ALL STARS STRIKE OUT

The Strange Link between Mortgage Fraud, Baseball’s Steroid Scandal and the Unemployment of Manny Ramirez

"I used to console myself that baseball was recession-proof, but … this is something different from what we’ve ever gone through."

• Bud Selig, Commissioner of Baseball

Unemployment is surging in the United States.

Indeed, the deluge of applicants has been so great that hundreds of thousands across America are "waiting longer than they should for unemployment benefits," according to The Washington Post , "because rising joblessness is overwhelming claims offices."

The newly unemployed are in good company. Among them are some of Major League Baseball’s biggest stars, including Manny Ramirez, Pedro Martinez, Frank Thomas, Ken Griffey, Jr., Tom Glavine and Ivan Rodriquez.

Also joining the ranks of the unemployed is Adam Dunn, the only player in baseball to hit 40 or more homeruns in each of the past five seasons, and Ben Sheets, the National League’s starting pitcher in last year’s All Star Game.

How did future Hall of Famers come to join former "Masters of the Universe" like ousted Merrill Lynch CEO John Thain and former Lehman CEO Richard Fuld among the ranks of the jobless?  

The answer has its roots in excesses of the now defunct real estate boom and the mortgage abuses that did so much damage to the economy.

A key player in the unfolding story is a character named Andrew Michael Bogdan, a Baltimore resident and one-time mortgage swindler who cultivated friendships with Orioles ballplayers – mostly has-beens and never-weres who incautiously brought Bogdan into their confidence about their use of "performance-enhancing drugs."

One particularly hapless Oriole outfielder Larry Bigby, whose performance lagged in spite of his pharmaceutical adventures, gave Bogdan the information and opening he needed to become an FBI steroid snitch. This he eagerly did in a successful bid to minimize his sentence in a real estate flipping scam. However, it led directly to the government investigations, Congressional hearings and The Mitchell Report about steroid abuse in Major League Baseball.

Bogdan’s undercover adventures continue to have repercussions on the sport today. These range from the upcoming trial of homerun champion Barry Bonds to the possible perjury indictment of All Star pitcher Roger Clemens.

Equally dramatic are the macro effects of the crackdown Bogdan precipitated on the market for Free Agent baseball stars.

Baseball experts such as Dave Sheinin of The Washington Post attribute much of the "industry-wide trend, visible for several years" in which teams prefer to sign "younger, cheaper talent at the expense of older, pricier veterans" to the crack down on performance-enhancing drugs.

According to Sheinin, "In simplest terms, it means teams have discovered that a 23-year-old making $500,000 can do the same job, often just as well, as a 35-year-old making $10 million. The trend has only increased since baseball banned amphetamines in 2006, making it tougher for older players to withstand the game’s daily grind."

Mike Bogdan was a key mover in these developments.

The story began far from the baseball diamonds, where Bogdan was nothing if not enterprising during the heyday of the real estate boom. He was a landlord in Baltimore’s Patterson Park neighborhood, where he worked with crooked real estate brokers and lawyers to defraud out-of-state lenders in connection with mortgages on rundown properties.

Bogdan’s property flipping scam relied on inflated appraisals and phony documents to illegally obtain about $3 million in government-insured loans. These were "subprime loans" on steroids, nearly 70 of which ended up in foreclosure.

After his arrest on the real estate and mortgage fraud charges, Bogdan agreed to serve as an undercover informant for the FBI’s continuing investigation of mortgage scams. He later met Bigby at a bar and came to learn that he was using steroids. Bogdan then duly reported this to the FBI.

His minders proved deeply interested in the tips and evidence he could give them. The rest, as they say is history.

A decade ago, if you had seen Bogdan, a little balding guy, cruising the shabby streets of Patterson Park in his Toyota Tundra, with vanity plates reading "IRENT2U," you would never have guessed that he was to be a contributor to an astonishing chain of events that bankrupted Iceland (not to mention Wall Street) and prevented Manny Ramirez from hitting homeruns.

Indeed, Bogdan’s story could be a walking advertisement for Linked: How Everything Is Connected to Everything Else and What It Means, by physicist Albert-Laszlo Barabasi. (Barabasi is an expert on networks and their unexpected connections.)

If you’re a baseball fan, as I am, you will be left to contemplate some unexpected connections during this coming season when teams full of non-stars take the field.

One of the facets of the steroid era that interests me is the residual evidence after the crackdown that although steroids may have enhanced the performance of stars, they certainly didn’t do much for the likes of Bigby. At last report, he was playing outfield in Japan for the Yokohama BayStars. But that was two years ago. He may be out of baseball by now.

Another unexpected consequence of Bogdan’s role in snitching on Bigby’s use of a variety of performance-enhancing substances – including human growth hormone , Deca-Durabolin , Sustanon , testosterone and anti-estrogen drugs – is that so many of the follow-on consequences are deflationary.

By implication, steroids were a revenue-enhancer, like cheap credit to fund dodgy mortgages. They created their own feedback effects.

In the last depression, there were no steroid issues. But the deflationary impulse was felt everywhere. And Major League Baseball salaries were cut sharply – even for the greatest stars such as Babe Ruth.

In 1929, Ruth’s salary was higher than that of the president of the United States. Ruth claimed he "had a better year." After the 1931 season, however, with attendance plunging, Ruth took a 10% pay cut. After 1932, Ruth’s salary was chopped by another 25%. And after 1933, when baseball attendance fell to just 6.3 million for all Major League teams combined, Ruth had to swallow a further 35% cut.

Today, there is no Babe Ruth. But if there were, he would be in danger not merely of a pay cut, but of not being resigned at all, as is the case with the recent premier home run slugger, Adam Dunn.

Times are tough everywhere. Even the "boys of summer" are running scared.  
 

Crisis Updates

  Washington takes center stage… What January’s bad news for stocks means for 2009… Why America’s new frugality could send the already battered economy over the edge…

** A fundamental economic power shift has taken place right before our eyes.

The New York Times makes the point that for the first time in over 70 years the epicenter of the U.S. economy is not Wall Street, not Silicon Valley, not the industrial Midwest, but Washington.

This is undoubtedly true. The cold, hard reality is that Washington is now the only liquid player in the economy.

I say this advisedly, of course. The government is only liquid in the sense that it can still borrow or print money to prop up individual companies (through recapitalization programs for banks, auto makers, insurers, etc) and the wider economy (through broader so-called "stimulus" programs).

Nevertheless, it’s now clear that without the fiscal life support of the government, the nation’s banks would simply disappear. And that would have a disastrous effect on not only the U.S. economy but also the world economy. 

What does it mean for Americans trying to navigate their way through this financial crisis?

It means we are now relying on the same goons who got us into this mess to get us out of it.

President Obama talked a big game in the election campaign. But what is he proposing as a way out of this economic mess?

The answer, unfortunately, is more of the same: yet another pork-barrel laden spending plan in the guise of ’stimulus.’

The current Senate bill will provide for a total of $885 billion in spending. It breaks down roughly as $560 billion in fiscal spending and $325 billion in tax cuts.

But take a closer look.

Much of the spending part of the president’s plan is on health care for the poor; education funds for the states facing budget cuts on schools; and more money for food stamps and unemployment insurance.

These are not unworthy aspirations, you might say.

But ask yourself this: Are they the kind of "shovel ready" projects the new administration promised? Are they the kind of projects that add millions of new jobs to the economy in a short period? And are they likely to reverse the insolvency of banks and the credit freeze that threatens to bankrupt hundreds of thousands of businesses across the nation?

I’m afraid not.

And closer inspection of the plan reveals two more worrying flaws:

1. 80% of the spending will not come on stream until 2010
2. Only 5% of your money will be spent on infrastructure projects such as highways and bridges

Don’t underestimate the opposition to this bill on Capitol Hill, either.

One of its most vociferous and well-reasoned opponents is Senator Jim DeMint (R-NC).

DeMint has attacked the bill as being a "hodgepodge of liberal spending projects" rather than a jobs plan. And looking at the following provisions, it’s easy to see where the senator is coming from.

• $400 million for researching sexually transmitted diseases
• $200 million to force the military to buy environmentally friendly vehicles
• $75 nillion for a program to end smoking
• $50 million for a national endowment for the arts
• $150 million for honey bee insurance

Americans face a basic question right now (whether we realize it or not). Do we want a free-market economy or a government-directed economy?

The de facto answer is that regardless of what you think, what you’re getting under President Obama is a government-directed approach.

You are also virtually guaranteed higher taxes for generations to pay back the hundreds of billions of dollars the government is about to spend out of an empty pocket.

So do I expect a recovery in the second half of 2009, as the wonks at the Fed and the outgoing presidential economic team have suggested? No, I don’t.

And I strongly advise you to keep limitations of this spending plan in mind if you are investing in the stock markets this year.

** Already, January 2009 has been the worst year on record for U.S. stocks in history.

The Dow dropped 8.8%. The broader market-weighted S&P 500 dropped 8.6%.

The January performance of the S&P 500 has accurately predicted the index’s year-long performance (in terms of positive or negative) for 60 out of the last 80 years. So the odds are certainly against 2009 being a good year for stock investors.

** Two other factors are a good gauge as to where the U.S. economy is heading this year.

The first is America’s personal savings rate. This shot up 2.9% in Q4. This is bad news for retailers and businesses keen to sell to U.S. shoppers.

The second is that consumption has fallen off a cliff. This week, the Commerce Department announced that consumption fell 1% in December and a staggering 9% in Q4.

If this trend continues, you can expect more layoffs, more bankruptcies, more foreclosures, more defaults on consumer loans, more bailouts for banks and auto makers and yet more government spending.

None of which is good news for USA Inc.