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Gilbert Uses Mortgage Meltdown Lesson to Handle James’s Absence

Majority owner Dan Gilbert of the Cleveland Cavaliers talks to the media prior to playing the Boston Celtics in the Cavaliers 2010 home opener at Quicken Loans Arena on Oct. 27, 2010 in Cleveland, Ohio. Photographer: Gregory Shamus/Getty Images
Majority owner Dan Gilbert of the Cleveland Cavaliers talks to the media prior to playing the Boston Celtics in the Cavaliers 2010 home opener at Quicken Loans Arena on Oct. 27, 2010 in Cleveland, Ohio. Photographer: Gregory Shamus/Getty Images

Nov. 18 (Bloomberg) -- Thousands of feet over Lake Erie in cloudy skies, Dan Gilbert sits in his eight-seat Hawker 700 jet and celebrates a win.

The previous night, his Cleveland Cavaliers opened their National Basketball Association season with a come-from-behind victory over the Boston Celtics.

“Let me tell you,” Gilbert said, “when we were down 11, that was, that could have gone...”

Gilbert, 48, is talking about the third quarter, when the Celtics were pulling away. The Cavs saved Gilbert from having to finish the thought by outscoring the Celtics 38-19 in the final 16 minutes to win 95-87.

Gilbert, as Bloomberg BusinessWeek reports in its Nov. 22 issue, calls the win the most “emotionally satisfying” of his five years as team owner, a stint that includes eight playoff series victories and a 2007 trip to the NBA Finals.

He savors this win above all others because it’s his first without the man responsible for his greatest loss.

Gilbert was once known mostly as chief executive officer of Quicken Loans, the largest online retail mortgage lender in the U.S., according to National Mortgage News.

He started the company at age 23 with $5,000. He’s now chairman of Quicken and its parent, Rock Holdings, a Detroit-based empire of 29 companies ranging from designer sneakers to private equity.

Yet Gilbert is more recognized these days as the emotionally unbound owner at the center of pro basketball’s best soap opera.


From 1998 to 2003, the Cavaliers lost two-thirds of their games and, according to “The Franchise: LeBron James and the Remaking of the Cleveland Cavaliers,” a book by Terry Pluto and Brian Windhorst, about $10 million a year.

Then, in the summer of 2003, the Cavaliers won the first pick in the NBA draft and chose James, an Akron teen just out of high school and perhaps the best basketball talent of his generation.

Cleveland hasn’t won a championship in any major sport since 1964. Yet the local kid was even better than advertised -- graceful and dominant on the court and an Ohio patriot off it, infusing the area with pride and packing the Cavs’ arena.

The mania gave then-owner Gordon Gund, who bought the team in 1983 for $20 million, the chance to cash out. Gilbert, who lost a 2004 bid for baseball’s Milwaukee Brewers, put together a small group of investors and bought the team for $375 million.

Cleveland made the playoffs in each of Gilbert’s first five seasons and became the third-largest franchise by revenue in the NBA -- a league that has two teams in the New York area, two in Los Angeles and one in Chicago.

Then it happened.

‘The Decision’

On July 8, James, now a global celebrity, announced on prime-time national television: “I’m going to take my talents to South Beach and join the Miami Heat.”

Gilbert learned the news at the same time as the rest of the world. To call it a loss is to underestimate its financial magnitude and the personal nature of the rejection.

Gilbert began writing an e-mail, 421 words addressed to “Cleveland, All of Northeast Ohio and Cleveland Cavaliers Supporters Wherever You May Be Tonight.”

“As you now know, our former hero, who grew up in the very region that he deserted this evening, is no longer a Cleveland Cavalier,” he opened.

“Narcissistic” and “cowardly” were on his list of adjectives.

‘Heaven’ Can Wait

“Some people think they should get to heaven and NOT have to die to get there,” Gilbert wrote. “Sorry, but that’s simply not how it works.”

He guaranteed the Cavs would win a championship before the departed hero did, adding: “You can take it to the bank.”

Gilbert is calmer now. In a meeting room at Quicken Loans Arena hours before the season opener on Oct. 27, he explains how the e-mail poured out of him.

He was at the annual Allen & Co. Sun Valley Conference of media and tech moguls. After watching the announcement, Gilbert wrote the letter in a couple of hours as his wife and three of his five children wandered in and out. He sent it to the Cavs public relations director, Tad Carper, and a few others in the front office.

“They looked at it,” Gilbert says, “but I was in a state where, you know, ‘Post this thing now.’ There were very minor changes.”

NBA Fine

The response was immediate. ESPN basketball writer Henry Abbott called it “disastrous.” NBA Commissioner David Stern fined Gilbert $100,000 and called his remarks “ill-advised and imprudent.” Jesse Jackson suggested Gilbert’s comments betrayed a “slave-master mentality.” Mark Cuban, owner of the Dallas Mavericks and a friend of Gilbert’s, applauded.

“Dan’s a passionate owner,” Cuban told reporters, “and he deserves a lot of credit for putting it out there. Most guys wouldn’t have the guts.”

For those who have known Gilbert since the early Quicken days, the letter wasn’t surprising.

“It wasn’t shocking at all, heck no,” says Shawn Krause, a vice president at Quicken Loans who has been with the company for 20 years. “If it wouldn’t have come out, I would have been, like, ‘What’s going on?’”

Lindsay Gross, one of Quicken Loans’ original three employees and now director of banking, says: “That’s Dan, the way he’s always been. He’s not afraid to call it out how it is.”

After four failed attempts by other developers to legalize casino gambling in Ohio, Gilbert sponsored a ballot initiative that would allow his Rock Gaming to build casinos in Cleveland, Cincinnati, Toledo, and Columbus -- and won approval in November 2009.

Detroit Move

He’s also moving 1,700 Quicken Loans employees from suburban Livonia, Michigan, to an airy new headquarters in Detroit’s downtown.

Gilbert insists that the Cavs, who are 5-5, will be “much, much better than most of the pundits are saying,” that the departure of James, 25, may have been “a blessing in disguise,” and that he would buy the team again today for $375 million.

“What we’ve asked Cleveland and the supporters and the people to support -- and they do -- is the franchise and culture and the philosophy, knowing those are going to keep changing, adjusting, improving until we do find a winning formula,” he says.

Outside the Cavs’ bubble, there are questions about whether Gilbert can draw fans solely on regional pride.

Different Franchise

“There are some franchises that are there, thick and thin,” says Michael J. Cramer, director of the Texas Program in Sports & Media at the University of Texas at Austin and former president of the Dallas Stars and Texas Rangers. “Think Cubs. Think Toronto Maple Leafs. Cleveland is not the Cubs. And Cleveland is not the Maple Leafs.”

Bob Whitsitt, an NBA general manager with the Seattle SuperSonics and Portland Trail Blazers for 17 years, now shepherds sports deals at Whitsitt Enterprises. He’s skeptical of Gilbert’s confidence.

“Since he bought the franchise, he and his people have done a really good job,” says Whitsitt. “I also know that once you own and are involved with it day to day, everything you look at isn’t half full -- it’s more than three-quarters full.”

NBA rules keep the Cavs’ management from discussing the team’s financial details. According to the numbers Whitsitt keeps, the Cavs had paid attendance of about 18,500 per game last season and an average ticket price of $70, resulting in $1.3 million in ticket sales per game.

Attendance Drop

Whitsitt saw similar figures with the Trail Blazers when they were a perennial playoff team. After he left in 2003, the Blazers failed to make the playoffs for five years running. Attendance fell by about 5,000 per game, to 15,000.

Whitsitt says it’s reasonable to expect a similar drop-off in the Cavs’ performance and attendance, which would translate into a loss of about $350,000 per game, or close to $15 million over the course of 41 home games each season.

Whitsitt said he anticipates another $15 million in lost sponsorships, concessions and other ancillary income. Using his standard 4.67 multiplier for revenue to franchise value, he said, $30 million in lost revenue equals $140 million in lost value.

“I’m not trying to suggest, ‘Hey, Dan, your franchise is falling apart,’” says Whitsitt. “But I am suggesting this would be the first time ever you’ve had to run a franchise without LeBron James.”


Around the Cavs, James is a ghost. Gilbert refers to him as “the player that left,” or “that one person.”

The season before James joined the team, the Cavs’ average attendance was 11,500, with a base of about 2,000 season ticket holders. For now, the franchise has a cushion before the post-LeBron era truly begins. Season ticket holders renewed at a better than 90 percent clip prior to James’ departure.

“Very, very few people, I mean a handful, were demanding refunds or canceling after the decision,” Gilbert says.

He acknowledges that he’s in uncharted territory.

“There really isn’t a parallel,” he says. “I cannot recall us ever losing a major, key person in a business. And it’s magnified by the public nature of the business.”

Gilbert also said he’s weathered bigger storms.

“We’re a survivor of the mortgage Armageddon,” he says of Quicken Loans.

Markets Lesson

Three years ago, just after the Cavs lost in the NBA Finals, Quicken was caught in the collapsing credit markets.

“That taught me,” he said, “never to be naive enough to think just because you put two decades into something, just because you do it right _”

Gilbert entered the mortgage business on a whim. In 1985, during the summer after his first year of law school at Wayne State University in Detroit, he was working part-time at his parents’ Century 21 realty office in Southfield, Michigan.

A loan officer walked in one day and suggested he try brokering mortgages. He brought the idea to his brother, Gary, and to Gross, a childhood friend and roommate for two years at Michigan State University, where the two hosted a local cable show called “Let’s Talk Sports.” Together they started Rock Mortgage out of a rent-a-suite in Southfield.

“We really didn’t even know what a mortgage was,” says Gross.

As he learned the business, Gilbert marveled over the fractured process of closing loans.

“The home-buying process in America to this very day is broken,” he says. “There is still no protocol on how a closing should work -- on who calls who with the closing costs, who delivers what papers to who.”

Call Center

When Rock had grown to 120 employees, Gilbert mentioned the then brand new company 1-800 CONTACTS as a potential model. Gilbert believed a call center platform would allow bankers to go from closing 15 loans every month to 15 every day.

Rock opened its first call center in 1996 and began offering Mortgage-In-A-Box, a user-friendly loan application delivered, as promised, in a box.

Behind the product was the organizational effort of mastering the loan process in 50 states and the myriad jurisdictions within them.

In May 1998, Gilbert took Rock Financial public, raising $33.3 million in its initial public offering. The following January, Rock took its Mortgage-In-A-Box concept online and began offering mortgages at

Mortgage Promotion

By that time, Intuit, the California-based developer of Quicken personal finances software, had established an online promotional hub for mortgage lenders and wanted to get into direct lending. Rather than build its own platform, Intuit interviewed a few dozen firms and selected Rock. In December 1999, Intuit bought the company for $532 million in stock, renaming it Quicken Loans and keeping Gilbert as chief executive officer.

Gilbert won’t say what he netted, but the sale to Intuit at the peak of the tech bubble vaulted him into the category of people who could buy sports teams.

In December 2001, Gilbert stepped down as CEO at Quicken and moved to the chairman’s office. The next month he turned 40. At a party to celebrate both milestones, according to Krause, Intuit’s then-CEO, Steve Bennett, approached Gilbert with a proposition.

“After Dan got done speaking and the thing was over,” says Krause, “Steve came to Dan and said, ‘Do you want to buy the company again?’”


Intuit sold Quicken Loans to Gilbert’s Rock Financial for $64 million in August 2002. Quicken had 2,000 employees by 2005. Two years later, credit agencies began to downgrade shaky mortgage assets.

“It was the first Tuesday in August that all hell broke loose,” says Krause. “Dan sent an e-mail: ‘Get a war room set up overnight and we’ll be in here first thing tomorrow morning.’”

Quicken executives, CEO Bill Emerson says, stayed in the room 18 hours a day for eight weeks until they had sorted through the worst of the problems. The company quickly shifted to making only loans that matched Fannie Mae and Freddie Mac guidelines.

“We turned this thing around in a week and went from some of the stuff that we were originating to a 100 percent Fannie-Freddie shop,” says Emerson.

This year, he says, the company is on pace to surpass last year’s $25 billion in loans closed. Krause, like Gilbert, sees parallels between the mortgage crisis and the Cavs’ loss of James.

‘Giving Up’

“Companies were in the fetal position, just giving up,” she says. “Here we hunkered down and looked at what companies can we buy, what’s the best thing to do. That’s the same that (Gilbert) did with LeBron. It’s like, ‘OK, this is a challenge.’”

As an NBA owner, Gilbert studies past teams as case histories. His current favorite model is the 2004 Detroit Pistons, a defense-minded team that won a title without a superstar.

Those Pistons were an anomaly. Teams with players such as Michael Jordan, Hakeem Olajuwon, Shaquille O’Neal, Tim Duncan, Dwyane Wade and Kobe Bryant have won 18 of the last 20 championships.

Losing with abandon was how the Cavaliers put themselves in a position to get James in 2003. That route is chancy at best. Only teams that don’t make the playoffs get in the lottery for the top pick in the draft, but the final order is decided by bouncing Ping-Pong balls.

James’s Ad

Players like James don’t come around every year. In the Cavs’ locker room after the opening game, James’s image suddenly appears like a ghost on one of the flat-screen TVs. It’s a new Nike ad that begins with a re-creation of James’ “Decision” special on ESPN.

James turns to the camera and asks, “What should I do?” On his jet the next day, Gilbert says he’s baffled.

“I don’t even get it,” he says, “I really try to understand.”

To contact the reporter on this story: Ira Boudway in New York at

To contact the editor responsible for this story: Michael Sillup at

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