Yet More “Shameful” Interventionist Rhetoric
| Mike Sykuta |
It’s obviously not enough for regulators from the Obama administration to march down Wall Street and mandate changes in the incentive systems of rank-and-file workers or even mandating that these “bonus” payments be rescinded (see here and here). Now banks that received bailout money are being chastised and brow-beaten from the bully pulpit of the White House for honoring long-term contracts signed years before the current “crisis.”
Today’s Wall Street Journal reports Citigroup is considering reneging on its 20-year stadium naming rights deal with the New York Mets to appease the White House and the populist press. Citi has already caved on its commitment to purchase a new corporate jet to replace two aging planes (a move that would likely have enhanced both fuel and environmental efficiency, ironically enough). Although Citi and the Mets claim the deal is still on, the attitude from Washington is remarkable in its complete disregard for the complexity of business deals, if not for the very essence of the institutional structures that support exchange (and contracting).
First, despite all the clamoring about Citi spending $400 million on naming rights while receiving $350 million in TARP funds, the reality is Citi is obligated to pay $20 million a year for 20 years. So while taxpayers are being told they are paying to name the new Mets stadium Citi Field, only a relatively small amount — certainly by bailout standards — is being spent this year. If the purpose of the bailout is to get firms through these troubled times and into a more stable future, we’re not talking about taxpayers taking on a 20-year commitment.
Moreover, this is a contractual obligation that would leave Citi liable for some level of damages if Citi were to renege. Given the chilling economic (and political) atmosphere, one might expect the number and size of replacement bids to be dampened, leaving Citi on the hook for a potentially larger damage than might otherwise be the case.
Second, the naming rights deal doesn’t live in isolation of the rest of the economy. The Mets were able to borrow against the asset of 20 years of cash flow in order to fund the building of the stadium up-front. One would expect those debt obligations, backed in part by the cash flows of the naming rights deal, would be affected if Citi were to cave again to pressure from Washington. What about the potential consequences of defaults or renegotiation in those deals?
Third, and this is what is really perplexing to me in this case, don’t we want the banking firms to succeed? In all the populist outcry, there seems little attention brought to why Citi (or any other firm) would be involved in such a deal to begin with. While one may question the numbers, presumably any company purchases these naming rights because they expect the value of their brand name will be enhanced by at least as much as the cost, whether by mere association (granted, not likely with the Mets) or by the “free advertising” and brand awareness that comes with hundreds of television and radio broadcast events held at “Citi Field” with all its signage and the obligatory, “we’re here at Citi Field. . . .”
Even as recently as Sept 2008, Target signed a naming rights deal with the Minnesota Twins that is believed to be similar in value (annually) to the Citi-Mets deal. Obviously, even businesses not flush with taxpayer dollars believe such deals have the potential to be good business. So why are we complaining about a bank that’s spending money in a way that creates value? I thought that’s what the bailout was all about.
Finally, while the moral hazard problem of the banking bailouts has been pretty well argued (see here and here, and of course, here), what about the moral hazard of long-term contracting among firms in bailout industries? Should it be expected that firms receiving federal bailout funds are to renege on long-term contracts for things that are easy populist political fodder? What incentives does that create for suppliers (or customers) to enter into long-term contracts with these firms? What are the implications for the speed (or likelihood) of recovery in such a contracting environment?
Sometimes it seems Washington can’t find a can of worms big enough. But, I suppose, better in New York with the Mets than in St. Louis with the Cardinals.