Manny Being Stupid

If you haven’t heard, Scott Boras and Manny Ramirez have rejected the Dodgers latest offer of a two year, $45 million contract due to the amount of deferred money in the deal. They rejected the offer despite the fact that it reportedly guarantees them $25 million for 2009 with a player option for 2010 at $20 million, giving Ramirez the best possible deal he could hope for.

Under this deal, he is guaranteed far more than his market value for 2009 (to be worth $25 million in a normal economic environment, he’d have to be a +5 win player – he’s not, and the environment isn’t normal), and he has the option of terminating the contract if he has a successful season. All the risk is transferred to the Dodgers here. If he declines in performance or gets injured, they’re still on the hook for the extra $20 million for 2010, in which case they could be looking at a $45 million deal that brings them a net of five or six wins. If he has another great year, he can hit free agency against next winter and try to cash in with an even better deal.

This is, without a doubt, a fantastic offer for Ramirez. And his camp is turning it down over deferred payments? This is ridiculous.

Time value of money isn’t very hard to calculate. Let’s assume that capital is worth 5% per year in this economy, just for the sake of argument. The rumored offer has the $25 million in deferred payments being setup to be paid at $10 million in 2010, $10 million in 2011, and $5 million in 2012, with no interest accruing.

Using the present value formula of PV=FV/(1+i)^n, where i is the interest rate and n is the number of periods of deferment, we can easily figure out how much money Boras and Ramirez are actually haggling over.

First Deferred Payment

$10 million / 1.05 = $9.52 million, $480,000 difference

Second Deferred Payment

$10 million / 1.1025 = $9.07 million, $930,000 difference

Third Deferred Payment

$5 million / 1.1577 = $4.32 million, $680,000 difference

The sum of the differences between present value and future value is $2.09 million. Manny’s $25 million deferred is worth $22.91 million in today’s dollars.

They’re haggling over $2 million dollars in value. They’ve got a sweetheart deal on the table, and they’re haggling over $2 million.

Give me a break. Sign the contract and get in camp. You aren’t even worth this contract, much less a better one.

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Dave is a co-founder of and contributes to the Wall Street Journal.

52 Responses to “Manny Being Stupid”

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  1. vivaelpujols says:

    He’s a putz

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  2. CptSpandex says:

    I think the sticking point is that Manny wants another year of guaranteed money. He isn’t going to get it, but with Bore-a$$ as an agent, I can see why he might think so.

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  3. I don’t agree that he is not worth that much(exp if he plays dh). He puts fans in the seats. But I do agree this is mind boggling. The yankee fan in me is hoping he wants either 3 years and x amount from the dodger. Or is going to take a lesser deal from the yankees with more playing incentives and media incentives (similar to arods hr record). A deal like this would have to change the tone of some people when discussing manny and his motives

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    • Fresh Hops says:

      Despite attempts and the fact that very smart people think about and work on these things, no one has ever been able to quantify the effect of star power on ticket sales even with a sizeable margin of error. That strongly suggests that the effect is too small to detect, which strongly suggests that there’s very little money involved in having stars over and above the wins they produce. (Unlike star power, we have come a long way in finding the marginal value of each win in a season.)

      The star power argument is probably garbage, probably invented by media to defend transactions that they like despite clear evidence that the transaction doesn’t make sense.

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    • Matt H. says:

      Agree. Stars lead to wins, which leads to money. It is not the “let’s go see Manny play today” argument that the MSM loves.

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      • Jack F says:

        I just want to say, I have gone to the ballpark when I lived in the city in question, to see a visiting star. Pedro, RJohnson, Maddux. On occasion to see a great team like Clev & Sea in the late 90’s early 00’s. I’ve never gone to see a position player in particular though. For what it’s worth.

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  4. Hizouse says:

    I agree with the sentiment, but I think the numbers are a little off.
    Assuming the option is exercised, if no deferal, he’d get:
    2009: $25M
    2010: $20M
    NPV= $44.05M (assuming he would get $25M today and $20M a year from now)
    With deferal, he gets:
    2009: $10M
    2010: $10M
    2011: $10M
    2012: $10M
    2013: $5M

    so the difference is closer to $2.7M

    I think Dave is correct if he changes the first deferred payment to being deferred for 2 years instead of 1.

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    • MetsFan says:

      Hizouse is right here, though I don’t think it changes the argument a whole lot. If you want to set the thing up in excel and assume 5% disc rate and monthly payments (Hizouse didn’t which is why our answers differ a bit), it looks like this for anyone who is really bored.

      PV of 25/20

      PV of Dodgers Proposal

      Difference is 2.67mm

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      • george says:

        and don’t forget Boras’ 5%… I’m sure Scotty won’t.

        Horrendous market to deal within and yet, these are fantastic numbers for a soon-to-be 37 year old player who quit on his team less than one year ago. I love the guy’s entertainment value, have been a LAD fan nearly all my life, and he is right up there with Sandy and Fernando for fan attractiveness.

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  5. Yeah, huge sweetheart deal, but could it be Manny turning it down? Is that possible?

    Off topic, but kind of on, one of the questions about Manny is his defense (or lack thereof) in LF, and one excuse I’ve seen is that the Green Monster contributes to his problems fielding.

    I don’t know if any of you have tried this yet, but since you all have all this great UZR data now, I assume it is available via splits in your database (though not on fangraphs), and thus it would be possible to split home vs. road fielding for him to see if his UZR has changed (or not) on the road vs. home.

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  6. economics101 mwf 12-1 says:

    Your argument is COMPLETELY dumb.

    WORST CASE SCENARIO, getting $25 million today and spreading it over various savings accounts WITH INTEREST is worth FAR more than deferred payments with no interest with inflation across the same amount of years.

    Take some financial investing classes. I hear city college courses are fairly cheap these days.

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    • Jon says:

      I don’t mean to sound snarky, but that’s why Dave (and Hizouse and MetsFan) used a present value calculation to determine the difference. The exercise they ran compares the difference between receiving $25 million this year and $20 million next year versus the $10 million the next two years plus the deferred money in 2010, 2011 and 2012. The 5% “cost of capital” assumption means that any money received today would be earn a 5% interest rate (your “various savings accounts WITH INTEREST”).

      When you do that calculation, you will find that the difference between the two contracts (all money in 2009 and 2010 vs. deferred money in 2010-2012) is ~$2 million. While that’s a significant amount of money for you and I, it’s not a huge amount of money in the context of a $45 million contract.

      And considering the other factors involved (poor economy, the Dodgers are basically negotiating against themselves), the $2 million difference is minor when compared to the fact that the Dodgers could decide to:

      – pull out of negotiations entirely if they are fed up dealing with him, or
      – decide to drastically reduce their offer (say 2 years and $36 million, take it or leave it)

      The point of the article is that the downside risk is fairly significant, which is why haggling over $2 million is silly from Manny Ramirez’ perspective.

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      • Jon says:

        Also, it’s usually not a great idea to blast someone else’s math when:

        1) You don’t show your own work.
        2) Yours is wrong.

        I’m not saying…I’m just saying.

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      • joser says:

        The funny thing is that (I think) Dave is presently in graduate school studying, among other things, economics… so not impossible he could be grading the tests turned in by Mr. Econ101 here.

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    • Fresh Hops says:

      This comment suggests one of two things:
      (1) You didn’t actually read the post.
      (2) You didn’t get a win in your Econ101 class.
      One of two things, or possibly both.

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    • Matt H. says:

      FAIL. FAIL, and did I mention FAIL.

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    • Bill says:

      There’s nothing wrong with sounding snarky when responding to a post that starts with, “Your argument is completely dumb.” I’m sorry, “COMPLETELY dumb”. I love that comments like this are rare on this site. And when they do show up, it’s funny- like the comments on the Mike Jacobs’ post a while back. Econ, present the data and calculations that you believe make this post “dumb”. If they are valid, the writer will either admit his mistake, or he will reasonably counter your argument.

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  7. Bodhizefa says:

    Boras and Manny are simply responding to the fact that Colletti and Co. blinked by offering a second year. It’s a simple sales technique on Boras’ behalf to continue calling Colletti on it and posture until he and Manny finally squeeze as much out of this as they can. Boras is a pretty damned solid salesman — he knows his target demographic extremely well and exploits the ever living **** out of them. That the GM’s around the league continue to cave in to his demands intrigues me to no end. You’d think that they’d learn their lesson and stop bidding against themselves, but Boras always presses and they always fold. It’s a tried and true process for him, and despite all of the clamoring on multiple boards I frequent, it’s something that he will continue to do and do well. I bet Boras gets Manny an offer for $50 million over two years or a vesting third year on top of the $45 mil. I’ll put the over/under at two weeks, and I’m taking the under.

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  8. fifth of says:

    Ramirez probably needs all the money right now because Boras has a sweet investment lined up for him.

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  9. John C says:

    I don’t even think the risk-free rate of lending is that much, so the lost capital is even less I think.

    Unless there’s some 5% risk free rate out there I’m missing.

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  10. stp says:

    econ guy,
    um, the calcs were basically correct and show good knowledge. you are dumb. Yes, money today is more valuable that money in the future. That’s the whole concept behind NPV. What’s Manny going to do with the money he gets now (vs deferred)? Either spend it on consumable goods and depreciating assets, or invest it. The current savings account rate is 2.5% for big money, a 3yr-CD about 3.5%, so the 5% discount rate seems aggressive if anything. Please tell us how you would discount the future money differently.

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  11. don says:

    I find Boras to be particularly loathsome (I’m sure I’m not the only one) so I’d like to see some of his clients get totally burned so he disappears. I doubt it will happen, but this year seems like as good a chance as any.

    I mean, why give Manny 45 over two years anyway? What’s the second best offer he’s going to get?

    These teams would be terrible – terrible at a sealed envelope auction.

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  12. Kevin says:

    I don’t find Boras loathsome at all. It’s not his fault teams bid against themselves. If they want to be that abjectly stupid, that’s their problem.

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  13. Joe says:

    Present value equations bring me back to college.


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  14. Maury Brown says:

    “The star power argument is probably garbage, probably invented by media to defend transactions that they like despite clear evidence that the transaction doesn’t make sense.”

    I have always agreed with this. There have been some cases where you could quantify star draw, mostly with pitchers. Best example was Fernandomania which Dick Moss used in arbitration.

    All I will say on Manny and the star factor is this…

    On the day after he went to the Dodgers, I contacted the club and asked them how ticket sales progressing. A press release shortly followed saying that the club had sold a record number of regular season tickets for the time period.

    There’s star power with Manny but if he hadn’t ripped off such a torid display of offense after heading West, I doubt we’d be seeing Boras locking horns with the Dodgers over the minutia of this contract.

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  15. Preston says:

    I think you’re a bit hasty in claiming he’s not a +5 win player – after all, he was a 6.5 win player last year, worth nearly $30 million by your calculations. Obviously, that was a best case scenario, and he’s much more likely to revert to being around a $15 million player, as he has more or less averaged the last several years, but at his peak he is clearly a 5 win player.

    On another note, it’s clear that the free agent market is depressed overall this year. It is not clear that it is depressed for the top tier of free agents – Teixeira, Sabbathia, Burnett, Lowe, and Perez all got deals that do not seem to have been significantly affected by the economic situation. Manny is absolutely in that tier talent-wise; now, the lack of bidders is obviously a factor that should drive his price down somewhat, but I think if you saw the Dodgers offering too much less (i.e. under $20 million a year), you’d start to see some serious competition for his services.

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  16. StolenMonkey86 says:

    Don’t forget, though, the Bush tax cuts will expire after 2010, raising the top marginal rate up to 39.6% from 35%. So he would actually be getting less money in those deferred payments. For the npv:

    2009: 25,000,000*.65*1=16,250,000
    2010: 20,000,000*.65*1/1.05= 12,380,952
    Sum: 28,630,952

    2009: 10,000,000*.65*1=6,500,000
    2010: 10,000,000*.65*1/1.05=6,190,476
    2011: 10,000,000*.604*1/(1.05^2)=5,474,858
    2012: 10,000,000*.604*1/(1.05^3)=5,217,579
    2013: 5,000,000*.604*1/(1.05^4)=2,484,561
    Sum: 2,759,878

    So to be fair, Manny isn’t arguing about $2.7 million, he’s arguing about $2.75 million AFTER TAXES, which goes from being 6.1% of the value of his deal to 9.6% of the value his deal with taxes, again assuming no deductions, and that’s not including he possibility that he might see higher taxes than 39.6% (Obama had discussed increasing payroll taxes for those who earn over $250,000, but we’ll have to see that get passed to see what it looks like). It could end up being a $3.3 million difference after tax difference if Manny has to pay an extra 2.4% in payroll taxes in 2011-2013, and then you’re talking about a difference of 11.5% of the contract value. Pretax, 11.5% of the NPV would be $5.06 million.

    At that point, he would have been better off with the 2x $20,000,000 options at the end of his old contract, and Boras really does not want that to happen, because that makes him look like a failure.

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    • george says:

      and there was no commission due on the $20 mil x 2, because it was already negotiated some 8 years (?) before…

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      • Kevin says:

        No, he would still owe commission on it, but he’d owe it to his former agent. I don’t think commission is paid up front, and even if it was, the commission on the option years couldn’t be settled until they knew if those were picked up or not.

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    • MetsFan says:

      You’re right — I completely ignored taxes. Although the impact will be a little bit less than your calcs due to state taxes being federally deductible. Most of his income would be subject to Cali’s top rate of 9.3% and the rest would be shifted to lower tax states wherever the Dodgers play away games. And as an aside, I hope the Dodgers pull this offer and anything else with a player option year.

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  17. StolenMonkey86 says:

    Blast – that sum is actually the difference between the two. The sum under McCourt is 25,347,342.

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  18. Damick says:

    So how many wins IS Manny worth? And how much IS that worth in “today’s econcomic environment”?

    As to the relation between Manny on the team and ticket sales-ticket sales trail team success by a season. I’d say some of the ticket sales this year are related to Manny’s performance last year. Assuming not signing Manny leads to not making the playoffs, it will be reflected more in NEXT year’s ticket sales, not this year’s.

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  19. Manny Rammers says:

    There used to be an article about how much Manny was worth but it’s not linked to Manny’s page anymore. Seems theirs a maximum of 3 unless I’m missing something.

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  20. Jeff says:

    I don’t think Manny or Boras have an issue with this contract offer. I honestly think he wants to hang out a little longer and miss some spring training.

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  21. altrenda says:

    @ Bodhizefa The Dodgers always offered 2 years, their first offer was $45 mil guaranteed for 2. This deal is different in that Manny can walk after 1, getting $25 mil, or stay for the second at his choice for another $20 mil.

    What Boras is holding out for is the 3rd year, and no one in baseball wants to give it to him.

    If the Dodgers offer him the 3rd year, or the Giants offer 20 per for 3, then they will have blinked.

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  22. Churchill says:

    They are haggling over status and public perception, not $2.75 million dollars. It’s quite ignorant and egotistical, but how can you believe it’s actually over $2.75 mil? It’s not.

    If LAD originally offered them 2/$47.75m with the same terms, we’d still be having this discussion. Boras may be good at his job, but like Dave alluded to, his attempts to make sure he doesn’t look like a failure are sure making him look like a failure.

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  23. MGL says:

    The media is specifically saying that “Boras turned down the offer.” Now, Manny can certainly empower Boras to accept or turn down any offer on his behalf. However, one way or another, the decision is strictly, 100% Manny’s. By that, I mean the contract is between Manny and the Dodgers, obviously. Boras has nothing to do with it other than he is agent for Manny authorized (by Manny) to do the negotiating and whatever else Manny wants him to do.

    IOW, if the Dodgers make an offer, Manny can accept or reject it no matter what Boras thinks of the offer. Period.

    The notion that “Boras accepts or rejects an offer” is a ridiculous one.

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  24. Evan says:

    stolenmonkey is correct with the tax issue and the after-tax impact.

    Also, I’d argue that a 5% discount rate right now is low. Given how many enterprises are starved for capital, you can buy all sorts of higher quality corporate bonds for close to 10% than 5%. Go out a few years, and those yields may well be lower. Alternatively, the orgy of government spending likely will spur significant inflation, making the value of money further out worth less. In either event, having the cash right now is likely worth signficantly more than 5% annually.

    Using a higher discount rate and the tax issue, and the deferred payments could easily lop off close to 20% of the value of the deal. Which, as stolenmonkey points out, could easily make this deal worse than the Boston options.

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    • MetsFan says:

      This one can go either way. For the risk averse investor, the discount rate is close to the risk free rate which is very low right now. For a risk seeking investor, the discount rate is higher because risk premiums are essentially at historic highs. So, it is a subjective number that depends on the individual. Since we have no idea what Manny will be doing with the money, 5% is a good “in the middle” guess.

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  25. Rich says:

    I think Manny is just not ready to report to ST.

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  26. Jeff says:

    According to ESPN Boras submitted two counter proposals – one with the same but no deferred payments and a second with the same deferral schedule but at $55 M. So, for what it is worth the Boras camp value the deferred payments at $10 M.

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  27. Marc H says:

    I’d let the greedy one walk! I’d pull the offer and say “Goodbye and Good Luck!” Manny will go down as one of the greatest RHH of our time, but this guy isn’t worth the haggling and fans won’t put up with it. Just another greedy athlete who’s image in his own mirror is more important than anything.
    Manny being Manny?? Please! Colletti?? Invest in someone who wants to play baseball!
    Not this self centered jerk!

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  28. Travis Hafner says:

    Manny should take the money now, the next offer is going to be significantly less if his name is on the soon-to-be-leaked list of 104, along with Pudge Rodriguez. No question A-Rod’s value has dropped below that lofty $252m with his ‘apology’ and shady cousin.

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  29. ????? says:

    ???! ?????????! ?????? ?? ??? ???? ??????! :)

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