Friday, December 14, 2007

The Steroid Era in Baseball and Subprime

Yesterday, Major League Baseball released “The Mitchell Report”, which culminated a 20-month investigation by former Senate Majority Leader George Mitchell, who was hired by Commissioner Bud Selig to examine the Steroids Era. The scathing 409-page treatise linked some of the game’s most famous players to illegal steroid and other performance-enhancing drug use, including Roger Clemens, Miguel Tejada, Barry Bonds, Gary Sheffield and Andy Pettitte. Scanning the report was a perfect activity for a snowy day!

Mr. Mitchell noted that "Everyone involved in baseball over the past two decades -- commissioners, club officials, the players' association and players -- shares to some extent the responsibility for the steroids era…There was a collective failure to recognize the problem as it emerged and to deal with it early on." As I read these words, I started to think about other excesses that occur under the nose of regulators.

Earlier this week, the Wall Street Journal reported that “In 2005, the Securities and Exchange Commission and New York state's attorney general's office launched separate investigations into whether Bear Stearns (the firm whose original disclosure sparked the subprime crisis) harmed investors by improperly valuing complex mortgage securities.” (Did Authorities Miss a Chance To Ease Crunch? December 10, 2007) In other words, like MLB officials who suspected steroid use in the past, there were problems that were percolating with the pricing of subprime fixed income securities that needed attention, but did not progress.

Both the SEC and the NY attorney general's office, headed at the time by Eliot Spitzer, identified the problem--that is, how to determine the value of securities backed by risky mortgages--but each regulatory body dropped the enforcement cases. Given the ensuing mess, I guess it would be na├»ve to expect that a regulator might admit “gee, we missed that one.” This is especially true of Eliot Spitzer, who many believe was better suited to building his case, publicizing “the most egregious allegations in the media, which put unbearable public pressure on the targets to settle.” (“The Humbling of Eliot Spitzer” The New Yorker, 12/10/07)

It is impossible to go back and hold Mr. Spitzer responsible for his inaction, just like it is difficult for MLB to figure out how to correct the past. In both cases, we fans would like to see more level-headed, proactive thinking, rather than the reactive sort that plagues the landscape in both industries.

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