The Mets and Bernie Madoff: A primer

Sandy Alderson recently commented that when he took the job as Mets general manager, he did not know just how badly the team’s finances had been ruined by their involvement with Bernie Madoff. This primer briefly explains some of what Alderson was referencing.

Why were the Mets so heavily invested with Bernie Madoff?

The Mets and their owners were so addicted to the Madoff gravy train that they had nearly 500 accounts with him. The basic reason is that Madoff gave the Mets three things all investors want:

1) High returns—The Wilpons were getting (fictitious) annual returns of 12-18% from their investments with Madoff.

2) Consistent returns—Madoff never failed to produce double-digit returns, even for a single year of their multiple-decade relationship. These consistently high returns are a big part of the reason the Mets made deferred-compensation agreements with Bobby Bonilla and others; they figured that instead of paying the players while they were playing, the Mets would give that money to Madoff. Then, by the time the deferred compensation was due, the investment would have grown enough to easily pay off the promised compensation with money to spare.

3) Liquidity—The nature of the Wilpons’ relationship with Madoff allowed them to invest their money, profit from it, and then turn around and reinvest both the principal and the profit to really accelerate their gains. They felt comfortable operating like this because they knew that whenever they needed a little extra cash, they could withdraw it from their Madoff accounts with no problem.

How much did the Mets lose when Madoff went bust?

When Madoff went bust, the Mets’ ownership had, according to their eventual settlement, approximately $500 million invested in Madoff accounts. The Wilpons also had used that money as collateral for other loans. The collateral going bust resulted in ownership having to borrow an additional $430 million against the team (now down to $250 million), and $450 million against SNY (now up to over $600 million). Financing these debts, as well as the $43 million annual payment on Citi Field, costs the Mets over $100 million each year, before any of the principal is paid down.

Are the Mets considered victims of Bernie Madoff?

Not really. Though their $500 million disappeared, Saul Katz and the Wilpons had been reaping false profits for years. The trustee for the Madoff victims sued to recover those profits, and eventually settled, with the stipulation that the Wilpons and their associates had made $162 million over the years in accounts with Madoff. While Wilpon supporters will try to point to this relatively low settlement figure as proof that the Wilpons were not guilty of wrongdoing or negligence, trial documents indicate that the nature of the final settlement was more of an acknowledgment of the unlikelihood that the trustee would ever collect a large judgment, given the dire financial straits of the Mets group. This is evidenced by the fact that the amount the Wilpons will ultimately pay is significantly less than the amount that the trustee for the Madoff victims had already won from Katz and Fred Wilpon in pre-trial motions.

Do the Mets have to give back the $162 million that the settlement says they made over the years?

No. Finally some good news! Based on the terms of the settlement, it is unlikely that the Mets group will owe more than $29 million to pay back the Madoff losers. Basically, the settlement allows much of their $162 million gain to be offset by their losses. In exchange for this concession, Katz and Wilpon have personally guaranteed to pay $29 million no matter what happens with other future recoveries by the fund. This is payable in two installments, the first in 2016 and the second in 2017.

What’s the bottom line here?

When the Madoff scheme went bust, hundreds of millions of dollars that the Mets’ ownership had invested with him disappeared. The Wilpons also had to borrow hundreds of millions more to cover debts they had made against their Madoff assets, and have almost a major-league payroll’s worth of money due every year just in interest on those debts. Finally, the Wilpons are likely to owe $29 million to a fund dedicated to making Madoff’s other victims whole.