the MLS's $35 million expansion agreement, they will be evicted. The MLS mandates that their teams play in soccer-specific stadiums. So after $31 million of public and private-funded renovations, there will be a new pitch in Portland, but it won't be for baseball.

MLS's Game Plan

The MLS's edict is grounded in savvy business planning, as the league hopes to dodge financial troubles that have plagued past, now-defunct American soccer leagues. "The MLS has built itself for the long haul," says Paulson. "It's been fiscally conservative and prudent, as well as successful in developing soccer specific venues, which is crucial." According to MLS Commissioner Don Garber, soccer-specific stadiums are necessary to maximize revenue through premium seating, television-optimized sight lines, scheduling priority, and increased advertising opportunities, including naming rights.

Considering the league's track record, it's hard to argue with Garber's recommendations. Founded with the proceeds of the U.S.-hosted 1994 World Cup, the league began with ten teams in 1996 and will number 20 teams by 2012. In 2007, MLS also saw considerable growth after the 2006 World Cup, with David Beckham signing with the Los Angeles Galaxy, the signing of a 10 year $100 million clothing and equipment deal with Adidas, and with Toronto -- one of its most profitable teams -- joining the league.

Expansion fees, which are somewhat commensurate with team values, have also climbed in recent years. For example, Toronto payed $10 million to join MLS in 2007, while the Seattle Sounders paid $30 million to join in 2010. Montreal, the next team to join after Portland and Vancouver, B.C. launch in 2011, will pay $40 million to become a member in 2012. The fees give teams rights to operate a club in their market, the opportunity to join the board of governors, and an ownership share in MLS's marketing arm.

If Seattle's success is any indication, the potential for Portland and Vancouver is promising. The Sounders were just named Professional Sports Team of the Year by Sports Business Journal, beating competition from the NBA, NFL, NHL and MLB. Partially owned by Paul Allen, the team plays at the Microsoft (MSFT, Fortune 500) co-founder's Qwest Field, and averaged 30,000 fans per home game in their 2009 debut season. In 2010, the stadium expanded its soccer capacity to nearly 36,000 seats, and has continued to sell out every match along the way. "In my view, this is one of the most successful launches of a pro sports franchise ever," says Garber.

With about 20,000 seats, Portland can't match Seattle's attendance, but the league still expects it to perform well and hopes some Pacific Northwest rubs off on the team. As a minor league soccer squad, they already pack the stadium and recently sold out a "friendly" exhibition match against Seattle in just six days.

A loud, raucous group calling themselves "the Timbers Army" occupies an entire section of PGE Park and stays on its feet the entire game. Away from the pitch, Adidas makes its North America headquarters in North Portland while Nike's (NKE, Fortune 500) worldwide nerve center is in nearby Beaverton. Local youth soccer participation levels are through the roof, and the area's televised soccer viewing is among the highest in the nation, says Garber. "There's clearly something very special taking place in the Pacific Northwest as it relates to soccer," he adds.

[Read the rest at Fortune]

The lingering question is why hasn't Portland supported the Beavers in greater numbers? Theories abound about whether the city is a 'baseball' town and I don't really know the answer, but decent MLB ratings on Portland TV suggest something else about the reality of professional sports in this media saturated age: when the best is easily available in your home, going out to watch minor league baseball feels like a compromise - especially for a town the size of Portland.  I just don't think minor league sports work well in big cities anymore.  I have a sense that a MLB team would be well-supported, but who knows?  We'll probably never find out.

Anyway, as for me, I have my Timbers tickets and am looking forward to the atmosphere that the new PGE Park will provide for soccer and for never-ending advocacy of moving the small time stuff out so that the Timbers can play on grass. I will miss the Beavers though and those lazy nights at the Park with friends and kids.

MLS in Portland: Attacking a Straw Man

Once again this week the MLS to Portland idea is being attacked in an Op-Ed in The Oregonian. Earlier in the week William Glasgow had a thoughtful piece in which he expresses support only if the risk were fully born by Merritt Paulson. In general he was against it but for generally good reasons (he doesn't believe the net social benefit is worth the potential net social cost). Today's opinion, however, is disingenuous and uses a fictitious straw man to attack the proposal. Dave Lister latches on to a comment made by Paulson to the legislature that there would be 600 construction jobs and 300 permanent jobs created by a new MLS franchise in Portland. This was clearly a nod to the fiscal stimulus idea during the current downturn. The 600 are short term jobs during a time of excess unemployment, full stop. Mr. Paulson has been admirable in his restraint from talking about the overall growth enhancing aspect of an MLS team because he knows that the evidence for this is just not there.

Yet Mr. Lister in his opinion chooses to construct out of this a straw man that claims Mr. Paulson was claiming exactly that: the MLS team would be an engine of growth. [He also have some seriously convoluted logic claiming that Sam Adams, an MLS supporter, is weakened by scandal and that makes an MLS deal more likely. Say what?] Claims that saying 'no' to previous public goods projects would have funded the Sellwood Bridge replacement and other more worthy endeavors is simply disingenuous. Bonds used to pay for the PGE park renovation and the Convention Center, for example, are still being serviced in large part by operating revenues. The Sellwood bridge will bring in no revenues, so the two are not comparable.

So what does Mr. Lister's prefer? Well, private enterprise of course. In his mind the city should give the $85 million to small businesses and they would be happy to hire folks. So let's pay small businesses to employ people - that's the free market at its best! Seriously, this plan is not about long term jobs it is about the livability and vibrancy of the city. Small business will thrive in Portland if it is a place people want to be, to spend time and where businesses want to locate. I believe that MLS will help enhance the city. I would, though, I am a huge soccer fan. Those who don't like soccer (and have any idea what they are talking about) will probably disagree and this is where the debate should be, not on tired fallacies of engines of economic growth.

The facts are that the MLS, after some early fits and starts, is now a solid sports league with stable profit-making teams. This is evidenced by the explosion in franchise fees, now at $40 million, up from $20 million a few years ago, the number of purpose built stadia, and the steady rise in the quality of play. Recent franchise additions have thrived - Seattle has already sold 20,000 season tickets before they have even played their firs MLS game - partly because tickets are reasonably priced. Smart business people are investing lots of money because soccer, the most watched sport in the world, has huge growth potential not just in domestic markets (like the NFL, for example) but in worldwide markets.

Anyway, as the least happy city in the US, don't you think we could use some more entertainment around here??

[Note: The Miami bid has been pulled, leaving only four bids left (out of seven initial bids) and few serious contenders. The probability of landing a team if a deal can be reached with the city, therefore, is very high - almost a certainty.]

MLS in Portland: Now or Never

A deal has been struck between Merritt Paulson and the city to bring MLS to Portland that addresses all of the community task force's concerns and protects the city against downside risk.  Portland is unlikely to ever have such a deep pocketed, committed investor in sports in the city again.  And it is virtually certain the chance to land MLS will not come around again. It is also pretty much a lock that the city will be awarded a franchise if the city approves the deal. Given the willingness of Merritt Paulson to take on almost all of the risk of the deal, the city should go forward with the deal to bring MLS to Portland.  

The only objection left seems to be the use of urban renewal district money to help fund the projects.  This is a small risk: if these projects do not increase the value of those districts, then this deal will end up being a net diversion of some funds.  However, given the plan now includes a Rose Quarter ballpark, the chance that the deal will substantially increase the value of the that district is very high, especially with the Blazers investing in the area as well.  Though it is unlikely that areas around PGE Park will yield much net revenue, the Rose Quarter drawing thousands of baseball fans all summer long, should provide year-round stability.  And as I have said before, the logic of urban renewal districts has nothing specifically to do with blight, any investment that increases the value of surrounding properties qualifies.  Blighted areas have a greater potential for increased values if the specific investments work, but also include greater risk as the tipping point is farther away.  So, as a whole the deal should provide a lot of positive tangible and intangible benefits to Portland with very little cost and almost no risk.  

Though city councilors suggest the timing is bad given the state of the city budget, I actually think the timing could not be better.  With unemployment rising rapidly and commodities prices at historic lows, the cost of construction should be at a low point, and money borrowed to fund construction projects will stimulate the local economy at a time when we desperately need it and when federal stimulus is not going to do the whole job.  

There are times, and this is one of them, that city leaders need to shed their focus on the day to day business of the city and think about the long-term vitality and livability of the city.  Pioneer Square was a stupid idea - a massive diversion of potential city tax revenue that could have funded schools, essential services, etc.  But looking back it is now seen as a watershed moment in the city's history.  A pivotal decision that created a focal point and revitalized the downtown core.  And even it has had substantial problems.  It took a number of failed businesses before Starbucks became a solid tenant in the restaurant (this was not the original idea) and the former Powell's Travel Bookstore space has been equally problematic.   But would anyone seriously suggest today that the square was a mistake?  Economists understand that we live in a world characterized by scarcity but the fundamental lesson of economic growth is that it takes investment in the future to ensure our prosperity.  Investments necessitate short-term sacrifice for long-term gain.  In this case, thanks to Paulson, the sacrifice is minimal for the city (though large for Mr. Paulson) but the potential gain is huge.  

The city should not look this gift horse in the mouth and made the bold decision to move the city forward even in these difficult times and approve this deal.

Two-Sided Risk and the (Portland) Paulson Plan

Merritt Paulson is obviously weary of sounding like he is threatening the city so, in his opinion piece today in the O, he very carefully makes a point that I have mused about before: without this deal to bring MLS and build a new baseball park, will the city be considerably worse off then it is today?

People who criticize the deal seem to assume that Paulson (or a new owner) can afford business as usual, but I am not at all sure that is true. Beavers crowds are paltry and Timbers crowds are not much better - are these franchises viable in the long run as tenants of PGE park? I doubt it. The Beavers are probably going to need to move anyway and the Timbers are not going to service the debt to PGE park. Without a permanent tenant in PGE park, the city is on the hook for all of the past debt. So while the risk of doing the deal has been discussed ad-nauseum, the risk of not doing a deal seems pretty high as well.

The risk to the servicing of the existing debt exists in either scenario, the appropriate question is: is it higher or lower with the plan? This is the story I wish the The Oregonian would cover.

Soccernomics: Timbers are Third Most Valuable Franchise, Who is Laughing Now?

There was some predictable guffawing round about the time Merritt Paulson was contemplating selling the Beavers baseball team and trying to get the city on board with the plan to convert Civic Stadium to a soccer-specific facility.  Soccer, they said, is never going to make it in America, what a stupid investment.

I defended him and the deal at the time and I have never regretted it.  But I was especially offended at the characterization of Paulson as a rich-boy rube that is going to take a bath on the MLS deal and take the city down with him.  Well, it has been a couple of years so let's take a look at where this whole cockamamy MLS-in-Portland thingy stands.

Forbes yesterday released its list of the most valuable MLS franchises and, yes, the predictable ones are at the top, Seattle and Los Angeles, but look which team is number 3:

The Timbers had an estimated revenue of $39 million in 2012 on operating income of $9.4 million.  If memory serves Paulson paid $20 million for the franchise fee for the Timbers, now the franchise is values at $141 million and on Tuesday MLS announced the newest franchise will be Orlando City who will pay $70 million.    Seems like a pretty shrewd investment - the Timbers could probably be easily sold for nine figures today - just four short years and a five fold return on investment (okay, there was a lot of other money spent on the stadium and such but still...).

Oh and on the field?  The Timbers are playing in the Western Conference Finals for a spot in then MLS cup on Sunday.  Go Timbers!

Public Finance: MLS and Convention Centers

I guess I'll admit at the outset that this post doesn't really have a single, solid point, just musings about two Portland public finance issues in the news in the last day or so.

First there is the convention center hotel project. Now I understand the basics: to attract big out-of-town conventions, it is necessary (it is argued) to have a adjacent big hotel to house conventioneers and potentially have additional banquet and lecture space. Building such a hotel privately is more expensive because private debt is more expensive than public debt, so the idea is to have the city finance the construction and then contract with a major hotel chain to manage the property.

I have lived through just such a project in Denver where they undertook a major expansion/renovation of the convention center and built an 1100 room hotel across the street with public money. Apparently, it has all gone very well: bookings have doubled and the hotel not only pays for the servicing of the debt but actually returns money to the city from excess revenue. I found a Dallas News article claiming that many cities have had considerable success doing these projects.

But does it make sense for Portland? I don't know but there seem to be some major challenges. First, the Oregon Convention Center is small. Really small. Denver enlarged their convention center by 50% before the hotel to assure their ability to attract large conventions. [The American Economic Association's annual conference - a gigantic affair - is going to Denver for the first time in 2011] Second, the competition for conferences is pretty fierce and while Portland in the Summer is a lovely place to visit, it is going to be hard to compete against places like Phoenix (and even Denver) for bookings in the other times of the year. Third, the bond market at the moment has gone haywire and the cost of municipal bonds may be far too high if they can even find buyers. Finally, the convention market may be hit hard by the economic downturn, though I think this will be a couple of years at the most, so by the time the hotel comes on-line, we should be getting back to OK times again.

So the moral here is it CAN make a lot of sense and be a huge boon for the city, both financial and in terns of redevelopment. The area around the convention center in Denver was awful but the renovating of the center and the new hotel rejuvenated the area and attracted new private investment as well. Of course, this was in the downtown core so it was a bit of an easier sell than in Portland. But it is by no means certain that it WILL make a lot of sense.

The second public finance issue in Portland is Merritt Paulson's proposal to remake PGE park for an MLS team and build a new baseball stadium for the (Portland) Beavers.

I have blogged about this in the past. I have two points. One, the view that there will be net positive investment in the city from this does not reveal itself in the data, though it can be an effective way to focus investment (as is the idea for the Lents location for the baseball stadium). Two, the benefits for Portland may not all be pecuniary and there may, in fact, be long-term pecuniary benefits that we don't see in studies of the impact of stadium investment. The non-pecuniary stuff is the exposure, the civic pride and involvement, the utility Portlanders get from having an MLS team. This could be negligible, but it may not. I was surprised in Brazil, the cradle of soccer civilization (sorry England), to see MLS shirts on young hipsters. This may lead to long-term pecuniary benefits just the same way we think of arts and cultural assets in a city. You create a place creative and energetic people want to live and work, you attract businesses and even tourists. I admit, MLS is a very small star in the sports universe of the USA, but I believe it will become huge and worldwide within my lifetime. Merritt Paulson, a smart guy, is betting $40 million on the same thing.

[I do have one HUGE concern: it used to be that MLS had a no-artificial turf policy, but they have abandoned this unfortunately. I hope Paulson is not planning on turf for PGE park, because I, for one, will not pay to see pinball soccer played on turf. It is painful to watch.]

The challenges for this project are similar to the hotel: uncertain economic times ahead, a bad bond market, and questions about the net revenue projections.

I often think that electoral cycles make the government too myopic and this leads to too little investment in the medium and long term economic health of the cities and states that they serve. So I am pre-disposed to think that taking some risks for future investments is a good thing, and I am here as well. I personally hope that Portland can find a way to do both.

Soccernomics: Grass - or Not

I have blogged a few times about my desire to see soccer played on natural grass.  I have lamented the decision by Merritt Paulson to install artifical grass at PGE Park.  And I have argued that the new modern natural grass field technology works pretty well in controlling moisture.

But I have to say that this is about as clear and direct an explanation as you could wish for, and I find it convincing.  This is from a Timbers Q&A with Merritt Paulson:

This is very simple. If we could have a quality grass field, we would. We cannot. PGE Park is below grade and only a small fraction of the field, especially after our new configuration, receives direct sunlight. That fact in and of itself makes PGE Park a unique challenge for grass even without the weather in the Pacific Northwest. In addition, add training needs (although we will provide a grass training complex for the team) to our fall high school and PSU football games that we will host, to our weather and you have an equation that simply does not work. Imagine an October soccer game, when the grass no longer grows in Portland, the day after a football game on grass. No way to get rid of football lines and an awful surface. Our organization has looked at this long and hard and will continue to look at it as technology advances. Turf is much better quality today than it was 5 years ago, and we will look at a product that favors soccer. Additionally, we will likely have our own custom grass cut-outs for exhibitions when necessary.

Let's hope that field turf comes up with a modified, soccer-specific, product soon. I think that the main adjustment would be to have slightly longer blades of fake grass to prevent the ball from bouncing too much and to slow the momentum of a rolling ball.  But still, soccer played mostly without tackles is just not the same.

Fred Thompson on the Bailout Plan

For the last week or so, I have been following the comments on the bailout/rescue plan on BlueOregon and Oregon Catalyst, which reflect local left/right thinking. The comments have been running 10/1 against. And, presumably, this has something to do with the negative votes of the majority of the folks in our congressional delegation. However, most of the comments just don’t make sense. They remind me of Howard Beale standing up during the middle of his newscast crying, "I'm as mad as Hell, and I'm not going to take this anymore!"

The Paulson Plan is quite simple. Both the Fed and the Treasury see the immediate problem as one of monetary contraction. As the value of bank assets drop, so too does their ability to extend credit. Why is the value of their assets dropping? No one knows what they are worth, so they aren’t worth much. Buyers won’t sell; sellers won’t buy except at extremely distressed prices.

If the immediate problem is preventing monetary contraction, the solution is to buck up bank balance sheets. That can be done by swapping T-Bills for the commercial. Moreover, if the Treasury makes the swaps by reverse auction they will also jump-start the market for the assets not offered for sale. It should work.

What are the disadvantages of this plan (all plans have disadvantages – there are no free lunches)? One is stressed by libertarian monetary theorists like many of the 200 signers of the economists’ petition against the bailout: the monetary /banking system is prone to excess, because it is so interconnected, politically responsive (corrupt), and debt dependent. We ought to let the market sort things out. If it takes a depression, so be it. We’ll be better off as a result. This view has some merit, but I’d prefer not to run the risk.

On the other hand, folks like Paul Krugman want to go even further than Treasury. Rather than relying on open market operations, something the Treasury knows how to do. They want the Treasury to take an equity position in failing banks as the Swedes have or Treasury did with Fanny-Mae and Freddy-Mac. This would minimize the risk to the public fisc, but probably also deter private investors from making investments in this sector.

The Paulson plan does not rule out this option, but neither does it require it. It is a sensible, prudent middle-of-the-road proposal.

In the mean time, three cheers for Darlene Hooley. It is nice to be represented by an adult.

Major League Soccer in Portland

The Oregonian reports today on Merritt Paulson's request that the city borrow $75 million on the bond market to pay for renovations to PGE Park and to build a new Beavers stadium in Lents so that he can buy an MLS franchise and bring it to Portland. The obvious economic question is: is this a good idea for the City of Portland?

[A quick disclaimer, I have played soccer all my life, am a devoted fan of the sport (and pretty good judge of teams - see my amazingly insightful prediction of Spanish success in the European Championship in June) and personally would welcome an MLS team in Portland.]

There has been quite a bit of economic research on the effects of new stadia and new teams and the results are in general agreement that there is little measurable net positive impact of teams and stadia to overall investment or economic activity. This research has done a lot to change the public debate about such projects, ten years ago, you would probably have heard about stadia being economic engines driving the city forward. Now, there is little in the way of overblown promises about being a boon to overall economic activity and, I think, Paulson and the City of Portland are to be commended in keeping the rhetoric subdued: with reasonable patronage, the teams could service the debt. Portland would carry the risk and the reward is an MLS team and a nicer place to watch baseball.

Though overall investment and economic activity are not seen to be increased by stadia construction, there is some agreement that such projects can serve as focal points for investment. In other words they can attract investment to an area that might not otherwise see it. This comes form the fact that there are positive externalities that comes from gathering people together in new or improved stadia: you bring custom to areas that would not normally see it. This custom is not totally captured by the teams themselves and thus there is a positive benefit that can be captured by those interested in opening up shops, restaurants, bars and even new housing.

Anecdotally, Denver is a good example of this. Before Coors field, Lower Downtown in Denver was a run-down warehouse district, with the new ball park it is now a thriving entertainment and shopping district and many, many new apartment projects have sprung up around the park advertising their proximity to the park and the district. [A caveat: we will never know the counter-factual - would LoDo have had the same renaissance without the stadium? This problem plagues economic research and we do the best we can to try and deal with it, but all of this evidence on the impact of stadiums is, at best, strongly suggestive.]

So, while there does not seem to be evidence of overall increases in economic activity (e.g., we should not expect the Portland tax revenue to increase), it is reasonable to talk about creating a focal point for local investment. Whether the small minor-league park envisioned for Lents is enough to drive enough investment to really create a change in the area is an open question, but I suspect so (it will also, hopefully, be small enough to avoid the other side of the externality: noise, trash and traffic). Open to debate, however, is whether there is another way to create a self-funded way to create a focal point (e.g., BIDs).

So is it a good idea? Well, people derive happiness from having sports and cultural attractions (we often see survey evidence of such attractions being a prime reason people choose to live where they do) but it is a very hard thing to measure. The point is that the benefits of having sports teams is more than just the measurable economic activity that they create, but the utility people derive from their presence. Whether it is worth the risk to the City of Portland to finance the stadium projects ultimately depends on how much these sporting attractions matter to Portland residents.

The Oregonian also published today an Op-Ed piece that argued that the City should not invest in stadia but rather green jobs. In it the author points out, rightly, that there is no evidence of overall net increases in economic activity or tax revenues from such investments, but wrongly suggests that we should, therefore, expect no local investment in Lents. These two things are not the same. What is worse is that the author presents a false dichotomy: invest the $75 million in energy improvements for housing. I have nothing against such a proposal in principle - but it has very little to do with the sports stadium proposal. The $75 million for stadia is intended to be self-funded, the green housing proposal is not self-funded. The fact that the city would borrow $75 million could impact their ability to raise more funds as cheaply in the future, but should not prevent them from investing in green housing or other such proposals in any significant way.

Global Panics Call for Global Response

What is clear this morning is that the coordinated (and quite dramatic) action of both US and European governments have potentially turned the tide on the global banking panic.  Individual actions were not enough, the finance sectors of each individual economy are so intimately intertwined that confidence can only be restored by coordinated action.  Of course the rally in the worlds exchanges could be short lived and there will still be blood spilled in the banking sector, but for now the outlook is positive.  

This all begs the question (once again): are the world financial markets so enmeshed that a global system of regulation and oversight is needed?

By the way, I am often asked about the strategy of buying equity rather than buying the toxic assets as in the Paulson Plan.  I am generally in favor of this for three reasons: one, the toxic assets are so complicated that figuring out what to pay is very hard - buying equity is simple and can be done quickly; two, buying equity is a direct capital injection that gives the government something tangible in return for its investment; and three, I think it restores confidence more forcefully than the buying of toxic assets.  But I also have hesitations: one, the government, finding itself part owner of failing banks, have a new incentive to prevent them from failing - even when they should; and two, if one is worried about rewarding the fat cats for bad decisions, this does that more directly.  On balance I am tilted pretty far toward the direct equity approach, especially after the terrible response by the market for the Paulson plan.

Soccernomics: Crests

WARNING: SPRING BREAK USELESS POST AHEAD

What is an American Soccer team supposed to do, try to be distinctly American or nod to the traditions of Europe when it chooses a team crest? Soon the Timbers will have to decide: from the Meritt Paulson Q&A:

Q – Josh Thompson:
when are you going to release the new crest?

A – Merritt Paulson:
June

I favor the classic European look.

The history of the MLS is that most teams started with pretty horrendous American-style logos:

Then they slowly moved toward Europe and things got better. So, since nobody asked here is my guidance for the good folks at the Timbers when looking at current MLS crests:

GOOD:

(Though the name is atrocious)

OKAY:

OH GOD PLEASE NO:

As for the Timbers, the current/throwback crest needs to retire back to the 70s even though it is pretty cool:

The new version actually was headed in a good direction but then some slanting and waving sent it off course and it seems a bit unfinished:

Lets hope for something classic, but a little better than the Sounders managed to do. 

By the way, the timbers army has done a nice job with their new crest:

This is not a small decision, so I imagine a lot of market testing will go on.  I think the key is to test it among soccer fans, not random 8 year olds  - which is how I imagine the Clash and Burn logos above were decided upon (fire breathing horse! scorpion!! AWESOME!!!).  Given that Portland is perhaps the most traditional and tradition-rich club in the US, I am optimistic.

MLS and The Beavers: Can it Still be a Public Good if it is For-Profit?

The Oregonian has the news that Beaverton has expressed interest in being the new home of the Portland Beavers. This makes a lot of sense and seems to be the best of a host of second-best alternatives (what exactly are we going to do with the Memorial Coliseum that we hadn't thought of before?). I am not sure why it is necessarily better than Lents except it would be Beaverton, not Portland partnering with Paulson.

In the same article the O reports that the plan to renovate PGE Park will come before the city council on Thursday for a vote, and it appears that everyone on the council is reasonably happy with it given that it does on include new urban renewal funds. Thus Portland is one step closer to the reality of MLS.

All this is interesting in its own right, but not what really strikes me, what strikes me is the many commentators who think that public goods and private ownership are incompatible. Most Oregonians would probably accept that art museums, cultural facilities, zoos, science museums, etc. are all important public goods and enhance the lives of most residents of a city and a state. The fact that they have a large positive externality argues for government participation in these activities. But spectator sports also have a positive externality - just look at how many people showed up to support the Blazers for simply making the playoffs. [Of course this externality can be negative, witness the JailBlazer era]

Just because wealthy owners like Merritt Paulson are in it for profit does not mean that there is no public good aspect of spectator sports, nor does it necessarily mean that such sports would exist without public involvement. But I do understand that it is as much about perception as anything else. Still, though there may not be any great economic growth enhancing aspect to spectator sports does not mean the city does not benefit from their existence.

By the way, not to be too anglophilic, but my suggestion for the MLS ready PGE park (other than real grass) is to have a big sign in the rafters saying "Welcome to Goose Hollow" in the tradition of many English clubs that are defined more by their neighborhoods than by their cities.

Thoughts on the First Two Timbers Games

In no particular order.

• It was nice to see Merritt Paulson getting love form the Timbers Army on opening night: they chanted 'Merritt Paulson' as he walked off the field.  For a guy to put so much of his own money on the line to revamp and create a real purpose for a city-owned asset, it is amazing to me how much flack he takes - mainly from the city's relatively small investment in its own building.
• I was surprised to see how much of the upper seats the Timbers had blocked off - a huge loss in revenue - but very glad: the concourse of the old stadium and the concessions and bathrooms can barely manage the crowd as it stands.  More would simply be too much.
• The entire operation has been very smooth, very professional and it has been great for all fans.
• The tradition of standing for the match seems to have been adopted by some other sections in addition to the TA sections, including mine.  I am of two minds: it is great to see the support, but I also see quite a few kids and some old folks who can't see anything for the entire match. 
• You gotta love John Spencer's enthusiasm (and the players clearly love the guy judging by how many go and hug him after a goal). When the Timbers conceded the second goal on Sunday, Spencer walked back to the bench enclosure and kicked in fury so loud the bang reverberated throughout the west stand.  
• Cooper is working really hard out there and is a beast to handle for a defender, but his touch around the goal is a bit off.  If he can get that going, watch out. Ditto for his understanding with Perlaza.
• There is a great mix of kids, young adults, middle agers, and oldsters at the stadium, it is really a community event and great to see.
• The Timbers Army has been fantastic: endless energy and enthusiasm but all in good taste.  
• The field is SMALL - there is a lot of congestion that the Timbers have dealt with better than other teams.  Can the Timbers make this a home advantage ala Arsenal at Highbury? (and that is the last I'll mention of Arsenal for a long, long time). 
• Civic Stadium has had a wonderful new rebirth and is incredibly cool - especially its downtown location.  And the number of people cruising the streets downtown in Timbers gear on match day is phenomenal.    

Soccer in Portland Redux

On Monday, The Oregonian had another article about the success of Major league Soccer in the US. And while the article was fine, by focusing on past and current demand I think it missed an essential aspect of investing in a business - expected future returns. MLS has made major strides in its short history: there is now a steady roster of teams, many new soccer-specific stadiums, more wealthy owners and an increasing talent pool. But these are only partly why franchise fees have gone from $10 to $40 million in a few short years. The fundamental trajectory of soccer, the world's most popular sport, in the world's biggest market is clear: up, up, up.


This is different than saying 'everyone else in the world loves soccer, so should the US,' this is about the fact that the soccer crazy world spends a lot of money following soccer and watches it rabidly. Top European soccer teams are as valuable as the biggest NFL and MLB clubs in America and English teams are falling over themselves to try and get a piece of the US market. So there are huge potential returns globally from the growth of the MLS. It is probably decades away, but that does not stop current valuations from reflecting the potential future returns. There is a reason, on other words, that Merritt Paulson is going to put up the 40 million himself - he does not want to share the potentially huge payday if franchise fees continue appreciating they way they have been recently.


Even domestically, there are many reasons to expect that attendance and viewership will keep increasing. The US population is increasingly representative of cultures where soccer is the main sport. The growth in soccer participation among youth players has been explosive whcih not only increases the potential domestic talent pool, but creates generations of soccer-savvy fans.


As for Portland, the proven support for professional soccer and a stadium that could become the best soccer stadium in the country make it a pretty safe bet for the city, one would think.


In short, the future returns from a professional soccer club in America are potentially huge. Merritt Paulson is no idiot. He is not about to spend $40 million on a suckers bet.

Soccernomics: Timbers Sponsor and MLS TV Ratings

Good and bad news on the soccer front:

First the good: the Timbers have just announced that Alaska Airlines will be their shirt sponsor (i.e. the company whose logo will grace the front of their shirts) when they become an MLS franchise.

Considering only about half of MLS teams have a shirt sponsor, this seems significant.  Obviously Alaska Airlines thinks that the team will garner enough media attention (especially in the Northwest) to warrant the investment.  This is in stark contrast to the new Philadelphia MLS franchise that still does not have such a sponsor.  The Timbers still have the stadium naming rights to sell as well, so economically speaking the Timbers are off to a pretty good start, which doesn't surprise me as from what I can tell Paulson has assembled a first-class front office.

Now the bad: according to the Sports Business Daily, MLS is struggling with TV ratings.

"MLS games on ESPN2 are averaging 257,000 viewers for 18 telecasts through Aug. 17, down 9.5% from 284,000 viewers through the same period last year (17 telecasts) and down 10.1% from the same period in '08 (16 telecasts)."

Given that attendances are up this year and another major TV market was added to the league, there is no way to sugarcoat this news.  It is terrible.  Modern professional sports are all about TV these days and you would hope that MLS would be making progress.  ESPN is doing better at promoting the games and even mentioning them once and a while on SportsCenter.  A big reason for the expansion push was to increase the TV footprint.  It is a work in progress but the movement is in the wrong direction.

Which brings up an interesting economics question: are domestic MLS games and the World Cup complements or substitutes? There was the thought that the World Cup would raise interest in soccer in general and that this would spill over to the MLS once it was over.  But this hasn't happened.  Perhaps then people got their soccer fix early in the summer and now have no use for more.  Or they saw what top class soccer looks like and noticed that MLS still has a ways to go to match that level of play.

And speaking of level of play, the NY Red Bulls with Rafa Marquez, Thierry Henry and Juan-Pablo Angel suddenly look like a top class and classy team.  Beautiful to watch.

Goodbye TARP

Today, Secretary of the Treasury Hank Paulson announced that they are scrapping the plan to buy troubled assets from banks. It appears that they started to realized three things. One, the ability to come up with a true value for the assets was going to be very hard and take a long time (and speed is of the essence). Two, the amount of leverage used to buy these assets meant that the affect on banks balance sheets was going to be minimal. Three, these banks have not been using the government money they have received so far and instead have been hoarding it - this would likely be even worse if they bought the assets. Other problems included the incentive for banks to only sell their worst assets, the problem of a huge and costly program needed to resell the assets and the continued deterioration of the housing market on which these assets are based.

[By the way, to give credit where it is due, I was on OPB with Earl Blumenauer right after the TARP was first announced and his opposition to it was partly based on the amount of time it would take to do it. Off air, I disagreed arguing that the announcement itself would be enough to restore enough confidence to get markets unstuck. He was right, I was wrong. I have been consistently too optimistic about the crisis until recently...and now I am just depressed.]

Injecting cash into banks directly through the purchase of preferred stock is a better solution for all three problems - but there needs to be more than persuasion used to get banks to not sit on the money they get, something the government realizes and is trying to address. It is also a very good idea to exert more effort to stem the erosion of the housing market which is both at the heart of the crisis and where most less-affluent Americans are having serious trouble as well as shore up consumer credit where things like the drying up of funds for student loans is both immediately troublesome but also exceedingly worrisome for the future if students are being prevented from getting a college degree.

Economist's Notebook: Sports Teams and Social Value

The Wall Street Journal has a nice article on the attempt to use contingent valuation (CV) to assess what the Minnesota Vikings are 'worth' to the people of Minnesota. The answer? $700 million. The problem is, of course, that what we answer to a hypothetical question like "how much would you be willing to pay to keep the Vikings in Minnesota?" may have little to do with how we would actually behave when it became time to pony up. One of the big problems is the free rider problem whereby you don't pay anything assuming that the fat cats will pay a lot. Environmental economists have, for many years, used CV methods to try and place a value on a forest, stream, or other environmental attribute (e.g. clean air). But this is the first time I have seen it for sports which surprises me. I would think that folks like Merritt Paulson would do something like this to try and convince city leaders that what he has to offer people care about.

Here are some excerpts from Conor Dougherty's article:

MINNEAPOLIS—Christopher Slinde, a lifetime Minnesota Vikings fan who has endured decades of heartbreak and lots of overpriced beer in supporting his team, believes Vikings fandom is priceless. According to economists, it's worth $530.65.

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As fans pack stadiums and couches to watch the National Football League's divisional playoffs this weekend, they care about victory. Economists are tackling a more abstract challenge: putting a price on the emotional benefits of having a pro sports team in town.

The worth of fandom may seem theoretical, or even silly. But it's serious business for teams like the Vikings, who want Minnesotans to help them pay for an $870 million stadium to replace the Hubert H. Humphrey Metrodome in downtown Minneapolis. The Vikings' Metrodome lease runs out in 2011 and the team says it won't sign an extension without a deal for a new stadium.

The team hasn't explicitly said it will bolt without a deal. But it insists the Metrodome cannot support a modern NFL franchise. So, many fans are convinced that without a new stadium, the Vikings will take their quest for football greatness to a warmer state with no Nordic heritage.

Sports teams sell their facilities as economic-development projects that create jobs and generate tax revenue. But a slew of studies have shown that publicly subsidized stadiums—usually paid for by selling bonds and paying the cost and interest with tax revenue–rarely return the money governments put into them. Teams continue to argue, often successfully, that they are worthy of subsidies because they are a source of civic pride and purpose.

But what is that worth? Economists Aju Fenn and John Crooker tried to answer the question in a study published in July 2009 in the Southern Economic Journal.

The two used "contingent valuation methodology," which is a nerdy way of saying they surveyed people and used statistical models to turn the answers into an average price Minnesotans place on the Vikings.

The result: The Vikings' "welfare value" is $702,351,890— $530.65 for each of the roughly 1.32 million households in Minnesota.

*********

You couldn't touch that money. It's an abstract figure meant to catch everything from the joy of donning blond braids and Vikings horns to the feeling of pride that even nonfans get from living in a "major league" city. In the broadest sense, Mr. Crooker says, "welfare value" represents the worth Minnesotans place on having the Vikings in Minnesota.

It's tough putting a price on feelings, which is why some economists are skeptical of contingent value studies.

"It's not that this is capturing nothing, it's just that it's not legitimate to interpret people's answers as if folks were spending their own money," says Peter Diamond, an MIT economist. He co-authored a 1994 paper titled: "Contingent Valuation: Is Some Number Better Than No Number?"

**********

Survey questions were fine-tuned by the Metrodome experience. In the 2002 off-season (to minimize in-season emotions), Messrs. Fenn and Crooker mailed 1,400 surveys to households across Minnesota, capturing both fans and nonfans.

The study's figures were based on the mail surveys, which had 30 questions ranging from demographic information to how much time the person discussed the Vikings at home and at work. But the so-called welfare value was generated from a single yes or no question: Would you be willing to pay $X out of your own household budget for the next year to make a new stadium possible? There was one price on each survey (it ranged from $5 to $100).

Mr. Fenn cautions that the $702 million welfare value doesn't mean that helping the Vikings with a stadium would be the best use of the state's tax dollars.

"We're not suggesting that the state of Minnesota act a certain way, or that voters support [a new stadium], or not support it," he says. "We're just pointing out that the Vikings mean a lot to the average Minnesotan."

Also, here is a nice Q&A With Jerry Bell of the Minnesota Twins (who are building a new stadium).

MLS and Public Goods: Grass Fields

Okay, now that I have been all rah-rah about MLS in Portland, I think it is a good time to look back at the league's history and future. The summary is: it is mostly a big success story but there are some troubling signs on the horizon - most importantly the move away from natural grass playing surfaces.

The league started as a single ownership structure with 10 teams and only a couple of wealthy backers, most notably, Kansas City Chiefs owner Lamar Hunt. Play was mostly in football stadiums and, truth be told, neither the play nor the atmosphere was very good. For a little while the future was uncertain, the expansion Miami Fusion folded, but the expansion Chicago Fire thrived. Losses were common, but Lamar Hunt's construction of Columbus Crew stadium was seen as a glimpse of the future: soccer specific stadia in which the team controlled all the revenue sources.

Slowly the league became established, more stadiums were built and new teams added, but the most important change was the number of new, deep-pocketed, investors in the league that diversified the league and sent a signal that it was here to stay. Now most existing teams are stable, many have their own soccer-specific stadium, and more stadia are in the works, and the league has solidified the broadcast rights and most games are now shown on TV.

A number of very important decisions were made along the way that facilitated the rise of the league in my opinion. The first was to scrap the silly rules that made MLS an international oddity, most notably the shoot-out that determined outcome in the case of ties. The second was a steadfast determination to get the game out of NFL stadiums and to keep it off of artificial turf. The atmosphere in big stadiums is awful (I know from my time in Denver), and the game on turf is horrible: the ball bounces and skids, and players are reluctant to tackle - a key part of the sport - and in stadiums with football, the gridiron mars the visual experience. All of which degrades the spectator sport badly.

This is where my concerns come in. Recently, in the interest of expansion, the league has gone away from the last two criteria. The Toronto franchise built a soccer specific stadium, but it has a turf field. And the Seattle franchise was allowed to play in Quest field and on turf. Vancouver will likely be awarded a franchise and will play in a NFL-style indoor stadium on turf. The degradation of the quality of the product for the spectator is deeply troubling. The Seattle decision is especially so. In the beginning MLS was seen as a good way for NFL owners to get some revenue out of their otherwise idle stadiums. But it has been a terrible failure: most teams that started in NFL stadiums have either folded, left (or are leaving) or are struggling to fill seats. Seattle may be an exception in the short-run, but the long run impact on the televised product of these reversals in decisions will be painful - especially as TV revenue is the key to the future.

So, should Portland get a franchise, I hope (pray) that Paulson puts in real grass. It is expensive to install and maintain. Apparently Chicago spent 1.7 million on a state-of-the-art natural grass field with heating and drainage compared to about $1 million for a new turf field. Maintenance is more costly for grass and there are concerns about durability. But Chicago is a stadium that hosts football and concerts in addition to soccer so if they can do it, surely Portland can too. I know it is a more expensive short-term option and may even be the individually rational long-term option, but turf is a bad option for the league as a whole. It is time for MLS to insist on grass again and the Timbers should too.

[Note, here is a consenting view, and one that makes another point: if MLS teams want to make money by hosting major international clubs, it is likely that those clubs will refuse to play on turf]

MLS in Portland: Can Portland Afford Not To?

The Oregonian once again endorses the idea of bringing an MLS team to Portland. I support it because I am pretty confident that in ten years, it will be seen as one of those brave decisions that ended up being a tremendous boon for Portland. But as always, I am quick to admit that I am a big soccer fan and would benefit from it a lot personally. But MLS is now a solid league with tremendous future potential - there is no other reason franchise fees have increased so dramatically. The market now realizes that the once fledgling league is on solid ground with purpose built stadia and a link to the enormous worldwide soccer market. Portland could very well be the crown jewel franchise - it will, without a doubt, have the very best stadium. Even this stadium being built by Red Bull, while shiny and new, will be in the suburbs. Portland, to go along with its European-like reputation, will have a European-like urban stadium. But caution, Mr. Paulson: it has to be real grass, NO TURF!

However, there does seem to be one thing that has not been discussed much and that is the alternative - where will Portland be in a few years without MLS? Civic Stadium (oops, PGE park) is too big for minor league baseball and it is likely that the Beavers will not be there for long - even if this bid for MLS fails. PSU football brings in a paltry revenue but depends on the stadium. So it is quite probably that in a few years, Portland will have an empty stadium on its hands with debt and no revenue. It seems to me that the city should think hard about what's next if they don't back the MLS.

Oh, and by the way, can anyone tell me what the entirely incoherent column by The O's Ryan White on Sunday was all about? I have read it multiple times and I still can't figure it out.

So What is the Bailout (oops, 'Buy In,' sorry Nancy) Supposed to Do?

Last time I blogged about why credit matters to the economy, today I will try and explain in as simple terms as possible what Paulson's original idea is all about.

The background is now familiar. Investment banks and securities firms, eager to provide outlets for a huge pile of global money, started bundling together more and more suspect mortgages, sliced them up and created Mortgage Backed Securities (MBS) (see my old posts on the credit crisis). The huge demand for these securities caused even more suspect mortgage lending. This all fueled the housing bubble which finally popped. When the value of houses started crashing the performance of the MBS tanked. They tanked so badly that it soon become apparent that no one could really figure out how to value them. When that happened, the market for these securities basically disappeared. [It is worth noting that though MBS are not the only culprit, they are the main one] Suddenly a major part of the asset side of these banks (both investment and commercial - the difference is not that significant anymore) balance sheets lost all of their value both because of the drop in housing values on which they are based, but also because of they worry about valuing them appropriately made no one interested in buying them. Banks suddenly faced a solvency crisis and needed to raise liquidity. Normally you can do this by selling assets but as I just explained, there is no market for them. Alternatively you can borrow money and lend it out or invest it to try and raise new capital through profits, but now no banks want to lend to each other because they are all worried about default (and rightly so, look at Lehman Brothers, WaMu, etc.) So with banks facing insolvency and the usual channels to overcome this blocked we find ourselves teetering on the brink of total meltdown in the banking sector.

What the Treasury proposes to do is to try and address the second part of the asset pricing problem for the MBS. Namely, that no one wants to buy them because no one can figure out what they are worth (and their worth depends in large part on the future performance of the housing sector). The Treasury claims that they are not worthless (as the current market price suggests) but that 'hysteria' [my word] in the credit market is causing the current price to be much too low. Basically this is a problem of asymmetric information (not knowing the true worth) and coordination failure (not knowing what will happen to housing values which depends on the freeing of credit, which, in turn, depends on confidence returning to the banking sector). Treasury thinks that it can figure out the true worth of these MBS assets and pay that today. Doing so, they believe, will calm the hysteria and free up credit because essentially banks will take the Treasury money and put it right back into T-Bills which will shore up the balance sheet, return them to solvency and make the eligible to borrow and lend again -- which will eventually trickle down to the housing market. Once the hysteria is gone and housing markets have stabilized, the true value of the MBS will become clear and the Treasury can start selling them back - hopefully for as much or even more than they paid.

You can see the risk: if the hysteria about the MBS does not calm down (no one wants to touch them ever again) or if the injection of liquidity does not free up enough credit to turn the housing market around, the Treasury could be stuck with a huge amount of worthless MBS and will end up loosing $700 billion with nothing to show for it. This is why some economists claim is it better to buy equity in the banks because then if it doesn't work you at least have some tangible assets you can sell (like, e.g., WaMu's retail branches that apparently Chase coveted). [The rejoinder to this is that the government may find itself heavily invested in banking, will have a huge amount of complicated real and paper assets to deal with, and will go to even greater lengths to prevent failure.]

So the real cost of the plan, will depend on the sales price of the MBS in the future (and how far that future date is). It's a big risk, but meltdown is a risk an order of magnitude larger.

NB: Later I will try and comment on the DeFazio plan.