Friday, January 27, 2012

Financial arbitrage is fun when it actually works

According to this article, one aspect of the New York Mets' financial problems is that they owe a huge amount of deferred income to former Mets players. Disastrous former Met Bobby Bonilla is the most famous example, as he is owed almost $1.2 million annually for each of the next 25 years, but there are others as well.

The article offers the following explanation for the Mets' willingness to accept huge deferred salary obligations:

"The Mets once were comfortable pushing salary obligations for their players into the future because the Wilpons were, Picard alleges, getting 18 percent average annual returns on money they invested with Madoff regardless of drastic market fluctuations. So why would it matter if they deferred a player's salary at 8 percent annual interest? They could pocket the sizable difference between the interest owed to the player and what Madoff could make for them."

For that matter, if you can keep on getting 18 percent annually no matter what, why ever pay cash for anything, and indeed why not run up all the debt that they evidently did?

Great financial minds, except for being fatally credulous?

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