Mets Sale to Steve Cohen Excuses a Decade of Wilpon Errors

(Bloomberg Opinion) -- Fred Wilpon and his brother-in-law, Saul Katz, made their first investment with Bernie Madoff in 1985. The amount was $3 million, which came from revenue from their real estate company, Sterling Equities. The next year, Wilpon, who was a minority shareholder in the New York Mets, raised his stake to 50% of the team. Then in 2002, he paid the Mets’s longtime owner, Nelson Doubleday, $135 million for the other 50% (along with the assumption of the team’s debt). The deal gave the team a valuation of $400 million. As Wilpon prepares to sell the team to hedge fund mogul Steve Cohen, keep that number in mind.

By the time Wilpon took control of the Mets, Sterling Equities had been putting money with Madoff for 17 years, and Bernard L. Madoff Investment Securities had become central to its business model. Wilpon did the same thing with the Mets. When money came in from preseason ticket sales, it was handed over to Madoff. He held the money Mets employees put in their 401(k)s. “Cash flow for day-to-day Mets operations was paid out of Madoff accounts,” the Forward wrote in 2015.

Because Madoff’s returns were so steady, year in and year out, Wilpon and Katz came to view him as akin to a bank: They would park money with him and pull some out whenever they needed cash. In 2008, when the Ponzi scheme was revealed, Wilpon and Katz had more than $500 million in their various Madoff accounts, according to the trustee for the Madoff bankruptcy.

The revelation that Madoff had been running a decades-long fraud was a disaster for Wilpon and Katz. The $500 million was gone, of course. And in 2011, the trustee, Irving Picard, sued the two men, demanding that they turn over $1 billion — $300 million in so-called fictitious profits and $700 million in principal, an amount the trustee said they had pulled out of Madoff’s firm since 2002. The trustee argued that the two men either knew that Madoff was a crook or should have known, given all the red flags. After a long, public — and, for the two men, humiliating — battle, Wilpon and Katz settled with the trustee in March 2012, agreeing to pay $162 million.

Wilpon insisted that the money lost to Madoff’s Ponzi scheme wouldn’t have any effect on the Mets. But that wasn’t remotely true. The Mets had enormous debts: It had to pay the city of New York millions of dollars in interest on the bonds that had been sold to build its new ballpark, Citi Field. The team itself regularly lost $50 million to $75 million a year, according to someone who has seen its books. Wilpon owned the SportsNet New York (SNY) regional sports network, which was profitable but also carried a hefty debt load.

To stay afloat, the Mets took an emergency $25 million loan from Major League Baseball in 2010. The following year, the team borrowed $40 million from Bank of America. To repay those loans, and to generate some cash, Wilpon sold 4% stakes to 12 limited partners in 2012 for $20 million each. Even so, the team and the TV network still carried a combined debt load of some $500 million, according to the Wall Street Journal.

Did the team’s troubled finances affect its performance on the field? Of course they did. In 2008, the year the Madoff fraud was exposed, the Mets had the second-highest payroll in baseball. By 2013, the Mets payroll ranked 23rd and was less than a third of their crosstown rivals, the Yankees. (By 2020, the Mets payroll had climbed back to fifth place.) Time and again, the team failed to bid for prominent — and expensive — free agents.

In recent years, the Mets had one terrific season, 2015, when they lost in the World Series. But overall, the team has had a miserable decade. Since 2009, the Mets have had only three winning seasons and two post-season appearances. In the pandemic-shortened 2020 season, the Mets came in last place in their division.

Today, the Mets’s finances are as precarious as they have ever been. The team is likely to lose $200 million — yes, $200 million — on the 2020 season. It has dipped heavily into a $250 million revolving loan from JPMorgan Chase. And the team owes $45 million in Citi Field bond payments.

You would think that when a seller of an asset is in such dire straits, potential buyers would try to pick it up on the cheap. But that’s not happening. Cohen’s winning bid is reported to be an astonishing $2.45 billion — which, if Major League Baseball approves the sale, would be the largest amount ever paid for a sports franchise in the U.S.(1) And that doesn’t include SNY, which Wilpon has kept out of the sale.

So let’s recap: A man who should have known better stupidly uses a Ponzi schemer as his banker. When the Ponzi schemer gets caught, the man’s businesses, including his baseball team, lose gobs of money. In most subsequent seasons, he mostly fails to field a competitive team. The team loses money year after year. Debt piles up. Yet this team that was worth $400 million when he took control 18 years earlier is going to be sold for $2.45 billion.

Is there any other business on earth where an owner can be as incompetent as Wilpon and come away richer than ever? As a plaything for the 1%, nothing compares to a sports franchise — and when a franchise becomes available, price becomes no object.

I once asked Steve Ballmer, the former chief executive officer of Microsoft, how he justified paying $2 billion for the Los Angeles Clippers in 2014. Ballmer, who is worth $75 billion, according to the Bloomberg Billionaires Index, just shrugged. “Things are worth what other people are willing to pay for them,” he said. For the owners of professional sports teams, it scarcely matters how they run their teams; there is always going to be an enormous capital gain at the end of the rainbow.

Cohen, who Bloomberg estimates is worth $10.1 billion, has a different kind of checkered past from Wilpon. In 2013, his firm paid a $1.2 billion fine to end a long-running insider-trading investigation by federal prosecutors. More recently, Cohen’s firm, now called Point72 Asset Management, has been accused by several former employees of sexual discrimination.

There is no guarantee that baseball’s owners will vote to let Cohen in the club. But my guess is that they will. Cohen has something that Wilpon hasn’t had since 2008: lots and lots of money.

(1) Before the pandemic, Cohen had agreed to pay even more for the team: $2.6 billion for an 80% stake. But the deal fell apart when the Wilpons said they planned to maintain control the team during a five-year transition period.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. His latest project is the Bloomberg-Wondery podcast "The Shrink Next Door."

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