Sterling, Putin Fiascos Show the Power of the Purse!

The power of the purse. It should never be underestimated — and it can be a tool for tremendous good IF it’s applied in the proper way.

Just look at the ongoing saga of Russian President Vladimir Putin. The world isn’t responding with bombs and bullets. It’s going after the wealth of Putin’s oligarchs and cronies. By limiting their ability to travel abroad and freezing assets held in non-Russian banks, the European Union and the U.S. are trying to squeeze their finances so they’ll help pressure Putin to back off.

But it’s Los Angeles Clippers owner Donald Sterling who’s getting an even more powerful education about the power of the purse now! I’m sure you’ve already read or heard about the racist remarks Sterling has been recorded saying.

Present and past NBA players have already weighed in angrily, with Los Angeles Lakers great Magic Johnson saying, “There’s no place in our society for it and there’s no place in our league.”

Like Putin, Clippers owner Don Sterling will get an education on the power of the purse.

Michael Jordan, formerly of the Chicago Bulls and current owner of the Charlotte Bobcats, released a statement saying “As an owner, I’m obviously disgusted that a fellow team owner could hold such sickening and offensive views” and “as a former player, I’m completely outraged.”

Then this afternoon, NBA Commissioner Adam Silver announced that Sterling would be banned for life from association with the Clippers. He will also be fined $2.5 million.

But it’s the Clippers’ corporate sponsors that are really turning the screws on Sterling. Just think about all those companies whose names you see on banners, cups, seat cushions, and tickets when you go to a professional sports game. Or the companies that help organize promotions and other live events — at the Staples Center where the Clippers play, or any other stadium and arena in the NBA, NFL, NHL, or MLB.

When a team is winning, and its most popular players and owner are charismatic, respected members of the community, sponsors fall all over themselves to be associated with them. But when the team starts losing, star players get into legal trouble, or an owner makes an idiot of himself, they will run away as fast as possible.

“The power of the purse can be used for good — whether putting pressure on the leader of a rogue nation and his cronies, or a titan of business whose views are woefully outdated in today’s modern world.”

Just in the past few days, the Clippers have lost the sponsorship of the Chumash Casino, the car dealer CarMax (KMX), and the airline Virgin America. Other leading advertisers such as Sprint (S), Kia Motors, Red Bull, and State Farm are yanking their business.

There’s no way to know exactly how much money we’re talking about. And with a net worth of an estimated $1.9 billion, Sterling won’t go broke. But the costs will mount very quickly, and the value of the franchise will tank, if corporate sponsors keep voting with their dollars. NBA Commissioner Silver said that other team owners will attempt to force Sterling to sell the team, though it’s unclear how long that process will take.

And, I might add, good for them! Like I said, the power of the purse can be used for good — whether putting pressure on the leader of a rogue nation and his cronies, or a titan of business whose views are woefully outdated in today’s modern world.

So what do you think? Is the NBA responding to Sterling’s comments in a proactive, smart way? What about Corporate America? How do you think companies that do business with Sterling and the Clippers should respond? Sound off on our blog.

OUR READERS SPEAK

Meanwhile, it doesn’t look like Bank of America (BAC) has many fans among our readership!

Bill wrote in to say “I do not trust any of the banks, especially BOA.” He said he is most worried about the trillions of dollars worth of derivatives exposures concentrated in the hands of a few small institutions, including BOA — and notes that even modest losses could quickly chew through their capital cushions.

Bill — you’re right on target! The figures on derivatives exposure from the Office of the Comptroller of the Currency (OCC) are truly staggering — $237 TRILLION in notional value as of the fourth quarter of 2013. As we saw with JPMorgan Chase (JPM) and the “London Whale” fiasco, a few wrong bets can quickly add up into millions or billions of dollars in losses.

As for J.P., he said he prefers credit unions over banks, saying: “They spend their profits on their member shareholders, not on the ‘stockholders’ of a for-profit bank. BIG difference.” And he asks, rhetorically, “How many credit unions were giving people BS mortgages? How many needed taxpayers’ dough to survive?”

Another good point! While big banks can offer a wider variety of financial products than some credit unions, they clearly have massive financial obligations to shareholders that can cloud their decision making.

Any other thoughts? Are YOU doing business with Bank of America? Do you have any interest in buying its shares? Let us know.

MARKET ROUNDUP

Here’s a quick recap of the OTHER important news of the day …

 Home price gains continue to cool, as I’ve been expecting. The S&P/Case-Shiller index of prices in 20 top U.S. metropolitan areas rose 12.9 percent year-over-year in February. That was down from 13.2 percent in January and the smallest rise since August. Look for this to sink into the single digits in the coming few months.

 On the eve of tomorrow’s Federal Reserve policy announcement, there’s more talk about how the Fed isn’t clearly communicating what it plans to do with interest rates.

News Flash Wall Street: You’re not going to get clarity because the Fed itself has no idea what it’s going to do! So it’s just stalling for time and trying not to look foolish, even as the interest rate market knows that more QE cuts, and then interest rate hikes, are necessary.

Siemens (SI) of Germany is trying to give General Electric (GE) a run for its money over France’s Alstom. GE has a $13 billion offer on the table to buy the French high-speed train and power transmission giant. But political considerations could tilt things in Siemens’ favor if European officials want to keep Alstom as a European company.

In the “Twisted Tax Tales” department, Apple (AAPL) is planning to sell a whopping $12 billion in bonds to fund its massive stock buyback. That doesn’t make much sense on the surface considering the company has $150 billion in cash on the books. But the lion’s share of that is held overseas, and if the company brought that money back into the U.S. it would pay a huge tax penalty — as much as 35 percent!

So in other words, silly tax policy is going to encourage an iconic American corporation to hoard cash overseas rather than invest it here … AND load up its balance sheet with several billion dollars of debt … all for the express purpose of stiffing the government to the tune of tens or even hundreds of millions of dollars. As those guys in the old Guinness beer commercials used to say, Brilliant!

By the way, one reason why Pfizer (PFE) is pursuing AstraZeneca (AZN) for an eye-popping $100 billion or so is taxes. Pfizer would likely re-domicile itself as a U.K. company as part of the deal.

That would allow an American icon — a company in the Dow Jones Industrial Average — to dodge hundreds of millions of dollars in taxes. Again, brilliant! Is anyone in Washington paying attention here?

Reminder: If you have any thoughts to share on these market events, don’t hesitate to use this link to put them on our blog.

Until next time,

Mike Larson