No matter how many pictures of pretty girls we attach to posts about the Swedish model of bank rescues, they still don’t attact much attention. It’s too foreign and lots of people (perhaps corrrectly) suspect that what works in Sweden might not work in places that aren’t Swedish enough.
Now New York’s Hugo Lindgren has found another great way to illustrate the value of taking necessary losses before you sit on a toxic asset so long you drag yourself down–the history of the Knicks and one-time star Stephon Marbury.
Here’s how Lindgren describes what happened:
The NBA is the economy and the Knicks are a huge, troubled bank. Marbury, entering this season, represented a toxic asset. A seriously toxic asset, like a fresh-built cul de sac ghost town in Nevada. He was owed $21.9 million on the remainder of his contract, a monstrously inflated figure based upon faulty forecasts of his potential value.
But like most toxic assets on bank balance sheets today, Marbury was not completely worthless. He was just worth a lot less than his assigned value (a.k.a. contract). Other teams would take him, just like somebody will eventually move into those lonely desert homes, but only at a steep discount. The question, as it is with everything these days, was how steep.
The market was not good. Other NBA teams were tightening their belts, and recognised that the Knicks were in a tight spot, so there was no point in offering anything approaching fair value. The price would just continue to drop. And so the Knicks were stuck. They didn’t want to give away a potentially valuable asset for way below its value. On the other hand, the longer they let the situation fester, the less valuable Marbury became.
Eventually, however, the Knicks all but gave up. To be free from his contract and sign with another team, Marbury gave back a sliver of his deal ($1 million), plus an agreement to drop his grievance over the $400,000 in fines the Knicks had levied for his refusal to play. A smidgen of honour and a few bucks were saved.
Thus the Knicks did what the banks have been resisting. They wrote down the value of their toxic asset. They ate the loss.
As Lindgren explains, Marbury was only a toxic asset to the Knicks because he was over-priced. Once they took the loss, Marbury wound up at the Celtics. There, where he isn’t taking up such an enormous part of the Celtic’s “balance sheet,” he might actually have some value to the team.
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