New York Mets fans call July 1 Bobby Bonilla. Every July 1 my beloved Mets pay their former player, Bobby Bonilla $1.1 million. These annual payments will continue until the year 2035 and will come to a staggering total of about $30 million! For those not familiar with the situation, Bonilla signed a big long-term contract to play baseball with the Mets. Unfortunately for the Mets and him, Bonilla never lived up to the promise ( or media hype?) he had previously shown. The Mets understandably wanted to get out of the contract as it was costing the team about $6 million per year. (This is small money by today’s baseball standard, where contracts paying over $30 million per year are not out of the ordinary). To make matters worse, Bonilla clashed with the team’s on-field manager, injecting a certain poison into the locker room. I personally heard from the relative of one Mets player at the time Bonilla believed the manager was trying to provoke him into a physical altercation so the Mets could void his contract. If true, this would be a somewhat unorthodox and questionable method of getting out of a corporate obligation.
Bonilla’s agent approached the Mets with what the team believed to be the deal of the century. Bonilla would leave the Mets and forgo payment of the remaining amount due of his contract ($10.8 million) for ten years. After that, the Mets could pay him $1.1 million dollars a year for 25 years. The imputed interest rate on the contract was 8% and the first payment would occur in 2011. At the time the deal was struck, the long term rate of return used by corporate pension plans was 8%, exactly what Bonilla was asking for in the payout.
The Mets ownership jumped at the opportunity. The Wilpon family, owners of the Mets, were real estate investors and if anything certainly understood the time value of money. Deferring payment of the remaining balance of Bonilla’s contract was a shining gem in front of their eyes. Mets ownership quickly reached out and grabbed the deal.
It is here where some common sense should have prevailed over financial mathematics. What went wrong? First, I verified the calculations using a mortgage payment calculator. That’s right. A mortgage payment calculator. It should have struck someone in the organization as being a little odd that you needed to use a financial function normally reserved for buying buildings to determine a players payout. (While we are on the subject of buildings, the Wilpon family was instrumental in designing Citi Field where the Mets play. That too was a disaster, but is a topic for another article.)
More importantly though, the Mets ownership was tied up with, of all people, Bernie Madoff. Yes, that’s right Bernie Madoff. The Wilpons were scammed by Madoff. They were promised a 10 to 12% return (depending on the article and the source) on their invested funds by him. So the Mets thought they could earn that rich return on the $10.8 million they owed Bonilla for ten years before they had to begin paying him. After payments began, the Mets would still be making a nice return on their investment, the spread between the interest they were paying Bonilla and what they were receiving from Madoff.
Of course, Madoff was arrested in 2008 and his fraudulent financial empire began to quickly unravel as it was one giant Ponzi scheme. The high rate of return the Mets expected for decades lasted only a few years at best. The losses the Wilpons sustained cut deeply into New York Mets operations and required the team to borrow money from Major League Baseball to meet payroll. Combined with plummeting interest rates, the Bonilla deal quickly became the laughing stock it is today.
It seems the Mets did not ask themselves two fundamental questions all prudent financial managers would have: (1) Was it reasonable that Madoff could give the Mets such a high guaranteed interest rate, and (2) Could he do it for 35 years? Sadly, as Simon and Garfunkel sang (yes, I am dating myself with this reference, but it is still true): A man hears what he wants to hear and disregards the rest. Studies have shown investment advisors may outperform the market for a few years, but can’t consistently. To assume someone could do this and offer such a high return for almost two generations is simply beyond belief. At the end of the day, the Wilpons did not earn the interest they were promised, but they had to disgorge payments in the Madoff bankruptcy filing. The Mets agreed to pay $45 million in four equal payments to the Trustee in Bankruptcy beginning in 2017. This amount was later slashed to about $61 million. The Mets obligations in this matter would have ended in 2021 but Bonilla will still receive his payments until 2035.
What are the lessons to be learned here? If the deal is too good to be true, it probably is. Be careful about claims of high rates of return over and above competitors over a long period of time. History has shown that is simply not true. Secondly, long term agreements have increased risk, as the Mets have found out. Be very careful about entering into such agreements–especially if you need Excel to calculate your annual payment over the next two and a half decades.
How did all of this turn out? Well, Bonilla is a happy person. He is receiving $1.1 million dollars a year well into his retirement. The Major League Baseball Players Union makes sure the Mets pay this obligation every year. ESPN reports there was a second deferred compensation plan that pays Bonilla $500,000 per year, ending in 2009. Mets fans can take heart though this payment is split between the Mets and the Orioles. In a somewhat perverse marketing twist, the Mets are now planning a celebration around Bobby Bonilla day in 2022. Bonilla is also cashing in on other endorsement opportunities, such as for Mint Mobile.
The Wilpons eventually sold the Mets to Steve Cohen, a billionaire investor. Private businesses are valued as a multiple of their cash flow less the value of long-term debt. The Bonilla contracts would have reduced the sales price offered for the Mets as well as any outstanding debt to Major League Baseball. In today’s climate, such amounts are chump change compared to the prices for such large business sales. The Mets were sold for approximately $2.5 billion dollars resulting in a huge gain for the Wilpon family. I suppose it is better to be lucky than to be an astute financial manager. I would prefer to be both though.