Saturday, February 28, 2009

Fun With McCourt Math

I had to chuckle when I saw two mathematical responses to reality using the absurdity of McCourt Math. As those of you know, Frank McCourt is dealing with numbers like a snake oil salesman, pushing the boundaries of sensibility as he tries to reshape reality to his own benefit. Fundamental, of course, is the McCourt Math Theorem, which basically posits that there is no time value of money impact when considering deferred payments.

It is the logic of this Theorem which underpins Frank McCourt's "$45M" offer to Manny Ramirez, which was trumpeted to the press as being a $25M/$20M deal, rather than the cold reality that it was a $10M/$10M/$10M/$10M/$5M deal given its slew of deferred payments. In Frank McCourt's world, these two payment streams are equivalent--in fact, he's not even offering to pay interest on the latter.

Common sense, of course, would say differently. These payments would normally be discounted back to determine "present value"--using a typical risk-free interest rate proxy of 7.5%, for example, the value of McCourt's actual offer is almost $4M less than the mythical $25M/$20M offer. But not for Frank, who is flabbergasted that Ramirez would turn it down. Perhaps Ramirez' grasp of basic math is beyond the intellectual boundaries of McCourt's capacity. (After all, these are only "details", according to the Dodgers' website. Hey, I'm independently wealthy off this blog alone, but $4M sounds like a pretty big detail to me.)

Dodger fans, of course, are quick to use math right back at Frank McCourt. The first suggestion was from David Pepper of Malibu who wrote in to Saturday's LA Times:

Let's assume that the Dodgers draw 2.5 million fans this year. With the $25 million post-Ramirez windfall, this means that the Dodgers could give everyone a $10 rebate, per ticket per game, without losing a dime. Now that's a stimulus package!"

McCourt Math, of course, would reject this payout, instead citing an uncertain macroeconomy, the unfortunate self-inflicted need to pay Juan Pierre $9M each next year, etc. But you can't blame a guy for asking. Heck, a $10 rebate barely covers 5/6th of a beer.

The other response came from "Nic J", who commented back using the McCourt Math Theorem itself:

I wonder if Mr. McCourt will agree to deferred money when I go to buy Dodger tickets this year.

Brilliant, Nic! Instead of me shelling out $185 a game for my pair of season ticket seats, I'll pay $50 today and pay Frank the rest in $10 payments stretching over the next decade and a half. No interest, of course. Whaddya say, Frank? We're using your math!

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I also want to take the time to counter Bill Plaschke and others' comments regarding McCourt's mythical offer of $25M in 2009 to Ramirez, which as many reported "would have put Ramirez as the second-highest paid player in baseball, behind Alex Rodriguez."

Now that we all know Frank McCourt's actual offer was only $10M in 2009, isn't it fair to note that the actual amount the Dodgers offered Manny is only on par with Hiroki Kuroda, and even less than Rafael Furcal's 2009 salary? And, by the way, $2M less than what we're paying Jason Schmidt next year. Hmm, that certainly puts things in perspective.

5 comments:

Nic j said...

Hey! I'm blog famous!

Eric Karros said...

Sax (or anyone), if he opts out after 1 year, are you sure he gets only the initial $10m and no additional deferred payments down the line?

berkowit28 said...

If he opts out after 1 year he gets $25m, however long it takes (presumably another 2 years: 10 + 5).

DodgerBlu said...

It turns out that I may know Pepper. Of course, he is aware of the economics of deferred payments, etc. The point is that, in today's economy, throwing such huge numbers around (even if it's "only" $10M) may leave the Average Joe amazed to realize that these guys make more per year than many of our US Senators COMBINED, or, more than the Supreme Court Justices, the Cabinet, the VP and the President COMBINER! Yes, the big bucks apply to owners as well, and, of course, it's a free economy, and, we choose to go to the games...blah, blah, blah. It just goes against the grain of us little people to attempt to contemplate numbers with so many zeroes to the LEFT of the decimal point. The Koufax's and Drysdale’s may have broken salary barriers when they held out for an unthinkable $100K, but, relative to an average worker’s salary back in the mid-1960s (assume even a low value of $5K), these Dodger greats held out for a multiple of 20 times what a typical family earned in those days. Nowadays, even if we use (your more accurate) “actual” salary of $10M, and assume that the average Joe’s salary is as high as $40K (to err on the side of a low multiplier), the multiplier is still upwards of 250!! So, in that context, it’s powers of 10 that are more relevant than your (albeit correct) factor of 2. And, trust me, I, too, am a Dodger fan, dating way back to the 1959 World Series, when the “Sons of Garvey” were, most likely (and, with all due respect), the “Toddlers of Garvey.”

Orel said...

Welcome to SoSG, DB! Your response reminds me of Babe Ruth's famous quote upon learning he was holding out for more money than President Hoover made:

"I had a better year than he did."