It’s ironic that the 22nd annual Baseball Assistance Team fundraising dinner, a collaborative effort between Major League Baseball and its players to provide assistance to former players and non-playing baseball personnel in need, was held in Manhattan last Tuesday night. BAT is a terrific organization that has issued more than $23 million in aid to more than 2,700 members of what it likes to call “the baseball family.” I’m beginning to wonder if the Wilpon family will soon be applying for a BAT grant.
Friday afternoon is a favorite time for companies to announce bad news because they believe the impact of negative information is lessened on weekends. That’s why when the Mets announced that owner Fred Wilpon would be having a teleconference this past Friday at 2:15, you knew that he would not be announcing anything joyous.
Ever since the Bernie Madoff scandal broke a little over two years ago, Fred Wilpon and his son, Mets Chief Operating Officer Jeff Wilpon, have claimed that the Mets were very much financially sound and that it would be business as usual. Jeff was particularly dismissive whenever the topic of adding new partners was broached.
It turns out that after a lot of Chicken Little speculation about how much the Wilpons lost in Madoff’s Ponzi scheme (some know-nothing sportswriters proclaimed losses ranging anywhere from $300 to $700 million), Irving Picard, the federal bankruptcy trustee in charge of accounting for who won and who lost with respect to Madoff Securities, surprised everyone by stating that the Wilpons and their consolidated corporate entities actually wound up ahead of the game, as their fund withdrawals exceeded contributions by roughly $48 million.
The initial thinking was that the worst the Wilpons could be on the hook for was that reported net gain. Forty-eight million dollars is not much more than what they wasted on disappointing pitcher Oliver Perez’s three-year contract. Certainly that was the impression the Wilpons were giving — until Friday.
Apparently Irving Picard was not content merely to try to recover the $48 million surplus from the Wilpons. He sued their companies for punitive damages for allegedly both steering business to Madoff and for ignoring many red flags that something wasn’t kosher with his firm. The Wilpons were understandably mum about the exact amount of treble damages that Picard was seeking from their Sterling Equities, but Fred did concede that it would be a very sizable contingent liability.
Picard’s hammer was clearly the impetus for the Wilpons to hire Allen & Company Managing Director Steve Greenberg to try to find a minority owner who would be willing to purchase an interest of up to 25 percent of team equity. Greenberg is the son of Hall of Fame legend first baseman Hank Greenberg. While he did not make it to the majors, Steve did play first base for Yale and played professionally at the Triple-A level before quitting and getting a law degree from UCLA.
Finding a limited partner for the Wilpons could be Greenberg’s toughest business mission to date. The tax laws allow deductibility for passive losses only if there are sources of limited partnership income, much in the same way that gambling losses can only be offset against said winnings to get tax benefit. Finally, profitable limited partnerships are taxed at ordinary income marginal tax rates, whereas long-term capital gains and qualified dividends are taxed at much lower rates.
The Wilpon family isn’t making Greenberg’s job any easier by their refusal to include any piece of their very profitable SNY cable network as part of a potential deal.
Serious investors would probably not rush into a deal with the Mets after seeing what happened to former Texas Rangers owner Tom Hicks. It was Hicks who signed Alex Rodriguez to a 10-year, $252 million deal and quickly found that he did not have the cash flow to sustain it. Hicks actively sought limited partners. When none came forward he was forced to sell the team to a consortium led by Hall of Fame pitcher Nolan Ryan.
Aside from Picard’s lawsuit, Sterling Equities will have a daunting task repaying bondholders who helped finance Citi Field. Sterling, with the help of the city, was able to float a $697 million bond issue with an effective interest rate of around 5 percent. Last year both Moody’s and Standard & Poor’s downgraded the bonds. Given the low interest rates that prevail in the marketplace now, a 5 percent return is a godsend for investors and a sizable economic burden on the paying entity.
It would appear to be a safe assumption that Sterling was allowed to float a $700 million bond in 2006 because of what appeared to be a very positive balance sheet that was enhanced by the inflated value of the company’s Madoff investment. The Sterling balance sheet has unquestionably been weakened by the Madoff scandal. It should be noted that since Sterling is a private corporation its financial statements both then and now are not available to the public or to the media.
One thing is certain: Neither Mayor Bloomberg nor Gov. Cuomo will be very happy with the Wilpons if Sterling ever defaults on a Citi Field bond payment.
And given the real estate market, Fred Wilpon is not going to get anywhere near fair market value if he has to start selling off properties to create a contingency fund for a possible settlement with Picard. Lenders will also be wary of dealing with Sterling now.
Mets fans have ample reason to be concerned. The conventional wisdom was that fans would be patient in 2011 and wait for the expensive contracts of Oliver Perez, Luis Castillo and Carlos Beltran to expire. Then the team could sign big-name free agents next winter. Don’t hold your breath for that.
The Wilpons’ fiscal woes won’t be ignored by Mets players who were livid that the team did not acquire a big name last July when the team still had a chance to be in the post-season. I asked former Met Brian Schneider if corporate culture has an effect on players. “It may not determine who wins and loses a given game, but it certainly does have an affect over a 162-game schedule,” he stated.
This is certainly the winter of Mets fans’ discontent.
Queens Chronicle sports columnist Lloyd Carroll is also a certified public accountant and an accounting professor at Borough of Manhattan Community College.