I realize this is a random post relative to my usual ranting about mobile, Apple, etc. but I found this whole topic fascinating.
For the full background see this article from the July 1 edition of the Wall St. Journal.
The basic story goes like this:
– Bobby Bonilla played [very badly] for the Mets during two separate stints, one from 1991-1995 and another in 1999. During the 1999 season, he played particularly badly, batting .160 with four home runs in 60 games. He also was caught playing cards in the clubhouse while the Mets were losing the last game of the playoffs. Infuriated, the Mets wanted to be rid of Bonilla and hence started negotiations to part ways.
The Mets still owed Bonilla $5.9 million for the year 2000. The very strange agreement that resulted was that the Mets would pay Bonilla nothing for another 11 years. However, beginning July 1, 2011, they will pay Bonilla $1.19 million per year for 25 years, totaling almost $30 million.
Sound crazy? Students of finance will immediately recognize that per the time value of money, these amounts could or should be “equivalent”. However, a key input for this would be the expected rate of return that each party would expect to receive.
Looking at the spreadsheet I created here (unfortunately no iframe or other way to embed Google spreadsheets on wordpress.com platform…), you can see that the Mets would have had to assume that they could earn > 8% per year on their cash, closer to 10%, in order to make this deal worth it.
One could certainly make the argument that a business owner should believe that they can generate those returns. However, I believe that a different factor was at work. It’s been well publicized that the Wilpons, the owners of the Mets had substantial investments with none other than Ponzi scheme artist Bernie Madoff. With the seemingly low-risk, high-return profile of the Madoff investments, it’s no wonder that the Wilpons felt that an 8% “loan” from Bonilla was a no-brainer.
It’s unclear how the Wilpons fared when the Madoff scheme collapsed (they insist they came out ahead) ). If they didn’t do quite as well as expected though, they might have gotten less than they bargained for with this deal…..
- Why the New York Mets Still Owe Bobby Bonilla Nearly $30 Million (ballhype.com)
- NY Mets owner Wilpon sued over Madoff losses (reuters.com)