Monday, January 30, 2012

Gazidis Explains Arsenal's Transfer Policy - 'The Big Short'

Thank you to Arseblogger and his minions for posting this on Arseblog news today: a transcript of an interview that Ivan Gazidis gave with Fox Soccer Channel yesterday. (Edit - watch a video of the interview here.)

I watched the interview, and attempted to live-tweet it, because I found what Ivan said revealing. If I was going to sum-up his comments, I would use a term that Michael Lewis (of 'Moneyball' fame) recently employed in his book about the small group of people who correctly predicted the collapse of the Mortgage-Backed Securities (MBS) market in 2008: 'The Big Short'.

The collapse of the MBS market in 2008 was a classic example of the deflation of a massive financial bubble. Certain institutions - most notably AIG, Lehman Brothers, Bear Stearns - essentially bet that the MBS market would continue to expand almost indefinitely. AIG in particular not only bought up tons of these securities, they even provided a kind of insurance to others in case certain MBS became worthless (the famous Credit Default Swaps).

However, a small number of investors saw the MBS boom for what it was - a house built on sand, or, more precisely, a house built on the idea that poor home owners would be able to pay back their sub-prime mortgages in the long-term. These investors bought up a variety of instruments that would pay out in the event that massive defaults started to occur in the MBS market. Needless to say, they became very rich when others hit the wall in 2008. Lewis called this the 'big short' - i.e., these investors 'shorted' (or bet against) the MBS market on a huge scale, and eventually made out like bandits.

What relevance does this have to Arsenal's transfer strategy you might ask? Well, from Ivan's comments, it appears that the club is essentially betting against the current trends in the transfer market continuing in the long-term - they are 'shorting' the market, in a way.

Ivan began the interview by saying something which I've long held to be true - I don't know why there is so much speculation about the state of Arsenal's finances. We are a public company that has to produce public accounts. As he put it:

You know, it’s interesting – there seems to be some mystery about this, but we’re about the least mysterious club in the world, we’re a public company. We publish our accounts. Anybody can have a look at them, they’re publicly available, you can look at them, and you can pretty much work out what our monetary situation is.

Anyone with any modicum of financial training can peruse our reports and come to a pretty certain conclusion on the state of the club's finances - as 'angryofislington' recently did. Namely - we have money, and enough money to buy exciting players, but the Arabic oil barons and Russian oligarchs will always be able to blow us out the water when it comes to the biggest transfers. I would say that we have fairly healthy cash reserves at the moment, but the idea that we can compete for any player is simply not true. We live within our organic cash flows and there is an inherit limit on how much we can spend. Whether Kroenke or Usmanov should give us additional money from their own pockets is an argument for another time. At the least, there is no need for cut-throat arguments among Arsenal fans about whether the club has any money or not - we do have money, just not as much as certain other sides. This means Arsene does buy, but he can't buy anyone. Indeed, Ivan reminded the FSC panel that we do actually buy players. We bought the Ox. We bought Koscielny. We bought Vermaelen. etc. etc. But, there are definite limits to our transfer policy. As IG put it:

We can’t afford to compete with oil money, and we can’t afford to compete with from, you know, super-wealthy individuals from Russia.[...]Our focus is *always* on young players, we’ve got fantastic development system and still there are young players coming through consistently from our youth ranks and that’ll continue to be the way Arsenal do things. [...] We’re about creating star players, not about buying them.

All this builds up to the key passages in the interview:

 I think the more important thing that our model is that it’s sustainable. So, if we’ve learned anything from the world’s economic crisis, it has to be that football clubs need to have responsibility – not just for today, but for their own futures. And,  you know, our business model means that we can continue to do what we’re doing forever [...]

Now of course there’s anxiety when [other] clubs are spending the kind of money they’re spending. We don’t believe that’s sustainable for the long term. We think that has to come to an end. UEFA agrees with us and is bringing limits on spending in, and we’ll continue to do things the way we do them. 

This is Arsenal playing the 'big short'. The club doesn't believe that transfer fees can continue to spiral ever-upward in the manner that they're doing at present. At some point, the club is predicting that all this will come crashing down, perhaps even taking a few clubs with it. Moreover, the club are convinced on this point because of UEFA's recent proclamations about financial fair play. If the market won't correct itself, the regulator will enforce correction. And when the market correction happens, and the bubble bursts, those clubs which have a sound, sustainable economic basis will prosper - namely, us. Until then, and possibly even after then, we will spend our money on astute, reasonable, economical purchases, and young prospects. We're not going to compete with Barca for Neymar, or Man City for whichever superstar they buy next, but we'll get guys like the Ox, Arteta, and Eisfeld.

Does this wash? Well, in a marketplace which played by rational economic rules, yes. But the economics of football are, to be frank, irrational. How long have clubs like Real and Barca racked up debts for? In any other line of work they would have gone bust a long time ago. And the club seem to be placing a lot of weight on FFP having a significant amount of influence. But will it? It's far from certain that UEFA will be able to enforce these rules. And, even if they can, who says that clubs will stay in UEFA in the long-term? Just like the top-four in England managed to set-up the Premier League, what's to prevent the European elite from establishing a European super-league if they don't like UEFA's new rules? Not much, in my opinion.

What it all comes down to is this - in the short-term, Arsenal will not be making any mega-purchases. Our transfer policy will continue to focus on unearthing undervalued gems, and young prospects. In the long-term, the club is betting on the collapse of the transfer-market bubble. Will this happen? Only time will tell. But at least the club is being honest to the fans about how they are directing our transfer policy, for better or for worse.


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Anonymous said...

As you say football is not in a rational market, if things don't change and FFP does not work then it will leave us pretty much permanent also-rans, good luck selling tickets at premium prices to see that Ivan..

I seriously hope he is right but fear he is not, I don't want to be old and grey by the time we next win something, there is no trophy for running the club 'sensibly'.

Jack Straw said...

What a great and perceptive article. It's incredibly refreshing to be reminded that there are supporters who can rationally analyze the status of the club. This should be mandatory reading for anyone who claims to be a fan of Arsenal.

It will be extremely fascinating to see if/how the FFP rules are enforced. I'm all for the self-sustaining model, but can understand the allure of some quick, free cash from Kroenke or Usmanov. If the FFP rules are not enforced the calls for their investment will reach deafening levels, and it will be interesting to see how they react.

One thing to remember - if "the football short" happens as the club seems to be predicting our spending power will be on the rise as almost every other clubs' falls. Once the stadium is paid off the cash the club generates could put us in a very elite class.

Anonymous said...

This is the same false equivalency we have been hearing from the club in years and is anything but honest. We haven't even reinvested the money we have received from selling our top players and weakened the club in the process.

The concept of a sustainable business model has become confused, where the club seem to have adopted it as the outcome of running the club, rather than a process. This is the essence of the widespread frustration many fans feel - we seem to have no sense that the goal of running the club is to win something not just sustain increasing mediocrity.

It feels like a group who know the cost of everything but the value of nothing - including why we "customers" are involved in the first place. Hint - it is not just to milked!

Anonymous said...

Imagine a scenario like this. Chelsea,MU,MC,Rm,Barcelona and few others flout UEFA ff rules. Do you sriously think Platini has the balls to ban these teams?
They could form a mini league of their own, and invite other big Euro teams to join them.
If UEFA does seriously take action thenArsenal's policy will pay off. The flip side is assuming the gunners are out cl,it will take at least afew year to get back let alone win it. And massive amounts of money has to be spent.
The things is if Wenger buys kids for that same amount he could got an experienced player ready for first team action.

Anonymous said...

Imagine a scenario like this. Chelsea,MU,MC,Rm,Barcelona and few others flout UEFA ff rules. Do you sriously think Platini has the balls to ban these teams?
They could form a mini league of their own, and invite other big Euro teams to join them.
If UEFA does seriously take action thenArsenal's policy will pay off. The flip side is assuming the gunners are out cl,it will take at least afew year to get back let alone win it. And massive amounts of money has to be spent.
The things is if Wenger buys kids for that same amount he could got an experienced player ready for first team action.

Anonymous said...

The real issue here is that 2014 will come and a loophole will be found that puts us right back at square one.

It's already happening. Take a look at Chelsea and ManCity deals now. They have skirted the laws by having companies give them large sponsorship deals - TShirts, Stadium. That money is not a part of the bottom line stuff. So they can continue indefinitely down this path.

Jim said...

Being financially prudent doesn't mean it has to be being a miser. We don't want to spend 50M on a player. We just want the sale proceeds of Cesc, Nasri and Adebayor, Toure to be spent on improving the squad. It's a reasonable request. My guess is there's nothing reasonable about a greedy board. All excuses and nothing.

Anonymous said...

It is sometimes easy for fans to forget that we didn't spend money at different periods for differing reasons. For example at the time that Adebayor and Toure were sold for around 40m, the club was trying to finish the Highbury development and had around 325m of short term debt which needed to be refinanced. At that time the banks were delaying the refinancing of the debt and as a result the club were forced the raise capital by selling players. Once the transfer window closed that banks were confident of no further balance sheet deterioration (through buying players) and refinanced the short term debt for another 12 month period.

This short term debt has since been paid off through apartment sales, however at the time other clubs were also concerned about AFC's finances and purchase terms were altered to force AFC to pay higher percentage of the purchase price up front thereby putting further pressure on the clubs cash flows.

More recently the club have not been able to bid against clubs like Chelsea or ManCity either on purchase or in personal terms offered to players - fans should remember that tickets prices have been increased mainly to pay for player wages. We should also remember that we have had 3 players crippled by opposing teams denying us their availability for long periods of time while having to pay their wages - Eduardo was one of the classiest/deadliest strikers that I have seen in an AFC shirt.

The point I was trying to make is that there are differing reasons for why we haven't bought players depending on the period - but like others I would agree that we lack a deal closer and seem to have lost a number of potential opportunities because of this

Anonymous said...

Simply put, it means the model is more scarlets and no superstars!

Anonymous said...

Gazidiz says: "And, you know, our business model means that we can continue to do what we’re doing forever [...]". This is built on the asumption that Arsenal supporters will continue to fill the Grove week in - week out. And as things stands this is starting to change - lots of empty seats and lots of tickets available on match days. So this means, I think, that if we are to become sucessfull on the pitch again then Arsenal can continue this transfer policy. It the down slide continue and we finnish outside the top four, this will in the long run not be "sustainable": support will decrease and results will get worse and we end up as a mid-table club. Gazidiz and the board assume a status quo regards results and supporter interest - I think that is wishfull thinking
Northern Gooner

Anonymous said...

Elegant defence gazides but I'm furious at this nonsense... Fizman did the emirates move NOT gazides, Danny said to us all its to 'compete' not to be self sustainable 'for ever' .... Who is kidding who here?... Ivan is stans stool, fizman sold us out for 120m to his family on his death to stan the very man Danny threw Dein out for!! Stan has not & will not invest one penny, his motives are beyond the wal mart bizarre, his other 'franchises' are CRAP as he is turning us into... Remember a fish rots from the head down, stan is the head, arshavin the bottom... We have a 29% shareholder who wants to 'compete'!

Finally Harry & joe lewis at the lane spend a third less than us on wages and are 10 points above us

It's all on stan & his stool Ivan's watch

We want our competing arsenal back!

Anonymous said...

Mind my word, this league is so corrupted that there is some invisible force taking action whenever you are seen as a threat to the team they would like to be winner. Typical example 2008.

Yes even if you go short and turn out you won the bet when everyone go busted .There is only one team that is Arsenal and you monopolized the market. But football is a team sport and you need someone to play with, who will care if there is only one team in the sport.