RealGM

Thought this was an interesting read:

http://www.businessinsider.com/worst-co ... lla-2011-7

The New York Mets gave 48-year-old third baseman Bobby Bonilla a $1,193,248 check today – and will eventually give him another one every July 1 for the next 25 years.

Well, after the 1999 season, Bonilla had one-year left on his contract. The Mets wanted to get rid of him and he wanted to leave, but it would have cost them $5.9 million to buy him out. That was $5.9M more than they wanted to spend.
So owner Fred Wilpon and then-GM Steve Phillips worked out a deal. If Bonilla agreed to defer the $5.9M payment and spread it out over a 25-year span, the Mets would begin paying him back, with interest, in 11 years.
Because of the generous 8% interest rate, Bonilla's $5.9 million will become $29,831,205. He'll receive his last payment in 2035, when he turns 73 years old.

Just boggles my mind the Mets would make that type of offer..

You never have to worry about Bobby B becoming one of those guys who will not have money.

What a great deal.

It's a good deal, but its not as good as it sounds. I don't have a financial calculator with me, but the present value of Bonilla's arrangement, given an average rate of interest of 3-4%, in 1999 was probably worth 10-15 mil at the time. Obviously still a deal that anyone would do, but really not as mind boggling as one would think.

Kurtz wrote:It's a good deal, but its not as good as it sounds. I don't have a financial calculator with me, but the present value of Bonilla's arrangement, given an average rate of interest of 3-4%, in 1999 was probably worth 10-15 mil at the time. Obviously still a deal that anyone would do, but really not as mind boggling as one would think.

No...it's still pretty damn mind boggling if you ask anyone, including a smart 5th grader.

Lucky26 wrote:

Kurtz wrote:It's a good deal, but its not as good as it sounds. I don't have a financial calculator with me, but the present value of Bonilla's arrangement, given an average rate of interest of 3-4%, in 1999 was probably worth 10-15 mil at the time. Obviously still a deal that anyone would do, but really not as mind boggling as one would think.

No...it's still pretty damn mind boggling if you ask anyone, including a smart 5th grader.

Yes, a 5th grader, much like yourself, would certainly find it mind boggling.

But I assure you that the people who struck that deal knew how the present value of annuity works.

I'll try to explain. Would you lend me $1000 today if I can guarantee that I'll pay you $5,000 in 30 years?

It all keys into the interest rate that is being paid to Bonilla and that is what now in 2011 makes it look so bad. I don't think anyone in 1999 would have expected that near decade long run of historically low interest rates that would follow in that time span. 8% looks ridiculous to us because the Mets could have borrowed that 6mil at 3 - 3.5% for 10 years and total value paid out would have been wayyyyy less than 30 million. If you looked at the interest rates in the 20 years prior to 1999, 8% seemed reasonable. BTW my Dad was a ForEx broker for 30 years and always had lots of advice for me about central bank's interest rates, and at that time he did not even himself foresee what would happen in the 00s. He thought the inflation caused by the tech boom would cause interest rates to rise to hold that inflation in check. To say he misread Greenspan was an understatement, as my Dad thought the Clinton White House priorities of keeping inflation in check would continue rolling forward rather than the shift to easy credit and the financial collapse that accompanied it.

Kurtz wrote:It's a good deal, but its not as good as it sounds. I don't have a financial calculator with me, but the present value of Bonilla's arrangement, given an average rate of interest of 3-4%, in 1999 was probably worth 10-15 mil at the time. Obviously still a deal that anyone would do, but really not as mind boggling as one would think.

Well, even in terms of present value, it's still quite bad and terrible management of funds. What possessed them to give him 8%? PV of the contract is at $9.7 Mil (assuming 4.26% over the duration of 25 years and 6.45% for the 10 year compounding period). Did they even bother to check a financial calculator quickly to see if the numbers matched up on a PV basis?

In the 4-5 years leading up to that, the rates hardly ever climbed above 7% for 10-year treasury rates and it mostly stayed at 4-5%. It seems foolish to give someone an interest rate pretty much near-double of what the going rate for 10-year treasury rates had been.

I still say Wells.

Yeah that's some real shoddy math by the Mets.

PV of the interest payments is $12,737,655.34

So between 1999 and 2010 his contract accumulated 7.247% in annual interest. Much higher than inflation.

Guess they really wanted to get rid of him.

Kurtz wrote:

Lucky26 wrote:

Kurtz wrote:It's a good deal, but its not as good as it sounds. I don't have a financial calculator with me, but the present value of Bonilla's arrangement, given an average rate of interest of 3-4%, in 1999 was probably worth 10-15 mil at the time. Obviously still a deal that anyone would do, but really not as mind boggling as one would think.

No...it's still pretty damn mind boggling if you ask anyone, including a smart 5th grader.

Yes, a 5th grader, much like yourself, would certainly find it mind boggling.

But I assure you that the people who struck that deal knew how the present value of annuity works.

I'll try to explain. Would you lend me $1000 today if I can guarantee that I'll pay you $5,000 in 30 years?

Easy big guy. You said yourself that the present value was about $10-15M back in 1999. That's a lot more than $5.9M. It's mind boggling that a team would make that kind of pay-out. If I knew somebody that would take a loan from me and pay me back over double in deferred present-day value, I'd be ecstatic. Pretty ridiculous "we'll be rich today, who cares if we've mortgaged the future" kind of delusion.

J.Kim wrote:Well, even in terms of present value, it's still quite bad and terrible management of funds. What possessed them to give him 8%? PV of the contract is at $9.7 Mil (assuming 4.26% over the duration of 25 years and 6.45% for the 10 year compounding period). Did they even bother to check a financial calculator quickly to see if the numbers matched up on a PV basis?

In the 4-5 years leading up to that, the rates hardly ever climbed above 7% for 10-year treasury rates and it mostly stayed at 4-5%. It seems foolish to give someone an interest rate pretty much near-double of what the going rate for 10-year treasury rates had been.

At the time, the 8% was slightly below the prime rate, and as inflation had started to ramp up and the finance world was in the midst of the hurr durr Dow 36,000! period of irrational optimism, it probably seemed like a reasonable decision. The DJIA peaked the same month, two months later the dot-com bubble burst and interest rates plummeted, and it probably started seeming a little less reasonable.

Plus, Wilpon was also getting 10-12% ROI on his considerable holdings at the time, so no biggie. Unfortunately, it was with Bernie Madoff.

Schadenfreude wrote:Wilpon was also getting 10-12% ROI on his considerable holdings at the time, so no biggie. Unfortunately, it was with Bernie Madoff.

This about sums it up. If it sounds too good to be true, it probably is. Unless you're Bobby Bonilla and the Mets offer you the equivalent of winning the Cash For Life sweepstakes in return for retiring a year early.

I really dont think this is as bad as what people make it out to be.

When you take into account the time the deal was made and the delay in payment.

I also do not understand why people were using base rate to compare.

What I do have to say is, players need more deals like this so they dont go broke.