Episode 19 - Stefan Szymanski on football finance woes and the similarities to the banking crisis

you know I've learned more about

football during my short time at Cass

Business School and probably any other

period in my life and one of the reasons

for that is the more the lectures I've

had from Professor Stefan Szymanski

economist extraordinaire you'll see him

really whenever a football finance story

appears pretty much on every media

outlet the BBC Sky News the newspapers

everywhere else and we'll his latest

thesis is latest idea probably put it

correctly is the term the football

crisis that you've probably noticed

Manchester United Portsmouth is quite

like the banking crisis asked him why I

think there's a very close similarity

and that comes down to this basic

economic concept of moral hazard so the

managers in the banking system as we now

know we're taking wild risks that were

unreasonable gambling the future of

their bank in the hope that they would

make lots of money and become very

successful and the reason they were

prepared to do that was because they

didn't see a downside they knew that if

the bank got into trouble then they'd be

bailed out somehow or another so there

was really no downside risk to them

engaging in this gambling and that led

to the crisis that we know is the

banking crisis well a similar thing it

really has been going on in football for

many years and not just in this country

but across in most in most football

markets and that is that that the club

owners and the club managers gamble on

success by buying players that they can

barely afford hoping that the team

succeeds and then that will bring in the

fans and that will pay off the debt but

also knowing that if they can't pay off

the debt then someone will come and

rescue the football club eventually but

if it all goes wrong at Manchester

United now come Glazer is going to be

financially wiped out the Glazer

situation if you're like is it's

slightly different from the from the

typical football crisis that we see

what's happened with the glazes is

really their investment in Manchester

night is like a giant buy-to-let scheme

they they bought the club by using

borrowed money just like you might buy a

house with a mortgage and then rent it

out to somebody who's monthly rental

payments pays off your interest and on

the debt and you end up owning the house

using somebody elses rental payments

well the glazes are doing a similar

thing because the the people renting the

club if you like are the fans who pay

ever-increasing ticket prices though

they buy merchandise they obviously of

course to generate TV rights revenues as

well those money are paying off the debt

and eventually if it works for the

Glazers they end up owning the club

that's a more stable situation

potentially than the situation that

clubs like Portsmouth at the foot of the

of the Premier League or many of the

other clubs in the lower divisions that

have gone into administration face

they're the ones who are the gamblers

because they've been gambling on getting

into a position like Manchester United's

mansion United already there it's what's

happening at Portsmouth it looks like

it's going only horribly male well again

it's it's it's the classic problem

spending money that you were unable to

afford but also there's been a problem

with the ownership so the club has been

sold off it's been sold to owners who

promised that they were going to be able

to invest money but actually don't seem

to be able to do so now in practice and

that's really a letdown for the club a

letdown for the fans who be made

promises and and this I'm afraid is

often the case with football finance the

fans are promised lots of things by new

owners but frequently they're incapable

of delivering it's during all this a

little-known fact has emerged and that

is if a football club goes bankrupt then

the football dense football creditors

get paid first football the football

creditor rule is an a remarkable rule in

any tax system certainly unique in the

British tax system which says that if

the club is cannot pay its debts the

first people in line to be

paid off our other football clubs and

other football and footballers who are

owed wages I'm ahead of the taxman which

is quite extraordinary and unfortunately

this rule actually feeds the craziness

it actually again encourages the club to

think that it doesn't need to pay its

debts it doesn't need to worry about the

taxman and it also encourages the other

football clubs and the and the those who

govern the Premier League and the other

leagues to not to pay attention to the

debts of other clubs because they know

they'll get paid anyway yes our football

clubs real businesses or even real case

studies and economics well there's

certainly great case studies in

economics but whether their proper

businesses or not is quite another

question there's certainly businesses

that struggle to make any money the

business model works really on the basis

that you want to succeed on the field in

order to generate a bigger fan base in

order to generate more revenue the

problem is only one club can come top of

the league only one club can come second

in the league and so on so there's a

limited number of slots and in the

competition to reach one of those slots

the club's end up eating up all the

potential profits in the industry and

more yes another comparison with the

banking crisis in banking it's the

bankers of being paid a fortune getting

these enormous bonuses in football it's

the players there is a it's certainly

true that the players and the senior

bankers get paid very large sums of

money in the case of the players though

we know that they are being paid for

something they deliver the wages that

players are played very closely reflect

their productivity what you're

suggesting bankers aren't earning them

there's some question there's not good

evidence to demonstrate that bankers

generate the income that matches the

salaries that they pay that's certainly

true so but the but there is a question

there about whether the club's should be

allowed to spend to quite the degree

that they are some people propose that

we should have closer regulation a

football club and they're spending

should be limited in the way that

happens in France and Germany although

others will say that that just invite

a system of corrupt governance to

replace the the mismanagement that you

see today are there any lessons from the

banking crisis that could perhaps sort

out the crisis in football violence well

I think one of the things we've realized

in banking is that tighter regulation is

required and there is a need to ensure

all of us against the systemic risks

that banks undertake and it and indeed

to prevent banks taking excessive risk

um the one question in the football

industry though Israeli who the victims

really are of the moral hazard and the

financial irresponsibility and certainly

a lot of investors have lost their money

but well you might say who cares about

that you could also say that the fans

lose if their team goes into

administration but these clubs never

disappear they're always reborn in

another guise and okay a team may go

down a division or two but that just

means the fans of another team go up a

division or two so in some sense that

balance is out um so it's not clear that

there are any real victims in the

football crisis apart perhaps from the

taxman and maybe we need to be concerned

about that and perhaps some of the

smaller creditors who get left aside

like the st. Johns Ambulance brigade

which is clearly a disgraceful failure

on the part of clubs to pay their their

debts briefly everyone who comments on

this is miserable and yes I look at you

and you're happy you're sitting there

you're optimist why well I'm an

economist as well as help tourists and

to me what's really in the best interest

of us as consumers is cutthroat

competition I don't like to see

businesses making lots of money what

that tells me is they're able to charge

high prices and not pass on those there

any cost savings to the customer so when

I see cut clubs businesses living on the

edge I actually think that's a rather

good thing because it suggests that

competition is working for the consumer

Stefan Szymanski thank you very much

indeed don't forget plenty more on the

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Alex Ritz and calm