Friday, May 27, 2011

The Worst Baseball Contract Ever?

Baseball fans and non-baseball fans alike probably aware of the relationship between uber-swindler Bernie Madoff and New York Mets owner Fred Wilpon.  This week's Sports Illustrated has an interesting article (Fred Wilpon Pays the Price, May 30, 2011) that sheds light on their relationship and the effect that it has had on the Mets.  By all accounts, the Mets are bleeding money left and right, and because of the impending lawsuit against Mr. Wilpon, they are unable to reinvest money in the team.  One aspect of the relationship which I was previously unaware was the role Madoff played in the contracts given to the Mets' players.  In particular, it talks about how Madoff may have influenced the contract of Bobby Bonilla.

In 1992, Bobby Bonilla was signed by the Mets to a contract which, at the time, was considered to be very extravegant.  Unfortunately, the Mets of the 90's were not all that great.  Bonilla's production on the field fell off during that time, and he became the whipping boy for agrieved fans.  In 2000, the Mets decided to part ways with the productive slugger.  In order to terminate his contract, the Mets had to pay his salary of $5.9 million for that year.  However, the Mets approached Bonilla with a deal.  Instead of getting $5.9 million in 2000, the Mets offered to pay him approximately $1.2 million a year for 25 years, starting in 2011.  Under this new payment structure, Bonilla was going to get $29.8 million altogether.  Why did the Mets agree to this? 

Bernie Madoff.

According to the SI article, the Mets were investing much of their operational money with Madoff.  Rather than putting their "day-to-day" cash in the bank where it earned a small rate of interest, they invested with Madoff and earned 10% to 12% - much more than they could with any bank.  The Mets figured that they could invest that $5.9 million with Madoff and earn enough on that money to pay Bonilla and still pocket a sizeable profit.

According to my calculations, even earning only 10% (the low end of Madoff's promises), the Mets would be able to pay off Bonilla's contract and still end up with close to $60 million by 2035.  That is about a 7% return on investment (i.e. if you invested $5.9 million in year 1 and you earned 7% a year, you'd end up with about $60 million).

Here is what the Mets were hoping would happen when they restructured Bonilla's contract (all numbers in millions):


YearStaring BalanceEarningsWithdrawalsEnding Balance
2000$5.90 $0.59 $- $6.49
2001$6.49 $0.65 $- $7.14
2002$7.14 $0.71 $- $7.85
2003$7.85 $0.79 $- $8.64
2004$8.64 $0.86 $- $9.50
2005$9.50 $0.95 $- $10.45
2006$10.45 $1.05 $- $11.50
2007$11.50 $1.15 $- $12.65
2008$12.65 $1.26 $- $13.91
2009$13.91 $1.39 $- $15.30
2010$15.30 $1.53 $- $16.83
2011$16.83 $1.68 $1.20 $17.32
2012$17.32 $1.73 $1.20 $17.85
2013$17.85 $1.78 $1.20 $18.43
2014$18.43 $1.84 $1.20 $19.08
2015$19.08 $1.91 $1.20 $19.78
2016$19.78 $1.98 $1.20 $20.56
2017$20.56 $2.06 $1.20 $21.42
2018$21.42 $2.14 $1.20 $22.36
2019$22.36 $2.24 $1.20 $23.40
2020$23.40 $2.34 $1.20 $24.54
2021$24.54 $2.45 $1.20 $25.79
2022$25.79 $2.58 $1.20 $27.17
2023$27.17 $2.72 $1.20 $28.69
2024$28.69 $2.87 $1.20 $30.35
2025$30.35 $3.04 $1.20 $32.19
2026$32.19 $3.22 $1.20 $34.21
2027$34.21 $3.42 $1.20 $36.43
2028$36.43 $3.64 $1.20 $38.87
2029$38.87 $3.89 $1.20 $41.56
2030$41.56 $4.16 $1.20 $44.52
2031$44.52 $4.45 $1.20 $47.77
2032$47.77 $4.78 $1.20 $51.35
2033$51.35 $5.13 $1.20 $55.28
2034$55.28 $5.53 $1.20 $59.61
2035$59.61

Of course, it didn't quite work out the way the Mets would have hoped.  The money they had invested with Madoff is gone, they can't earn a guaranteed 10% any more, and they are still on the hook for the $29.8 million they owe to Bonilla over the next 25 years.

Worst contract ever!

No comments:

Post a Comment