Madoff Mess - Part 1 of Many

Looking back to my blog post in November welcoming new GM Sandy Alderson, I discussed one of the most recent stories about how the Mets mismanaged resources. They deferred $5.9 mm of Bobby Bonilla's salary in 1999 at a rate of 8%. Now Bobby is back on the payroll for the next 25 years. I scratched my head over this high accrual rate. It is common to defer salary so the ownership can lower the present value of a large contract. They typically reserve that cash and/or invest in a low-risk security. In some cases they can earn a return on that money higher than the salary's deferral rate. For example, Johan Santana defers $5 mm annually at 1.25%; Carlos Beltran deferred $22 mm of salary at 1.72%. If ownership put that money into tax exempt municipal bonds or medium-term treasuries, they would earn a return higher than the deferral rate. But 8% for Bobby Bonilla's salary? That is crazy. Yes, rates were especially high in 1999, but that deal should have raised many red flags.

A report in the New York Times this week discusses how Bernard Madoff had a significant role in Mets finances - more than 500 accounts can be tied to the Wilpon family and Saul Katz. The Mets even placed deferred salary into Madoff accounts. The article quotes a former Mets employee who claims Bernie returned 18% each year to the Wilpons/Katz. No wonder they put Bobby's deferred salary into a Madoff account - they leveraged off of their own players to put more money in their pockets.

Let's also not forget how the Wilpons handled retirement savings for their employees at Sterling Securities, one of their real estate investment businesses - they put 92% of a 401(k) plan into Madoff accounts. The widow of an employee who lost his entire savings is currently in litigation with Fred Wilpon, the trustee of the plan.

Now that Fred Wilpon announced that he is seeking a limited partner of about 25%, the floodgates have opened. But who would do business with these guys without receiving control of the team and having to deal with legal risks? Besides the control issues, there cannot be much equity value in the team, which according to Forbes is worth roughly $845 mm. Keep in mind the team has $375 mm of debt and the stadium has $695 mm of debt. Also, attendance is way down and the team's brand has been crushed by poor play on the field and ownership's financial woes. The only value is in the team's 60% stake in SNY, the regional cable network that broadcasts Mets games. SNY, which is owned jointly with Comcast and Time Warner, is rumored to be worth $1.3 bb and brings in $150 mm of subscriber fees annually. This is a much sturdier asset and could receive significant interest from value investors.

The offices of Baker Hostetler, the firm tasked with untangling the Madoff mess, share a floor with me. I often have the pleasure of hearing lead counsel and partner David Sheehan shitting his brains out in the men's restroom. A colleague of mine has heard from a Baker lawyer that this is just the tip of the iceberg (no pun intended). I know that the suit against the Wilpons was filed in bankruptcy court, but I wouldn't be surprised if the Department of Justice is working on a criminal case. In the meantime, Let's Go Mets!!