Left Behind by LeBronBy
Tens of thousands of feet over Lake Erie in cloudy October skies, Dan Gilbert sits in his eight-seat Hawker 700 jet and celebrates a win. The previous night his Cleveland Cavaliers opened their 2010-11 NBA season with a come-from-behind stunner over the Boston Celtics. "Let me tell you, when we were down 11, that was, that could have gone..." Gilbert is talking about the third quarter, when the Celtics were pulling away. He can't bring himself to name the damage he imagined unfolding. The Cavs saved Gilbert from having to finish the thought by outscoring the Celtics 38 to 19 in the game's final 16 minutes. Gilbert 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 National Basketball Assn. finals. He savors this win above all others because it's his first without the man responsible for his greatest loss. His first without...
Outside basketball arenas, Gilbert, 48, 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. Gilbert 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 software 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 2007's The Franchise by newspaper writers Terry Pluto and Brian Windhorst, about $10 million a year. Then, in the summer of 2003, Cleveland won first pick in the NBA's annual draft lottery and chose an Akron teen just out of high school who also happened to be the greatest basketball talent of his generation.
Cleveland is not a city with a history of catching breaks. Its industrial decline has been well chronicled, but its sports teams are, in their way, more tragic. The city hasn't won a major championship 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. On July 8 the Akron kid, 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. It was a cuckolding.
Gilbert began writing what became the most famous e-mail in sports history—421 furious words in the incongruously cheerful comic sans font, peppered with caps and addressed to "Cleveland, All of Northeast Ohio and Cleveland Cavaliers Supporters Wherever You May Be Tonight." He opened: "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." "Narcissistic" and "cowardly" were on his list of adjectives. "Some people think they should get to heaven and NOT have to die to get there. 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, 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 longtime Cavs PR man 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." The response was immediate. ESPN basketball writer Henry Abbott called it "disastrous." NBA Commissioner David J. 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," he 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 was not 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."
Gilbert says he has no regrets. "I think it pretty well matched up with how the vast majority of people in this market and this community were feeling, from little kids to old ladies," he says. He keeps binders filled with the more than 4,000 responses to his e-mail, nearly all of them supportive. He says he was shocked by the tizzy his font choice caused—he's been using comic sans in e-mails for years. As for the championship guarantee, Gilbert calls it "added motivation for this entire franchise and city." Las Vegas calls it something else. The night of the Cavaliers' most humiliating loss, the Las Vegas Hilton listed the Miami Heat as 9-to-5 favorites to win the title. Cleveland was 300 to 1.
Obstreperous optimism is one of Dan Gilbert's signature traits. A squat five-foot-seven Detroit native, he spent a few years trying to set Michigan's steroid-free bench press record. At his peak, he weighed 165 pounds and pressed 340, and he still believes that most any obstacle, physical or logistical, can be moved with the right amount of determination. This explains why, after four failed attempts by other developers to legalize casino gambling in Ohio, he 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. It's also why he's begun moving 1,700 Quicken Loans employees from suburban Livonia to an airy new headquarters in Detroit's beleaguered downtown.
Gilbert insists that the Cavs, who are currently 5-5, will be "much, much better than most of the pundits are saying," that the departure of LeBron James 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. Culture and philosophy are a lot harder to root for than a two-time MVP, but that's what the Cavs are selling. "We're Believe-land now," says veteran guard Anthony Parker. "Our identity is outworking our opponents on every given night."
It's hard to measure belief within the Cavs bubble. Outside of it, though, few people seem to think Gilbert can draw fans solely on regional pride. "There are some franchises that are there thick and thin. Think Cubs. Think Toronto Maple Leafs," 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. "Cleveland is not the Cubs. And Cleveland is not the Maple Leafs."
Bob Whitsitt, an NBA general manager with the Seattle Supersonics and Portland Trailblazers 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. Whitsitt saw similar figures with the Trailblazers 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 anticipates another $15 million in lost sponsorships, concessions, and other ancillary income. Using his standard 4.67 multiplier for revenue to franchise value, $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."
Whitsitt speaks his name. Gilbert refuses to. 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. Still, 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." Yet as Gilbert points out, he's weathered bigger storms. "We're a survivor of the mortgage Armageddon," he says of Quicken Loans. Three years ago, just after the Cavs lost in the NBA finals, the collapsing credit markets almost pulled the company under. "That taught me never to be naive enough to think just because you put two decades into something, just because you do it right..." He doesn't finish the sentence.
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, Mich. 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 Gilbert's alma mater, Michigan State, 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 is no protocol on how a closing should work—on who calls who with the closing costs, who delivers what papers to who. Almost every closing in this country is still a Chinese fire drill, which always just amazed me."
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 a Mortgage-In-A-Box, a user-friendly loan application delivered, as promised, in a box. Behind the simple 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 RockLoans.com. By that time, Intuit (INTU), the California-based developer of Quicken personal finance 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 CEO. 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, now a private company, continued to ride the expansion of consumer credit. By 2005 it had 2,000 employees. 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 8 weeks until they had sorted through the worst of the problems. The company quickly shifted to making only loans that matched Fannie Mae (FNM) and Freddie Mac (FRE) 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, thanks to the boom in refinancing, 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 their superstar. "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, 'O.K., 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. The Pistons, though, are an anomaly. Teams with players named Michael Jordan, Hakeem Olajuwon, Shaquille O'Neal, Tim Duncan, Dwyane Wade, and Kobe Bryant have won 18 of the last 20 championships.
Many believe the Cavs will have to sink before they rise—that they should shed their most expensive players and accept an abysmal season or two to give themselves a better chance at signing another star in the free agent market or picking one up in the NBA draft. (Losing with abandon was how the team put itself 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 picks in the draft, but the final order is decided by bouncing ping-pong balls. 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 (NKE) ad that begins with a re-creation of James' Decision special on ESPN. James turns to the camera and asks, "What should I do?" Scenarios unfold—James as a cowboy villain, a poet, and co-star with Don Johnson on Miami Vice—before he finally asks, "Should I be who you want me to be?" On his jet the next day, Gilbert admits to being baffled. "I don't even get it," he says, "I really try to understand."
Earlier that morning, Gilbert received an award at a luncheon thrown by the Downtown Cleveland Alliance. On the van ride over to the Huntington Bank (HBAN) building, he frantically preps his acceptance speech. He hasn't read the file put together by his PR team.
Gilbert extemporizes for half an hour, rambling about the Cavs and his casino plans until eventually he finds his theme: Downtown Cleveland needs more people. Reversing the flight of young people from the Midwest to the coasts is Gilbert's great cause, and the symbolism of the departure of the player that left is not lost on him. "Cleveland is a great community," he says in closing. "Let's make it even better. Let's make it to levels that people will be shocked about—including those who went to South Beach."