While I like to attend the rare baseball game, and despite having a lot of die hard Met, Red Sox and Yankee fans in my life I am not by any means a “baseball fan.”  Notwithstanding, I couldn’t ignore this amazing story that has grabbed the attention of the New York Baseball market.

The year was 2000 and the stock market was bubbling, the Mets were making money hand over fist with Madoff and they had just been in the World Series, but they had this pain in the ass player, who sucked on and off the field, Bobby Bonilla.  To add insult to injury if the owners wanted to get rid of him they had to pay him $5,900,000.  So, the Mets came up with an idea:

The Mets decided it best to buy out the remaining $5.9 million dollars of Bobby Bonilla’s contract in January 2000. Instead of paying him the $5.9 million dollars at the time, they struck a deal where payments would be deferred until 2011. Commencing in July 2011, Bobby Bo is to receive $1.19 million per year until the year 2035.

Essentially the deal called for a guaranteed 8% on his money.

Would You Take Bobby Bonilla’s Deal?

I know for me it would be hard to turn down nearly $6,000,000, however, I haven’t/won’t earn $50,000,000 of the course of my career.  At the same time Bobby Bonilla was a spending fiend and realized that this type of set up was basically his retirement pension.   Additionally, it allowed him to defer taxes for nearly 40 years (on the very last payment)!

On the other hand, he took the deal when no one knew about 9/11, 2.5 recessions and 2 bubbles that would burst, so the decision to lock up that kind of money couldn’t have been easy.  All you need is one investment guy, one real estate guy or one business guy to say, “I can beat 8%, what the hell are you doing?”

Would You Offer the Deal?

Before we get into the math discussion of the deal you have to remember at the time, Mets were flying high just appearing in a recent World Series and they were making obscene money having $500,000,000 (yes, that is Five Hundred Million Dollars) with Madoff.

The math behind the deal is a little complicated but it has to do with Net Present Value of a Future Income Stream. According to Leimberg Services (the caluclator I used to create the table below):

Present value computations provide quantitative techniques for determining the impact of time on  financial decision making. The present value concept is essential in understanding the effect of time on the profitability of an investment, how the projected value of an investment’s future economic returns affects the price that should be paid for it now, and how to compute the value of an investment’s future economic return.

Investment, by definition, implies a delay in consumption or enjoyment. There must be some compensating reward for an individual to forego current consumption or enjoyment in favor of future consumption. That “profit” must be large enough to justify (at least in the mind of the investor) the expected delay. The measure of the profit is typically called the “rate of return” or the “rate of interest.”

Discount Rate: 8.00%
Annual                 Cumulative
Year              Income              Present Value            Present Value
—-              ——              ————-            ————-
1                     $0                     $0                       $0
2                     $0                     $0                       $0
3                     $0                     $0                       $0
4                     $0                     $0                       $0
5                     $0                     $0                       $0
6                     $0                     $0                       $0
7                     $0                     $0                       $0
8                     $0                     $0                       $0
9                     $0                     $0                       $0
10                     $0                     $0                       $0
11             $1,200,000               $514,659                 $514,659
12             $1,200,000               $476,537                 $991,196
13             $1,200,000               $441,238               $1,432,434
14             $1,200,000               $408,553               $1,840,987
15             $1,200,000               $378,290               $2,219,277
16             $1,200,000               $350,269               $2,569,546
17             $1,200,000               $324,323               $2,893,869
18             $1,200,000               $300,299               $3,194,168
19             $1,200,000               $278,054               $3,472,222
20             $1,200,000               $257,458               $3,729,680
21             $1,200,000               $238,387               $3,968,067
22             $1,200,000               $220,729               $4,188,796
23             $1,200,000               $204,378               $4,393,174
24             $1,200,000               $189,239               $4,582,413
25             $1,200,000               $175,221               $4,757,634
26             $1,200,000               $162,242               $4,919,876
27             $1,200,000               $150,224               $5,070,100
28             $1,200,000               $139,096               $5,209,196
29             $1,200,000               $128,793               $5,337,989
30             $1,200,000               $119,253               $5,457,242
31             $1,200,000               $110,419               $5,567,661
32             $1,200,000               $102,240               $5,669,901
33             $1,200,000                $94,667               $5,764,568
34             $1,200,000                $87,654               $5,852,222
35             $1,200,000                $81,161               $5,933,383

So assuming an 8% discount rate, Mets really just created a private deferred annuity.  Again, that ignores what we knew about what was going to happen to the economy.

Would you do either side of the deal? Why or Why not?