Affordable Housing Institute : US

How much did third baseman Mike Lowell leave on the table by re-signing with the Red Sox?

This post creates an excuse to run yet another photo of the World Series Champion Boston Red Sox

 

Scarcely had the Red Sox completed their sweep of the Colorado Rockies when the chants began: “Don’t — sign — A-Rod!” went one, referring to the Yankees’ just-announced free agent shortstop. 

 

Mr. Rodriguez eventually signed for roughly $275 million over 10 years

 

“Re — sign — Low — ell!” went the other, referring to World Series Most Valuable Player Mike Lowell, and roughly three weeks after that chant, about a week into full free agency, Mr. Lowell pleased legions of Sox fans by signing a three-year contract for $37.5 million, a move universally applauded for its altruism, as illustrated by this Boston Globe story:

 

Less was more for Lowell

He deemed Boston most valuable place

By Nick Cafardo, Globe Staff  |  November 21, 2007

Thirty seven and a half million was enough for Mike Lowell.

The Red Sox third baseman cast aside bigger and better offers (the Yankees, Phillies, and Dodgers all were reportedly in the hunt at one time) to stay in Boston and accept three years.

Lowell, whose deal became official yesterday, took part in a conference call with Sox general manager Theo Epstein and spoke about his happiness at returning to the Red Sox.

 

Lowell’s back with the Sox?

 

Explained Mr. Lowell: 

“There were things that were considered. Definitely. The amount of money that was left on the table . . . I didn’t really struggle with it, but I was thinking, ‘Is guaranteeing that fourth year something I should really pass up?’

 The Red Sox’ general manager (and chief player negotiator) also agreed: 

Epstein said signing Lowell was a big part of the off-season plan, and he now will concentrate on the bullpen and the bench. He also said he appreciated Lowell taking less money to stay. 

In a similar vein, Mr. Lowell’s teammate Curt Schilling responded to a punctuation-challenged commenter on Mr. Schilling’s blog: 

Leaving money on the table????? 37.5 for three years thats great! But C’mon Curt you guys play baseball for a living. 37.5 million is a crap load of money for a 33 year old in his descending prime …

Give me a break … 

If someone offers you 45 million or more, and someone else offers you 37.5 million, and you take the latter offer, doesn’t simple math mean you are leaving money on the table?

 
His pitching’s way better than his financial expertise

To his credit, Mr. Lowell made his decision on factors beyond simply the pay check: 

“I enjoy Boston,” he said. “My family enjoys Boston. Secondly, the Red Sox organization does everything it can to win a World Series – for my career, that’s a big factor. Thirdly, before this contract I had financial security, so I like to believe that I’m not all about money.  I feel like I’m more of a baseball player than a businessman.”

“I really don’t believe everything should be about money. I’ve had teammates in the past who have gone to other places. Sometimes they have second thoughts that they took more money elsewhere. I didn’t think my happiness should be judged just by dollars.” 

So there you have it: Mr. Lowell left money on the table … but just how much money? 

The answer takes us into the realm of risk and optionality — and by the slightest of detours, into the realm of financing risk, and hence back to the subprime mess.

This sign should be posted at every loan closing 

[Be honest, you thought this post was just gratuitous Red Sox adulation, didn't you?  Well, this is justifiable Red Sox adulation -- so there!] 

In effect, Mr. Lowell’s contract is analogous to a three-year adjustable rate mortgage (ARM): for three years he will be paid $12.5 million a year, and his market value will be reset after the 2010 season.  

How does that compare with his market value?   

Yet the temptation was there. 

Mr. Lowell found out.  He elected not to sign with the Red Sox during the fifteen-day exclusive negotiating period, and tested the waters. 

Media reports had Lowell linked to a four-year deal with the Yankees to play third base, which quickly shifted to first base after it became clear Alex Rodriguez was going to return.   

Mr. Rodriguez, we will recall, interrupted the eighth inning of the last game of the World Series to call a reporter to announce that he was exercising a contractual option to void the remainder of his Yankees contract, whereupon the Yankees announced they would not negotiate with Mr. Rodriguez.  As it turned out, both sides were bluffing.

 
I can’t understand why they don’t like me 

Just before the Red Sox-imposed deadline was about to expire, the Phillies, after professing that they were adamant about not going after Lowell, stormed in with a four-year offer at about $50 million.

 Wait a minute! 

Something’s worth with that math 

Lowell said no to that. 

$50 million for 4 years = $12.5 million per year.  So what’s the comparison? 
The issue, as you’ve undoubtedly grasped a long time ago, is not quantity but price rate.  The price of a Lowell-year has been set by the market at $12.5 million.  Should the Red Sox buy four or three of them? 

Either way, in 2008, 2009, and 2010, Mr. Lowell would be paid $12.5 million for his services.  At issue is what happens in 2011.   

All the while, Lowell’s agent, Sam Levinson, was trying to squeeze another year out of Epstein, but Epstein wouldn’t budge.

What do you mean, your last offer is in cement? 

In Mr. Lowell’s preferred scenario, in 2011 he would be pledged to the Red Sox, and his rate would be $12.5 million. 

In the Red Sox’ preferred scenario, in 2011 the parties would renegotiate, just as they are negotiating now. 

In simple terms, Mr. Lowell left money on the table only if he could have talked the Red Sox into overpaying him.  You can’t blame him for trying … 

Can’t blame a guy’s agent for trying 

Even during yesterday’s conference call, Levinson, attempting humor, posed as a Staten Island Advocate reporter and asked Epstein, “Would you please consider giving Mike a fourth year?” 

… nor can you blame the Red Sox for declining: 

Epstein responded, “Sam, I’ve heard you ask that before. We’re going to hold off. We’re very happy with the contract that we signed Mike to and we look forward to a great three years. We appreciate the interest.” 

From the perspective of late 2007, looking forward three years, what are the risks and optionalities? 

Somebody’s has to take each of these risks: who should it be? 

Injury.  Mr. Lowell could be injured and suffer a permanent drop in his abilities.

Age.  Mr. Lowell’s age could catch up with him and his performance could drop off.

Market price.  The market for third basemen could rise faster than the rate of inflation.   

By refusing to go a fourth year, the Red Sox are saying, in effect, “we think it more likely than not that in 2011, we will be able to find a third baseman of your then quality for less than $12.5 million.”  The Red Sox, in other words, are betting that by the end of 2010 Mr. Lowell will be less valuable than he is today.  

How tough was it to walk away from the four-year offers? 

Mr. Lowell’s position is more complex, for if he moves, he faces two relocation risks: 

Professional.  Mr. Lowell could go to a worse work environment: a poorer team, a bad park, and as a result lower production.  (When the Red Sox traded for Mr. Lowell, he was widely regarded as being overpaid, so the Florida Marlins insisted that the Red Sox take him and his contract off their hands.)

Personal.  Mr. Lowell is spectacularly popular in Boston, and his family is happy here.  Any other situation could be less pleasant. 

What do you mean, I’ve just signed with the Tampa Bay Devil Rays? 

“I kind of weighed where I felt comfortable and where I’d have the best chance to win a world championship. Plus, we just won and I played with a set of teammates that are unparalleled and the fan base is unbelievable.” 

From Boston Common … 

To the Dominican Republic, they’re all citizens of Red Sox Nation 

Lowering risk is particularly appealing for Mr. Lowell, who is closer to the end of his career than its beginning.  The Red Sox will always need a third baseman and will therefore always have to fill the spot, while Mr. Lowell’s earning power will decline precipitously once he retires from baseball.   

[Even world-renowned affordable housing consultants do not command sums like this. -- Ed.] 

In the abstract, Mr. Lowell’s bet is that his 2011 value is higher today than it will be if he has to negotiate in 2010 — yet Mr. Lowell as an individual also values continuity and security.  

“It wasn’t tough in the sense that I knew I wanted to play in Boston, though I wanted to play for four years,” he said. “The tough part was four years with other teams/three years with the Red Sox.  But I can’t say that I’m upset with the situation. How can I be upset with the money I’m going to be making and the chance to compete for a world title?” 

This is worth something.
 

“I always expressed how much I enjoyed playing here in Boston with my teammates, my manager, and all the fans, and that hasn’t changed a bit, so I’m actually looking forward to working hard this off-season and getting myself ready for spring training. 

“There were definitely things that were considered. Not everything about the whole process was easy.

“The analysis I did with my family is, you look at the cities and you look at the teams, you see where they fit, and you compare that with the way you feel and the way you fit with the Red Sox. So ultimately my fit and my comfort level, family, and my team in Boston outweighed those other options. 

Mr. Lowell’s thought process mirrors that of the new home owner.  Moving from rental into an owned home delivers security of tenure, a place where a family becomes part of a community.  These things have value, so he is willing to give up some optionality in exchange for security. 

“I feel the fans have embraced me and I’ve embraced the fan base of Boston,” he said. 

By contrast, the Red Sox’ thinking takes the more dispassionate view.  They are always going to be putting out capital, and while they make choose to fix their payment rate for three years, if they believe Mr. Lowell’s personal yield curve is likely to decline, they are willing to play the percentages, because they have greater financial resources, which they are investing in a diversified portfolio of ballplayers, some young, some old, some whose value is rising, some whose value is falling.
 

Lowell said he was flattered by the affection of the Boston fans, some of whom held up “Re-sign Lowell” signs at the parade. 

In the end, each side got what it most valued:
 

“I’ve enjoyed playing in Boston since the first day I was traded, so I’m thrilled to remain here for three more years.” 

Or — if things go well — four or more? 

There can always be another negotiation, ideally after another World Series championship. 

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