Funny story: I was supposed to have Bobby Bonilla on Masters in Business, but it did not come to pass.
That was a shame, because Bobby Bonilla Day is a fascinating cautionary tale about hubris, fraud, misunderstanding risk, and all sorts of other amusing and fun BeFi issues. I went deep down the rabbit hole on this one, and it led to some astonishing findings.
The basic story goes something like this: In 1999, the NY Mets decided to cut Bonilla loose after the season ended. Rather than pay him the $5.9 million contract balance in a lump sum, they offered a deferred deal of $1,193,248.20 for 25 years beginning July 1, 2011. That is an 8% interest rate, resulting in a total deal value of $29,831,205 over 36 years.
Why would the Mets do this?
Through a combination of misunderstanding risk, overconcentration in a single investment strategy, and not recognizing when promised returns are too good to be true. Getting scammed by the biggest Ponzi scheme in modern history didn’t help either.
These errors led the Mets’ ownership to craft the dumbest deferred deal in MLB history.
Sterling Equities, owned by Fred Wilpon (Chairman) and Saul Katz (President), acquired a partial interest in the New York Mets in 1980; they later became full owners in 2002. Both men had a close relationship with Bernie Madoff, and they (along with numerous friends and family members) were associated with 483 Madoff accounts. The promise: 12% per year, guaranteed.(!)
Instead of simply paying $5.9 million dollars in a lump sum, the strategy was to “invest it with Bernie”; they (wrongly) believed this would generate a return on Bonilla’s buyout of $8,496,000 (12 x $708,000) by 2011 (plus the original capital of $5.9m).
Rolling that $14.4m into the 12% Madoff fund creates a run of $1,727,520 per year; if the Mets pay Bonilla $1,193,248.20, that leaves an annual net of $534,271.80; over 25 years, that adds up to $13,356,795, and an engineered total of $21,852,795.1
From 2011 on, the Mets could pay Bonilla and pocket the difference!
I reverse-engineered the Mets/Bonilla/Madoff numbers as best as I could, and I believe the math looks something like this:
Perhaps it is a coincidence that the arbitrage between the 8% promised to Bonilla and the 12% expected return from Madoff was exactly $5,900,000 (25 X $236,000) — the original contract amount owed to Bonilla. Of course, all of this presumed that Madoff was not a felon siphoning billions from his clients, including Wilpon and the Mets.
Oh, to be a fly on the wall listening to that pitch:
“Not only do we earn $8.5 million before paying a single penny to BB, but the net arb over the life of the deal covers his full $5.9M! It’s free money! And thats not counting the $13.4m it will generate by 2035…”
Only, not so much. The cost of NOT paying the $5.9m payout was –$23,931,205.
The lessons here are obvious:
-Simplicity beats complexity
-Money has a time value
-If it looks too good to be true, it probably is.
Also, don’t do business with conmen…
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1. These are simple annual returns; I didn’t bother compounding any of these fictitious gains…
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