Thursday, September 27, 2012

How the Fed almost killed the NFL

How is that headline for an attention getting plea for eyeballs?  This will take a second to explain but there is some truth that mock headline.

First, the Fed has been aggressively easing for going on 4 years now (and I think you could argue it goes back to the post 9/11 era as well).  This easing, coupled with active purchases of mortgage backed securities has kept interest rates at near historic lows.  This is great for borrowers as it reduces their cost of borrowing, however, for savers the pain is felt every time you open up your statement and see that your earned $0.14 last year in interest.

Well, of course, but how does that impact the NFL you might ask?  Now that the contract has been settled (about a week too late for Green Bay fans) it is clear that one of the big sticking points was reforming the pension system for officials.  I don't have all of the details in front of me but I believe the new plan will keep the existing officials in a traditional "Defined benefit plan" through 2016 when they will switch new officials hired after that date to a "Defined contribution plan" (ie, 401k). 

So why was this such a contentious issue? Well, for one employees love the security of a defined benefit (I get $x/mth for y months) and those plans were relatively easy to manage from 1950-2001 for 2 reasons - 1) You could park 50% of your assets in US Treasuries and earn 5%  all day long and 2) You could use the other 50% of your money to buy dividend paying stocks that might yield 3% via a dividend and give you upside if the market went up.

Well, thanks to the Fed's efforts pension plans can no longer assume they will get a 5% free pass from Treasuries.  More likely they are looking at a blended return of 2-2.5%.  Since most pension plans assume an unrealistic 8-8.5% return every year the plans have to reach for return in the stock market. Some years that works out and some years it doesn't.  Business owners, in this case the NFL owners, hate that kind of uncertainty.  You are seeing it across the country as pension plans continue to underperform, the primary driver isn't poor investments as much as it is the lack of return achieved on government debt which is being suppressed by the Fed.

However, if I were on the debate team I would counter this concern of the NFL owners by saying the Fed actions have allowed them to build massive stadiums with debt borrowed at record low rates which have dramatically increased their net worth (Jerry Jones for example).

So in a nutshell, the NFL did severe damage to it's brand over the pension issue because the return on their investments have not kept pace with plan assumptions due to the Fed policy which strives to maintain a low interest rate environment -- and there you have it, how the Fed almost killed the NFL :)

Just don't tell Ron Paul or he'll want to audit the Fed's betting record to see if they bet Seattle straight up to win last week.

Cheers!

No comments: