What if baseball had a loaning system?

It’s the all star break, so that means I’m going to write about whatever I want. We’ll return to your regularly scheduled Royals #content next week (which will probably be an updated Royals prospect list), but for now, I’m going off topic.

The other day on Twitter, all around good guy Chris Crawford (of NBC Sports and Rotoworld) proposed the idea of essentially, what if baseball had a loaning system.

Reflexively, you’d compare this to the loaning system in football soccer where teams will loan their younger players (occasionally older guys) to other teams to get them playing time they couldn’t find on their own club. Typically these are big name teams like Chelsea, Manchester United, Barcelona, and Real Madrid. They are constantly competing for every title in association football, so they can ill afford to give consistent playing time to 18-20 year old undeveloped kids. So instead, they loan those players out to “lesser” clubs since often these 18-20 year old kids are better than many players on the team. Thus, the “lesser” club gets to add talent (boosting wins and revenues) while the bigger club gets to have their player receive constant playing time and coaching.

Loaned players, at least in the Premier League, aren’t allowed to play against their parent club. They can play against their parent club in a tournament only if they haven’t already played for them in that very tournament. Also, either team can pay the players wages, but typically that falls on the shoulders of the team loaning out the player.

Teams even have the ability to recall the player they are loaning at anytime (but costing them a fee). Clubs loaning the player also can negotiate as part of the loan the right to buy the player from the team (as we saw with the shady loan dealings of French wunderkind Kylian Mbappe).

So how would this work in baseball? A lot of the general things would fit pretty smoothly. The above description doesn’t really break any logic of baseball, it’s really all just about figuring out how the player would be valued. We’ll try to answer Chris’ example about Mike Trout (and we’ll only stick with a half-season rental even though you could just stretch the valuation out).

We’re assuming as well that we can either pay cash, prospects, or both. Now, cash kind of bends the rules as the MLB has to approve any cash deals above $1M but we’re going to also assume that with the new loan rule, cash payments are savvy.

Cash

I actually think we can steal a bit of finance/investing principles here for an all cash deal. In finance (oh boy I’m about to lose you), companies will enter into forward rate agreements (FRAs) to take a long or short position on interest rates, currencies, and other variable assets. One side will go “long” (as in, hope it goes up) on either a floating interest rate (one that changes daily) or a fixed interest rate (like your typical loan). Naturally, the opposite side will take the other end of the trade. If you and I were trading, and you think interest rates are going to go up, you’d go long the floating rate. This means I’d take the fixed rate side. What would happen is that at some date in the future, we’d pay each other the respective rate on some nominal amount. If interest rates went up and your floating rate was higher than my fixed rate, I’d pay you. If my fixed rate was higher, you’d pay me (technically we’d both pay each other and the side that was correct on the agreement would just get the excess cash).

So where am I getting at with this? Well if you entered into a FRA with me but then suddenly had a change of heart, you can’t just back out. What you’d have to do is take an offsetting position in the FRA (so if you were pay fix, receive float, you’d enter into a pay float, receive fix FRA). This is what I am getting at here.

If you were to loan Mike Trout from the Angels who are out in this example out of contention, you would calculate his surplus value and pay the Angels that amount plus his salary (you could even discount it back to present value).

Mike Trout is owed ~$16M for the rest of the year and is projected (per FanGraphs) ~4 wins for the rest of the season. Using $9M/WAR, that puts Trout at ~$36M in value. Since he’s owed ~$16M, he’d have a surplus value of ~$20M for the rest of the season (or $19.67M if you discounted it back to today based on having him from July-October). So the Angels would be paid $36M: $16M for his contract and $20M for his surplus value.

Here is how that would look:

The Angels would have to receive $37.8M in cash from the loaning team if they were to loan him out for the full half-season.

If the Angels magically found themselves back in contention or had a string of injuries, they would then recall Trout from his loan, owing the other team simply the remaining amount of the projected surplus value.

So if September rolls around and the Angels want him back, they’d have to value Trout for the rest of the control period (through October in our example). If he was worth ~4 wins for 3.5 months (mid-July to October), that’s ~1.2 wins per month. He is being paid ~$6.4M a month, giving him a surplus value of ~$5M a month. The Angels would simply enter an offsetting agreement for the ~$5M plus remaining salaries and pay the loaning team (we’ll say the Royals here - yeah right...) that amount.

The reason they would have to do this instead of just cancelling the loan and recalling the player, is because likely at the time of recall, Trout is worth actually the prorated version of his projected WAR back in July. Instead, he might be worth more or less than the remaining amount. Maybe back in July, the Angels expected him to be worth 1.2 wins a month but Trout goes into another level and is now worth 1.6 wins a month. The Royals have come out ahead in the deal as they are paying the Angels like he’s worth 1.2 wins but he’s actually worth 1.6. Thus, the need for a revaluation and an offsetting agreement.

If you noticed, the money the Angels were due to be paid over the terms of the loan are now equal to the money the Royals are owed despite the only having about half the deal left.

A crude timeline:

This doesn’t really work though. Superstars like Trout wouldn’t be cash swaps because they are just too valuable really to be worth the effort. Instead, I think you’d see expensive, bad contract guys as call cash deals. For instance, what if a contending team could acquire the rights to Miguel Cabrera for a few months, but without taking on all of his remaining contract. Instead they agree to pay the Tigers the rest of his salary owed for the year (there would likely be no surplus value, so instead the floor is just what he is owed). The Tigers save a bit of dead money they would have owed anyways and the contending team could have a decent bench bat (albeit not a cheap one).

I think you’d see cash deals for prospects loans too, likely instead of worrying about surplus value, the team loaning the player out just pays the full salary (the MLB minimum). The Astros could loan out Kyle Tucker to get him playing time without risking the growing pains he might have at the same time Houston is trying to win another title. Cleveland could do the same with Francisco Mejia while Yan Gomes and Co. man the backstop for the AL Central leaders.

Players or prospects

Just like in real life baseball, in this hypothetical world contending teams wouldn’t trade currently useful MLB players for even a superstar like Trout. They would instead do normal prospect for star swaps. I don’t think the trades would be similar to what we see now in rental-for-prospect swaps that are common at the trade deadline. The Angels would retain the services of Trout for beyond just the rest of the season and they’d also have the right to recall Trout. Just factoring the the fact that they’ll get Trout back once the season is over should lower their return. Furthermore, a discount should be given since the Angels could recall Trout.

Now Trout is an extreme example here. He’s the best player in baseball and if he were traded today, he’d get a pretty sweet return for the Angels. If he were loaned out as well, he’d get a good, but lesser return too.

The cash valuation approach wouldn’t quite work here where you could pay the Angels just the prospect equivalent of surplus value. The Royals would have to discount the Angels return because then Angels could just continually keep flipping him while they had control. For most non-Trout players I think the team loaning out the non-Trout player would typically get a discounted package than they would receive if non-Trout were a free agent at seasons end. Part of this is because of just that; if Trout were a free agent after the season, the Angels could potentially net the premium package and then also re-sign him. In the loan scenario, they don’t have to run the risk of losing him. Borrowing from finance again, where pricing a derivative often times we’ll subtract the present value of a benefit and add the present value of the cost to the price. Being able to retain Trout is a clear benefit for the Angels, so we’ll subtract that.

This though might all go out the window when economic forces take hold and the Yankees decide to just overwhelm the Angels with money or the Braves use their strong farm system assets to make themselves the highest bidder. In theory, teams shouldn’t pay as much for Trout in a loan than if he were a free agent at winter's end.

A counter-argument to that though might be that players teams could get more than normal because they’d have a better incentive to list players on loan. Normally you couldn’t get Mike Trout unless the Angels were so far out of contention both this year and conceivably in the near-term future as well that Trout wouldn’t make them a contender by being on the roster (which he has basically done every year for LA). The Angels could loan Trout out for 2018 and 2019 but still retain him for 2020 (rules would have to be in place that a player cannot be loaned in a season where he is free agent eligible the following winter - otherwise he’d be a normal trade). They could be more selective and only move him for a huge return, otherwise they’d just hold on to him.

As a counter-counter-argument, more players on the market would theoretically lower prices. Say a couple teams with stars end up not being as good as they expected. Those teams could flood the market with elite talent, making it a buyers market.

I think this is an extremely interesting idea, and while it would need clear rules and governing, players could be a part of a playoff run instead of sitting at home in October. Prospects could get valuable MLB experience (and service time) instead of dominating AA/AAA and learning nothing. Once they return to their parent club, their growing pains are gone and they are ready to fulfill their destinies as the superstars they were meant to be. However as cool of an idea I think this might be, let’s work on getting the DH in both leagues first.