The Premier League, Bailouts, and Moral Hazard

Over the weekend reports surfaced that the Premier League was considering an unconventional financial maneuver to keep struggling Portsmouth FC alive. The Queen’s taxman is looking to windup the south coast outfit after tax bills reportedly close to £12m pounds have gone unpaid and incoming funds do not look imminent for Pompey. In response the club and the Premier League are looking to advance payment on the parachute payments the club would receive later this year in order to stave off the liquidation order. Pompey are in favor for obvious reasons, and the Premier League are desperate to keep the League’s name untarnished by a disastrous recalculation of points that Pompey’s disappearance would require. Paying the parachute payment in advance would require the approval of the other 19 members of the league.

And so the Premier League finds itself in a situation that seems quite familiar to anyone who has kept up with financial news in the past two years. Governments have been busy plugging holes in the global financial crisis by bailing out firms which, despite their possible contribution to the problem, are deemed ‘too big to fail’, i.e. the failure of the firm would pose an unacceptable risk to the system as a whole. The same situation is now occurring in football, writ small. The Premier League has the potential meltdown of one of the teams in the league on its hands, which throws the legitimacy of the entire competition into question. There is no doubt that years of gross mismanagement on Pompey’s side is responsible for the rot being exposed now, but the Premier League cannot escape their culpability for the current situation. The League has sat by happily for years, whether in ignorance or complacency, as its member clubs edge closer to financial armageddon. This has to be accepted as an undeniable fact when even the leviathan of the league, Manchester United, is £700m pounds in debt, a figure which would be harrowing for companies with ten times the turnover of the Red Devils.

The Premier League should be doing everything in its power to ensure that this year’s competition remains intact and Pompey receive the payment. To do otherwise would be an extremely poor decision both commercially and politically. The biggest issue, as it was with the financial industry bailouts, is moral hazard or the effect on future behavior of other firms, in this case other football clubs. Many will argue that bailing out Portsmouth would encourage reckless behavior among football club owners, but this argument overlooks a much stronger argument for helping Pompey. Allowing a club to fail injures the life blood of the football world, the supporters. Supporters have the least culpability in a nightmare scenario like the current one (even less, arguably than mortgage holders) and have put the most on the line, hard earned pay. They have neither say in player’s wages, ticket prices, or transfer fees; they simply support the club they have been born to love. Allowing a club to fail to fulfill some free market delusion would be cutting off your nose, ears and lips to spite your face and would be a public relations fiasco for the Premier League.

This does not mean that clubs should be given a blank check and allowed to operate willy nilly. Owners should be punished when they abuse club finances (as so many have), serious inquiries need to be held into what caused the current situation and the results should be made public. In the future the Premier League needs to do a better job (or start doing a job at all) of understanding how clubs under its aegis are being financed and how they operate. When a club is spending 90% of turnover on player wages it is surely an indication of future troubles; controls need to be instituted to detect and prevent ridiculous club-wrecking spending. The Premier League must recognize that football is not a free market industry, it is an entertainment good which becomes much less entertaining if clubs within the package start going belly up because they are being mismanaged.

Pompey should be a tremendous alarm bell for the Premier League and English FA that a much harder look needs to be taken at the business of the clubs under their governance. This is an overwhelming priority for all supporters, and something that should be actively pressed for. If better regulation and enforcement are not introduced to the system we may quickly find that the magic of football is lost among the news items of long treasured clubs imploding year by year.

The Premier League, Bailouts, and Moral Hazard

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