Premium and Super Premium Subscribers Get a 20% Discount at MLB.tv!
July 12, 2002
How to Easily Save $160 Million
My wife has a SEP IRA through her employer that's administered by Merrill Lynch. On our coffee table, I noticed one of the inserts from her latest statement lying around - "Merrill Lynch and You". It's in the same family of newsletters that you get with any number of things, like fundraising requests from your alma mater, your monthly bank statement, etc. It's a bunch of feel-good pablum designed to do two things: (1) Make you feel better about the company you have this relationship with, and (2) Wring more of your cash away from you, in one form or another. Normally, this wouldn't have grabbed my attention, but I found the headline to be hilarious, and it fit nicely into the stream of consciousness I was on. The headline read:
Stock Ratings to be Based on Projections of Total Return and Risk
As you may or may not be aware, Merrill Lynch and other large financial firms have recently come under fire for recent equity recommendations (stock ratings)--previously, Strong Buy, Buy, Hold, or rarely, Sell. The headline naturally caused me to commence giggling, with the obvious question of "What the f--- were they based on before? Who are these imbeciles?" The cynical answer is, of course, they were based on how much investment banking dough that could be pried, albeit indirectly, from an overly trusting public, and these people aren't imbeciles at all.
So what about money spent on players? The model's not dissimilar; clubs invest in players in the form of contracts, either over one year, or over several, based on risk, and the expected return, both in terms of performance and financial benefit - with a heavy overlap between those two areas in most cases. The weird thing is, the bad investments in baseball, particularly long term, end up surfacing again and again, and the parallels to the market are really interesting. Just like I've had the privilege of owning NBC Internet stock, the Colorado Rockies currently own the contracts of Denny Neagle and Mike Hampton. I can't find anyone to give me more than $2.19 (the liquidation price) for my remaining NBC Internet stock (I have one stock certificate for 2 shares), and Dan O'Dowd is finding that dumping Mike Hampton is like trying to get rid of a case of herpes or some Clamato.
So how come the media, for the most part, doesn't connect the dots, and call GMs on the carpet more for some of these downright miserable signings? We're entering a phase of increased scrutiny and responsibility on Wall Street. Why not in front offices? I've bitched about a lack of accountability in front offices for several years, but hey, maybe the horse only looks dead. Let's go through the rosters and come up with "The untradables" from each club. We'll set the bar pretty high - guys that clearly are grossly overpriced albatrosses, costing a club a fortune and a roster spot. Even if a guy's been hurt for much of a single year, or has totally tanked, we'll cut slack and not include him on the list, which is why Chan Ho Park is MIA. They don't necessarily have to be super-expensive or anything - just a clear waste of money, roster space, time, or, in the most egregious of cases, Kevin Young.
Player Salary (2001 or 2002) Alomar, Sandy $7,750,000.00 Alou, Moises $5,250,000.00 Alvarez, Wilson $9,000,000.00 Ausmus, Brad $4,250,000.00 Bagwell, Jeff $6,500,000.00 Bell, Jay $8,050,000.00 Benjamin, Mike $925,000.00 Bordick, Mike $4,500,000.00 Clark, Tony $4,462,500.00 Clayton, Royce $4,500,000.00 Cordova, Marty $2,500,000.00 DeShields, Delino $4,333,667.00 Dreifort, Darren $9,400,000.00 Dunston, Shawon $1,000,000.00 Everett, Carl $7,333,333.00 Fryman, Travis $5,750,000.00 Glanville, Doug $3,016,667.00 Gonzalez, Alex $4,250,000.00 Grissom, Marquis $5,000,000.00 Hamilton, Joey $7,250,000.00 Hammonds, Jeffrey $6,500,000.00 Hampton, Mike $10,500,000.00 Hentgen, Pat $4,500,000.00 Hernandez, Roberto $6,000,000.00 Higginson, Bobby $5,325,000.00 Hitchcock, Sterling $6,000,000.00 Jarvis, Kevin $1,250,000.00 Jordan, Brian $9,100,000.00 Karros, Eric $7,500,000.00 Kendall, Jason $5,100,000.00 Knoblauch, Chuck $6,000,000.00 Lima, Jose $6,250,000.00 Martinez, Tino $6,300,000.00 Mayne, Brent $2,150,000.00 Meares, Pat $3,790,000.00 Mlicki, Dave $5,300,000.00 Mondesi, Raul $11,500,000.00 Neagle, Denny $7,200,000.00 Offerman, Jose $6,750,000.00 Oliver, Darren $4,600,000.00 Ordonez, Rey $4,000,000.00 Palmer, Dean $7,500,000.00 Paquette, Craig $1,500,000.00 Perez, Neifi $3,550,000.00 Segui, David $7,000,000.00 Sele, Aaron $7,000,000.00 Snow, J.T. $5,750,000.00 Stevens, Lee $4,000,000.00 Stottlemyre, Todd $8,000,000.00 Surhoff, B. J. $2,350,000.00 Vaughn, Greg $8,250,000.00 Vaughn, Mo $13,166,667.00 Williams, Gerald $3,000,000.00 Williams, Matt $9,000,000.00 Wilson, Preston $3,500,000.00 Womack, Tony $4,000,000.00 Young, Dmitri $3,500,000.00 Young, Kevin $6,125,000.00
I don't mean to suggest that all of these guys are bad players. They're not. I don't have an objective measurement here, because it's not necessary for the illustration. I also don't want to judge these ex post facto. All contracts are entered into in an environment with specific information available at the time; in my opinion, all of these signings were foolish on the part of the club, and that was readily identifiable at the time of the signing. That's the list I'm going for, and if you want to add a couple of guys to it, or take a couple of guys off of it, that's fine. I won't quibble with that. Also, the numbers are a mix of 2001 and 2002 - not to exaggerate, but because those are the numbers I have handy at the moment. In some cases, the salaries are higher.
But consider the impact of just these signings. I would argue that everyone on this list is replaceable fairly easily. (Hundreds have volunteered to sit on the Dodger DL in place of Darren Dreifort for his contract.) According to the completely and totally incredible numbers offered by MLB, MLB clubs lost an aggregate $232 Million in 2001. Therefore, and because of competitive balance issues that shift, we need to change the economic system in baseball.
Before we do that, don't you think it'd be a good idea to improve management first, then see what happens? That's an awful lot of dough wrapped up in those player salaries, even for one year. $321.7 Million. Even if the wasted payroll could just be reduced by 50%, that'd be a savings of $161 Million, assuming no other economic effects. The sad part is that it's not really that difficult for management to realize that savings. There's a pattern to a number of these signings. In almost all cases, players are signed after an atypically good year, ownership underestimated the likelihood of performance decay due to age, ownership underestimated the probability of a serious injury, or ownership failed to consider the cost and availability of reasonable replacements.
One example: The Arizona Diamondbacks signing of Matt Williams. At the time, you may recall, the Diamondbacks worked very closely with Matt Williams' representative, and made lots of warm and fuzzy noises (which were true) about Williams being a great community and clubhouse guy. Well, that's all well and good, but let's take a look at the information available when Joe Garagiola, Jr. inked him to his current contract:
So, at this point in time, the Arizona Diamondbacks signed him to a 5-year deal worth $45 Million. And, as an added kicker, a no-trade clause. Based on this action, I have to assume that at least some of the following is true:
I picked Matt Williams because his name was at the top of my screen when I needed an example. You can go through and examine each signing and come up with a similar list. But it all comes back to Projections of Total Return and Risk.
I get a lot of emails complaining that I'm nothing but a shill for overpaid ballplayers. Nothing could be further from the truth. I'm in favor of something approaching a free market, and I believe that if one were implemented, and management better understood what replacement options were available to them, salaries would absolutely crater for the vast majority of players. I also believe we'd see better baseball on the field, and better relations between ownership and the MLBPA.
Management in baseball has barely moved since the last labor dispute, either in terms of understanding their own business processes better, or behind the scenes when it comes to revenue sharing. Like most innovation, it's happened in certain areas (like Oakland) very rapidly, while other places continue down the same failed, tired, Bonifayed road. I've said it before, and I'll say it again. Accountability in individual front offices, combined with sustained, genuine, focused effort can deliver not only a single club to the promised land, but baseball as a whole.