Happy Bobby Bonilla Day! Every 1st July finance nerds and baseball fans celebrate the best* contract ever signed. Why? Because every year the New York Mets pay Bobby exactly $1,193,248.20, which would be an unspectacular salary for a top baseball player, but Bobby retired in 2001. So, what is going on?
In 1999, Bobby Bonilla was a talented, but aging and injury prone, third baseman for the New York Mets baseball team. After a poor season, the Mets wanted to offload Bonilla, but still owed him $5.9m for the next season. With cashflow and salary requirements for the rest of the team, the Mets weren’t keen on paying off the remainder of his contract.
As a compromise, Dennis Gilbert, Bonilla’s agent, suggested an unusual deal: rather than pay the money now, the Mets could defer any payment until 2011. From 2011 onward they would pay him $1.19m every year until 2035. That way the Mets would avoid paying anything now, and Bonilla would turn his $5.9m into $29.8m. A nice pension by anyone’s standards, even a professional athlete.
The Mets were basically paying Bonilla an annuity which compounded at 8% from when the deal was agreed, so it’s easy to see why Bobby would sign up to it, but why on earth did the Mets agree to such a deal? Because the Mets were earning more than that from their investments. The main investment of the Mets’ owner was earning 10% per year – if they invested that $5.9m at 10% and paid Bonilla at 8%, they were making a nice profit out of the deal.
Unfortunately, that 10% yielding investment was in Bernie Madoff’s hedge fund, which in 2008 was exposed as the world’s largest Ponzi scheme, making the Mets’ owner one of the many victims of the most infamous fraud of the last 50 years.
Suddenly the deal with Bobby Bonilla, which looked so affordable, so profitable, seemed like a terrible thing to do, a fixed cost based on an unfixed income.
So, what do Bobby, the Mets and the best contract ever signed teach us as investors?
Firstly, that if an investment is pushing out stellar returns, and no sign of the risk that is being taken to generate them, then we should worry. Like the Icelandic banks that collapsed at the same time Madoff was unmasked as a crook, if something looks too good to be true, it probably is. If your investments sometimes fall in value, especially during difficult times for that strategy, you may not be happy, but at least they make sense.
Secondly, that you should choose your counterparty carefully. Bobby could have taken his £5.9m and invested it in Madoff himself, but instead he chose the Mets, an international franchise with millions of fans over a fund he didn’t understand.
Perhaps most importantly, this story teaches us the inherent risk of having certain outgoings paid for by uncertain income. Regardless of if you’re buying highly leveraged commercial property or postponing the buy-out of an athlete’s contract.
It also underlines the importance of high quality, independent advice. When negotiating a complex deal, or making important decisions, it is important to take advice from experts so that you can concentrate on your area of expertise, be that baseball, or something else. Bobby Bonilla doesn’t like talking about his incredible contract, but a few years ago when asked about the agent who brokered the deal, he simply replied he “has a lot of love for that man”.
Wouldn’t we all?
*best if you are Bobby Bonilla