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Money Lessons from the Jeremy Lin Contract Saga

Posted By Jim On 07/19/2012 @ 7:16 am In Personal Finance | 13 Comments

It was hard to miss Linsanity this past NBA season, even harder if you are one of the many misery loving fans of the New York Knickerbockers. Having lived away from New York (Pittsburgh for nearly six years, then Baltimore for almost ten), a bad New York Knicks team meant little television time and almost no attention from the sports media. They weren’t stellar while I was in high school, reaching the Finals once before they ran into the twin towers of San Antonio (Robinson and Duncan), but they were entertaining and you had to cheer for Patrick Ewing. The epic battles against Reggie Miller and the Pacers plus the bitter rivalry with the Heat (PJ Brown flipping Charlie Ward on the free throw line!) made it fun to watch, even if the team would have years of malaise afterwards.

So this past season, seeing Jeremy Lin capture the basketball world’s attention for about two dozen games was awesome. Too bad the Knicks let him go to Houston because they didn’t want to open the wallet a little wider. He would’ve been pricey (but worth it? [3]) but it would’ve been great for a fan like me.

Here’s what I learned watching him play:

You & Your Family are Priority One

As a restricted free agent, the Knicks could match any offer given by another team. So Lin and his agent went out to get an offer. They got one, a fat one, from Houston for three years and $25 million dollars. It would be about five million in each of the first two years followed by a “poison pill” $14 million in the third year. It’s a pretty rich contract and one that the Knicks declined to match. Was it financial? You could look at the luxury tax implications but the salary wasn’t ridiculous in terms of point guards. It was high for someone with Lin’s history and the structure was terrible for a team signing him, but ultimately you have to do what’s good for you and yours.

You could point to the Knicks “giving him a chance” and how he “owed it” to New York to stick around, but that’s crap. You only get so many shots in life and when you see it, you have to take it. Lin did get a chance and he performed. Now he’s being rewarded for it.

Financial Discipline Is Crucial

Part of the financial reasons why the Knicks didn’t keep Lin had to do with the luxury tax. In some sports, there’s a hard cap of how much you can spend on player salary. In basketball, there’s a luxury tax (like in baseball). If you exceed the salary cap, you have to pay the other teams in the league a tax. There are a lot of different exceptions to the cap but the basic tax is the team owe $1.50 for each dollar over the cap. That amount increases to $1.75 if you exceed the cap by $5 million to $10 million. $2.50 for amounts $10 million to $15 million. Anything $15 million and over is subject to a tax of $3.25. It’s punitive and designed to be punitive.

When you look at Lin’s contract, coupled with the other big contracts on the team, it was clear that without some changes, the Knicks would be over the cap by a significant margin. Calculations were that the third year would cost the Knicks around $60 million, once you factor in the tax. That’s because Carmelo Anthony would be owed $24.4 million, Amar’e Stoudemire would be owed $23.4 million, and Tyson Chandler would be owed $14.6 million. Poor discipline in the past led to this (though that’s not to say what they could do in the future – which is unload one of those contracts).

Sometimes It’s Not About Money

Now that people are playing monday morning quarterback on the whole thing, myself included, word is getting out that perhaps it was not all about money. There’s talk that people were upset about his commitment after not willing to play against Miami last year when his knee was 85%. There’s talk about how Lin was unhappy the Knicks didn’t approach him sooner or how Lin was being ungrateful. I don’t know what the whole story is, I suspect we’ll hear about it in the coming weeks, but emotion plays a big role in these types of decisions. Much more than you’d expect.

Don’t Show Your Cards Early

Here’s the part of the whole saga that boggles my mind – the Knicks’ front office has a big mouth. When the terms of Lin’s initial agreement were first released, it was four years for around $28 million. It was a deal that the Knicks could’ve accepted, so they decided to say they would match anything. Houston called their bluff and the actual signed contract was for $25 million over three years.

When you’re negotiating, don’t tell the other side what you plan to do! They should find out what you’re doing… when you actually do it. The Knicks should’ve said they wouldn’t match that offer, Houston might have backed off a little, and then the Knicks could’ve matched. Instead someone who wanted to feed the media made the decision much harder.

I wish Lin the best of luck, too bad it won’t be in a Knicks’ uniform.

(Photo: nikka_la [4])


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[3] but worth it?: http://observer.com/2012/07/msg-stock-jeremy-lin-effect-leaving-07172012/

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