CapTalk: My Dream Job

Edit: I've decided to turn this post into a new running column, "Cap Talk," dedicated to the finances of the NBA.

Another Edit: I had to correct some mathematical errors and errors in describing the cap. This was before I had done enough reading to truly understand some nuances of the cap. Please forgive the errors.

For those of you who know me, you know that I have few very strong passions in life. These (in no particular order) are: anime, finance, mathematics, irrational thoughts, high-fructose corn-syrup, racist jokes, and basketball. The past couple weeks have really been a large mish-mash of all of those put together: catching up on my anime, applying to full time jobs, working as a math CA/starting math classes, trying to get one of my friend's laid instead of myself, eating various overly-sweetened snack products, managing to insult four ethnic minorities in the span of ten seconds, and spending a lot of excess time looking at the salaries for various NBA teams as the off-season winds down.

The first few seem pretty reasonable for me in any given week. However, the last one is seemingly a little off; most of the off-season's trading action in the NBA is over, and the regular season isn't starting for a few weeks. That's when I realized that all effort I have exhibited towards getting full-time employment in Financial Company X has been completely misguided. I've thought all along that I wanted to go into finance, into business, the corporate world, thinking that once I got there I would know what I truly wanted. Yet the more I think about it, I realize that even my greatest financial dream (running my own billion dollar hedge fund), does not even come close (both in feasibility and enjoyment) to what I would truly love to do: be an NBA Business Analyst.

"WTF is that?" you may ask. Well an NBA team is the same as any other business, they have compensation and operating costs as well as massive profits. They just happen to do it selling basketball paraphernalia and tickets to sporting events involving (mostly black) men throwing a rubber ball around a hardwood floor. Having interned at Legg Mason last summer where all I did was expense analysis, I find that this would be an amazing outlet for my skills and experience.

Even though I know I would inevitably have to start out analyzing the cost-to-benefit ratio of Kobe Bryant jerseys vs. Kobe Bryant hats, my dream would be to one day be able to focus on what I truly enjoy: analyzing the NBA trade possibilities with respect to the salary cap.

Those of you who don't know the NBA, it has a soft-cap, meaning that any team that spends over a league-set amount on player salaries has to pay the difference between what they are paying their team and the luxury tax level. This is called the luxury tax. In other words, they have to pay:

Player Salaries - Luxury Tax Level = Luxury Tax Payment

The repercussions of this is that they are effectively paying two dollars for every one dollar they are over the cap. Some teams (Lakers, Knicks, Celtics) can afford to do this because of their excessive profit margins. However, teams in smaller markets (ie Grizzlies, Timberwolves, Sonics... er, Thunder) will be unable to pay such a penalty. This naturally gives teams from larger markets an advantage. However, there are several benefits to being below the salary cap: You can sign free agents (those that make you go over the salary cap) without impunity, you can take on extra salary when trading for players, and the most obvious, you save money. But the true skill to manipulating the cap is being able to maximize the amount of talent on your team for the amount of salary you're paying.

Now players are coming and going non-stop, but this isn't half the problem. Most of the problem comes from players demanding pay-raises/contract extensions. The poster-child for this dilemma shall be the Summer of 2010, when LeBron James, Dwyane Wade, Chris Bosh, Carmelo Anthony, and a multitude of other superstars will be opting out of their rookie extension contracts and entering the free agent market. This coming season, Lebron James shall make approximately $14 million. However, given his level of talent, he is obviously worth more than that, probably upwards of $20-25 million per year. In case you didn't know, there is a very large difference between $14 million and $25 million. Cleveland's total salary for next season will be somewhere around $85 million, which will be something like $20-$25 million above the projected cap. Their dilemma lies in how much they are willing to pay in luxury taxes in order to keep James.

God, just writing about this stuff makes me cream my pants. All right, not quite, but it's close. Very close. I have a feeling it will be extremely difficult, but if this whole finance thing doesn't pan out/interest me enough, I will most definitely turn toward my new-found passion: using my math/finance knowledge on my favorite sport, basketball.