Lieutenant Island Views : Commentary About Finance, Politics and Baseball

A Tale of Two Cities-Red Sox/Yankees Economics in the 21st Century | March 31, 2009


The last five years have been the best of times for Red Sox fans. Starting with their infamous collapse in 2004, they have been the ugliest, if not the worst, of times for Yankee fans.

One could argue that the performance dichotomy is the result of two disparate economic strategies. The Yankees continue to follow strictures established by Col. Jake Rupert in 1920: spend significantly more than any other team to hire away the biggest names in the majors. The Red Sox operate with a hybrid version of Money Ball relying heavily on home grown talent, making strategic bets on reclamation projects like David Ortiz, Bill Mueller, Mike Lowell, Brad Penny, John Smoltz et al. and using Sabremetrics to execute on the field as well as in drafting players.

The two strategies are also seen in their approaches to free agents. The Yankees tend to use muscle to outbid others for big name free agents regardless of the cost. In dealing with free agents, their own and other teams’, the Red Sox tend to have price limits and stick to them (this even was true with Daisulke Matsuzaka). The Yankees hardly ever are outbid in auctions unless it is a onetime sealed bid process where they do not have a chance to up their offer (this is how they lost Daisulke Matsuzaka). This year, the Yankees out did themselves with signings of CC Sabathia, AJ Burnett and Mark Texeira. The Red Sox made a run at Texeira but would not match the Yankees bid. Their real focus was to add four reclamation projects (Takashi Saito, Brad Penny, John Smoltz and Rocco Baldelli) for a combined annual compensation level less than any one year salary of the three big Yankee additions.

Surprisingly, though the Yankees are the huge spenders, they exhibit less alacrity than the Red Sox at jettisoning stars or exploring new strategies. Mid-season trades of Manny Ramirez and Nomar Garciaparra were bold moves by the Red Sox which improved team chemistry without significantly reducing run generating firepower. The Yankees seem less willing to adopt new approaches. Perhaps this is why they still stick with the almost 90 year strategy of Jake Rupert.

The sad reality is that, since 1978, their high priced players strategy has been a bust. The Yankee championship teams of the late 90s were built along the lines of the Red Sox model. This happened during a period when George Steinbrenner was banned from baseball. In Steinbrenner’s absence, Gene Michel and Buck Showalter were able to develop home grown players like Derek Jeter, Bernie Williams, Jorge Posada, Mariano Riveira and Alphonso Soriano who took them to the promised land. As those players aged, and Steinbrenner was reinstated, it was “déjà vu all over again” with more spending, off the charts payrolls and diminishing performance.

One has to wonder what goes through the Steinbrenner’s heads. If there is a proven strategy to win more games win with less expense, why not try it? It could result in less gut wrenching failure and greater profitability. Red Sox fans regularly thank the lord that George and his boys have not figured out the new paradigm. They do this because they know that God IS a Red Sox fan!!!

For another take with some interesting statistics, check out Alex Speier’s piece, “A Different Shape to the Red Sox-Yankees money Wars”.

http://www.weei.com/sports/boston/red-sox/alex-speier/different-shape-red-sox-yankees-money-wars

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1 Comment »

  1. This blog’s great!! Thanks :).

    Comment by matt — March 31, 2009 @ 10:30 pm


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About author

Mr Thaler is currently the Managing Partner of Lieutenant Island Partners, an organization providing corporate finance advice and general consulting to corporations and not-for-profit organizations. Mr Thaler retired as Vice Chairman of Deutsche Bank Securities in early 2008. His background includes experience as an investment banker, senior manager, business builder, college professor, not for profit board chair and trustee. In his thirty plus years as an investment banker for Deutsche Bank and Lehman Brothers, he has been involved in numerous significant debt and equity financings, mergers & acquisitions, leverage buyouts, restructurings and cross border transactions. Of particular note, Mr Thaler has been one of the most active participants and strategic advisors to the homebuilding industry. In a period of significant turmoil and losses, he was one of the few active bankers to the industry who did not have either a loss or credit write down. He is currently advising several public builders on strategic matters and is an adjunct professor of finance at Morehouse College in Atlanta, Georgia. Though he lives in New York, he is a life long Red Sox fan! www.LieutenantIslandPartners.com

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