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wallet cashFor the past couple of days, nerdy folks like me have been taking to our calculators to obsess over the Chicago Cubs’ reported 2013-14 international free agent signings.

It’s been a while since I’ve been in a math class, but I know how to use the plus button, and I couldn’t quite square what the Cubs were doing. With a number of top tier talents reportedly signed by – or “agreed to terms with” – the Cubs this week, the organization was set to blow far past its allotted international signing pool.

As I wrote last night:

After signing Torres, Moreno, and Mejia for $3.35 million, and after netting $963,000 extra to their $4,557,200 bonus pool yesterday via trades, the Cubs had about $2,446,210 left to spend, after considering the 5% they can go over without incurring dramatic penalties. With Matos getting $270,000, the Cubs are down to approximately $2,176,210, give or take a few bucks.

Thus, ostensibly, the Jimenez signing would put the Cubs way over their limit. In fact, they’d be so over the limit (more than 15%, by my quick calculation) that they’d be exposed to the most severe penalty: a 100% tax on the overage and (worse) the inability to sign any prospects for more than $250,000 for the next signing period.

The logical conclusion, then, was that some of these players weren’t yet “signed,” and the Cubs would be sure to acquire more pool space before officially signing these guys so that they didn’t blow the budget and become subjected to such a severe spending restriction next year. After all, we know two things to be unequivocally true about this front office: (1) they aren’t stupid, and (2) they aren’t going to sit out an opportunity to accumulate young talent.

But then rumors started circulating this morning that the Cubs were planning to go after even more expensive international talent this year (those rumors came from Phil Rogers, who deserves credit for getting this line of thinking started). Indeed, that rumor had the Cubs going after so much more international talent that, even if they added the 50% extra pool space that is permitted under the rules, they would *still* blow well past their budget, and would be subject to a 100% tax on the overage and the restricted ability to sign any individual player for more than $250,000.

Why would the Cubs do that to themselves? They’re going to have a huge pool again next year thanks to the poor big league performance, and the best international players get bonuses in excess of $250,000. In effect, the Cubs will have to sit out on all of the big names next year if they blow their budget this year. There’s no way they’d willingly do that, right?

Actually, yeah. They might. And it’s potentially genius.

Let’s imagine that the Cubs really liked this year’s international crop. Given how quickly, aggressively, and expansively they’ve gone after players, I’d say that’s a safe bet. Imagine further that the Cubs aren’t quite as enamored by next year’s crop – that’s not a requirement for this theory, but it certainly helps.

Against that backdrop, the Cubs decide to go hog wild spending this year. Yes, it will mean a huge overage tax and the inability to buy the big boys next year, but the Cubs love this year’s group, so it’s worth it in their eyes. Essentially, then, there are no spending restrictions for the Cubs this year – even if every other team is feeling the pinch of those restrictions. That creates inefficiency. That creates opportunity.

Going nuts this year costs the Cubs only one thing. And it’s the one thing they have that the new guys haven’t yet been able to leverage: money.

Back in the pre-new-CBA days, Theo Epstein’s regime was notorious for spending heavily on the amateur side. But, by the time he came to the Cubs, the ability to do that in the Draft was swiftly foreclosed. In the international market, restrictions also went into place, but under the approach the Cubs may now taking, those restrictions could work to their advantage.

Well, what about the signing restrictions for next year, you ask. Now the Cubs can’t sign any big names, and they’ve got this huge pool of money that they can’t really use effectively (yeah, they can spread it around to a bunch of $250,000 guys, but there are only so many talents at that precise level, and the Cubs aren’t going to get them all – the punishment is supposed to be restrictive, and it is). What a waste, right?

Nope. Here’s the loophole I see (assuming I’m reading the CBA correctly, and I don’t see this as being prohibited): if the Cubs decide they can’t effectively use their entire bonus pool next year because of the $250,000 restriction, they can trade pool space for players or prospects.

Think about what has happened by the end of this approach. The Cubs got to sign anyone and everyone they wanted in the 2013-14 international class. No real restrictions. Then, in 2014-15, they can sign their normal fill of low bonus, diamond-in-the-rough types, and use their big pool money to, essentially, buy players or prospects. By signing enough big-timers this year, the Cubs can more than overcome whatever they might lose in prospects next year. And then they can further make up for that loss by trading pool space.

All they’ve lost in this process is the one thing they’re happy to throw around: extra money.

In this way, the Cubs are converting the cash they’d like to be able to spend on the amateur side – but can’t, because of various restrictions – into a huge number of international prospects this year, and then (hopefully) some players or prospects next year. The key is that, even if you get penalized this year, your bonus pool next year does not go away. The pool remains an asset that you can use in trades next year.

This approach is exquisite, and brilliant, and perfectly aligned with what this front office is about.

(If you want to get very detailed about all of this, you’ll note that, because of the no-international-draft-poison-pill the MLBPA and MLB planted earlier this year, if you were going to blow your budget, this was the year to do it. If you do it next year, the penalties become much more harsh. These guys are just so freaking smart.)

Ok. Now that you understand the loophole, you’re all wondering one thing: if the Cubs were planning to blow past the budget anyway, what’s up with the trades they’ve made?

I think I can explain them all.

The Ronald Torreyes for $800,000 of pool space: If the Cubs were going to blow the budget, why ship off a promising youngster for pool money the Cubs weren’t going to use anyway? Well, it’s probably pretty simple. If the Cubs blow past the budget, then every dollar of pool space they acquire is a dollar they don’t have to spend in tax. In that way, if the Cubs do use the approach I described above, they just sold Torreyes for $800,000 in actual cash. We can debate whether he was worth more, but he’s a small, flawed prospect at a position in the Cubs’ organization (second base) that’s likely to become very crowded. His future was, at best, unclear, and if the Cubs didn’t believe his extreme hit tool would overcome all of the other issues, they were probably happy to sell him for some cash. (The added pool space also provided them cover if they couldn’t get all of the international prospects they wanted to sign. In that event, they could stay under their cap, and not blow the budget for guys they didn’t really want in the first place.)

Acquiring pool space in the Scott Feldman/Steve Clevenger deal: Given my feelings on the value of pool space, the approximately $400,000 in pool space that the Cubs picked up from the Orioles in the Feldman/Clevenger trade never struck me as all that valuable. Folks on all corners of the ‘net tried to convince you that the $400K – not even a 10% bump in the Cubs’ pool – was the entire thrust of the deal. No way. The Cubs, I suspect, actually really liked Jake Arrieta and Pedro Strop, and were willing to take a shot on them rather than the maybe-far-less-than-we-all-expected prospect packages they were offered. So, what was the pool space about? Well, I mean, the Cubs wanted it. It’s not like it’s worthless. Given the Torreyes description there, it was probably worth about $400,000 in real money to the Cubs. That’s a lot of dough, when you think about it. But in a big baseball trade, it’s a throw-in. That’s probably all this was. (With the caveat, once again, that more pool space gives the Cubs some cover if their SIGN ALL THE PLAYERS plan didn’t work out when it was time to put pen to paper.)

Sending $210,000 in pool space to the Dodgers in the Carlos Marmol trade: This makes a whole lot more sense now, doesn’t it? The pool space was only worth $210,000 of real cash to the Cubs, since they were going to blow the budget anyway. And since the Cubs saved $500,000 in the deal, they netted $290,000 in actual savings (assuming Marmol isn’t ultimately dropped, and then signs with another team, in which case it has been reported that the Cubs owe the Dodgers some more cash). Pretty simply explanation, and pretty logical, too.

So, there you have it. We’ll see if the Cubs’ approach actually bears this all out, but I now wouldn’t be at all surprised to see them nabbing some bigger names. In fact, it’s what I really hope to see now. I’m not in the front office, and I don’t know everything they know, but on paper here, this strategy looks pretty damn good.

Here’s hoping it happens, and that it works.

  • Kyle

    I just can’t follow you on the Torreyes thing. Torreyes isn’t an elite prospect, but he’s darn sure worth more than $800k in cash. It all breaks down on the Torreyes trade, imo.

    • Ben

      I think I agree here. I don’t like to comp guys to major league players, but Torreyes is going to the organization that has Altuve. Underside 2nd baseman, little power, good hit tool. Not sure how their defense compares though. Overall, seems odd to give a guy away when it seemed very, very likely that they were blowing past the cap anyway. If it was 50/50 or something along those lines, I would agree with the move. But it doesn’t make a ton of sense to give away young talent.

    • Ben (BG2383)

      I was thinking that maybe they didn’t decide to do this until they had already traded him but I doubt that is the case. I agree that I wish Cubs had kept him around. I watched him play on Sunday and then when I went back to see Smokies on Tuesday he was gone :(

    • cubchymyst

      I like Torreyes as a prospect. The guy could hit and considering his age I don’t think the idea of him adding some doubles power was out of line.

    • http://www.bleachernation.com Brett

      For what it’s worth, Keith Law disagreed (as I originally said the same thing to him – i.e., that Torreyes is worth a lot more than $800K). He just didn’t see it with Torreyes, though, so that could have impacted his opinion on the value.

      Cubs know Torreyes better than anyone, so …

      • Kyle

        Keith Law is only worth listening to when he agrees with me.

        • SirCub

          “Anyone in the world is only worth listening to when they agree with me.”

          FTFY

          • Kyle

            I thought that was sufficiently implied.

    • brunsmk

      Would have made more sense to trade Torreyes for another teams prospect versus the money if they aren’t that interested in him anymore as a prospect.

    • http://www.hookersorcake.com hookersorcake

      Also they take away 800k from the team with the biggest pool, Houston. Reducing Houston’s resources and adding to their own. Once again doubling an advantage.

    • Hansman1982

      The $800k on Torreyes quickly gets converted into $1.6M when you factor the tax on overage. Meaning the Cubs game out $80k ahead on Marmol, and $800k ahead on Feldman plus his salary.

      That’s nearly $2.5M between Marmol, Feldman, Torreyes and Clevenger plus salaries and a couple 2014 potential BP arms for a whole lotta nothing.

      • OCCubFan

        No, you’re double counting. The 800K for Torreyes is the right to spend money without penalties. It does not include the money itself. Therefore, all you gain is the avoidance of the tax on 800K. and possible penalties on next year’s spending on IFAs.

        • RoyB

          The “double counting” is because of the 100% penalty.
          Take an case of a team over spending and being potentially over their allotment plus the 5% by $2 million and facing penalties of $4 million. Adding an allotment of $800,000, now with the 5% amount officially makes them now $1,160,00 over and facing a penalty of $2,320,000. So the $800,000 allotment actually saved $1,680,000.
          You don’t want to forget the 5% too.

          • OCCubFan

            No. If you are $2 million over, a 100% penalty is $2 million.

        • Hansman1982

          Damn, flaw in my plan. This is the only reason I’m not a FO person right now.

    • jayrig5

      Maybe the Astros were shopping that pool space around to teams the Cubs were bidding against for Eloy or whoever, and that deal prevented another team from fitting him into the slot.

  • Ben (BG2383)

    The strategy makes me nervous but that is why Jedstein makes the big bucks and I don’t. I hope you have a nice holiday Brett.

  • brobots

    clap. clap. CLAP. CLAP. CLAP.

  • http://www.shadowsofwrigley.com TC

    Small note – don’t the Cubs get heavily taxed on overages? So if they go into the 100% tax range, the savings on the Marmol deal go down to $80k, since the $210k in pool space represents $210k in spending they wouldn’t get heavily taxed on

    • Hansman1982

      It also doubles the return on Torreyes and Feldman/Clevenger.

  • OCCubFan

    Thanks for the lucid explanation. One possible flaw is that it assumes that none or few of the many unknown 15-year-olds out there will not turn into phenoms over the next 12 months.

    • Ben

      Not necessarily a flaw. If that happens, and the Cubs are able to trade the space, teams may be more willing to deal a semi-legit prospect for a ton of space in order to sign the phenom. If there isn’t a good player to sign, teams won’t be willing to deal for cap space.

    • nkniacc13

      that’s what your belief in scouts are for

  • TonyP

    Wow, great write-up.

  • Coop

    In a way, the pool money might be viewed as double its face value, if they are blowing past the cap. Every dollar over is taxed at 100%, so every face value $1 over is actually $2. So in this context, Torreyes was traded for $1.6 million.

    • http://www.bleachernation.com Brett

      I could be wrong, but I don’t think so – because the Cubs still have to “spend” that $800K.

      (If pool were $4M, and they spend $6M, they then pay $2M in tax for total outlay of $8M. If pool were $4.8M, and they spend $6M, they then pay $1.2M in tax for total outlay of $7.2M. They saved $800K.)

      • baldtaxguy

        Yes, you are correct, forgot the slot is spend as well

      • Hansman1982

        Then that puts more of a weight on your SIGN ALL THE PLAYERS hypothesis.

    • baldtaxguy

      Yes, that was my initial thought. Its both the slot $$ and the tax on top.

      • baldtaxguy

        But I am wrong

  • Cheryl

    Brett, If you’re right and it all seems to fit, they’re one smart group. You really thought outside the box on this one, and so did they. Nice work.

  • Tommy

    Great article. Thanks for the insight and answering a lot of the questions I’ve had on the whole international trade thing.

  • X the Cubs Fan

    This is kind of exciting.

  • Abe Froman

    Why not sign as many of the top ten prospects as possible outbidding all? Does the overage tax get exponentially restrictive? Very astute theory Brett, if you’re right you have a lot of bragging rights coming your way.

    • Kyle

      One reason off the top of my head would be that the scouting of these guys is so scattershot and subjective that there’s probably a few of the top 10 that we just flat-out don’t like.

  • Grant

    Two other factors to consider:

    1) If you’re going to “SIGN ALL THE PLAYERS,” minimizing what your competition can spend is actually a worthwhile strategy. The more wedges the Cubs acquire, the fewer their competition will be allowed to use.

    2) If you show other teams that you’re planning on ignoring the spending limit, they may adjust their strategies accordingly to stop you. Perhaps part of the acquisition of wedges on Day 1 was to obfuscate the Cubs strategy?

  • fivetoolmike

    Mentioned this to Brett on Twitter, but the Rays did this last year and are incurring those restrictions this year. http://theprocessreport.wordpress.com/2013/02/11/badler-rays-first-team-to-face-new-international-signing-penalties/

  • Dustin S

    Various pieces of this topic were kicking around in my mind this morning, but this excellent article definitely helped clear the strategy up. It’s such an impressive set of moves by the front office.

    They have left themselves in a good position where they can really go either way now. They’re close enough to probably be able to pickup pool money to get below the big penalties if they want to (especially if a team that isn’t going to use them all is willing to give up slots on the cheap), or they can just go all-in.

  • Daniel

    Plus, and I think it’s pretty important, next year we will be trading our place in the pool of money, but not actual money. That will probably be a few million saved. Am I understanding correctly? Trading the ability to spend but not actual money trading hands.

  • Crockett

    This makes my week better.

  • nkniacc13

    So who else is there for the cubs to sign

  • Kyle

    If they do plan on accepting the restrictions, then that would seem to be a significant chunk of baseball budget that’s going back to the MLB team (unless it’s being swallowed up by lower revenue) in 2014.

    Between this and the Feldman return, that’d be two intriguing little data points pointing toward 2014 getting more resources toward competitiveness than 2013 did.

    • http://www.bleachernation.com Brett

      And the Cubs would have bonus pool dollars to trade for big league pieces, say, halfway through the season.

      • cubmig

        Soooooo….it is: “Damn the torpedoes! Full speed ahead!!!”

        Great article.

  • mudge

    Excellent work Mr. Taylor.

    • Internet Random

      +1

      Ace are smart.

  • X the Cubs Fan

    The Cubs have been linked to every top 5 prospect on Ben Badlers list on Baseball America and #23 Jen Ho Tseng

  • Starwin Bastro

    Also with the increased penalties and taxes next year, the bonus pool slots become that much more valuable to teams wanting to sign top prospects but avoid paying overage. Theo and Jed have always been big believers in game theory and this international spending strategy is a reflection of that. Predicting other teams moves and strategies for next two years and then determining what the best response is to other organizations moves

  • cubchymyst

    I’m not sure about is how much the FO knows about next years international class. I have a hard time believing that the FO can accurately predict next years international class when most people agree that we can not accuratly predict next years MLB draft of high school and college kids with longer track records.

    • BWA

      I suppose it doesn’t really matter. If they sign 2x as much talent this year plus trade pool space next year, then we have at least the same amount of talent in the system and it is all 1 year more mature and closer to contributing.

      • cubchymyst

        It is to soon to draw any conclusions about their strategy, but it is an obvious gamble because of how hard it is to predict talent that young. Next years class could be better then this year, and I don’t think there is a good way of knowing with players that young. I think this strategy is only worth it if the get more the 2 times then what would normally be expected. If this is the strategy hopefully the FO goes hog wild and signs a lot of these kids.

        • cubchymyst

          As an add on, if the FO sees this class as one of above average ability (I haven’t ever followed this closely so I have no clue if that is the case) then next year class could likely be worse. But I still stand by the fact the the FO needs to go all in and sign a lot of these guys to make this work.

    • JoeyCollins

      Exactly. Nobody can really predict the 16yo kids we’re signing now, these are lottery tickets in every sense of the phrase. If the FO thinks they have a feel for a good number of the kids this year, and isn’t too impressed with, or doesn’t know much about next years class, then spend the money now before the penalties go up. There’s a chance they miss out on some stud next year, but there’s also a chance they signed 3 or 4 this year.

  • JoeyCollins

    I’ve always been down for overspending this year if the FO thought the players were there to spend on, but i didn’t know they could still trade their slots next year. If I had realized this earlier I would have been hoping for over spending all along. I also thought the harsher restrictions for no draft were already in place, but if they don’t kick in until next year then this year was definitely the year to spend. If this is truly how this plays out and we get one or two of those 15 yo kids who turn 16 this month, or a couple other big signings, then all I can say is great job Theo, Jed, and the entire FO.

  • another JP

    Phil Rogers commented on the strategy this morning and you’ve certainly detailed the logic behind it. Seeing how the Cubs have allocated a fair amount of resources to the DR facility, it really plays perfectly to the talent available there and gives them an advantage most other teams don’t have. If we go on to sign Luis Encarnacion as has been suggested the Cubs would have signed 3 of the top 4 BA ranked Int’l prospects.

  • Bill

    Is it possible they were trying to set the market price(and trying to set it low) on trading players for IFI money? If their plan is to trade that money next year for prospects, it would make sense to set a data point now by trading Torreyes for “only” $800,000. Thereby possibly allowing them to get more bang for their buck next year.
    Not saying this is what they are gonna do, but if next year they can only spend $250,000 on a player, what if they spend $2 million or $4 million on one player? So what? What’s the penalty? What actually stops them from doing so? Maybe it’s worth the penalty. I have not read that part of the CBA. I don’t know, just throwing it out there.

    • JoeyCollins

      I had the same question on what the penalty would be next year, but my guess is that the MLB has to approve all of these signings and just wont allow anything over 250,000. Maybe not, but i can see that being the case.

    • Kyle

      MLB would reject the contract

  • Kevin

    If the Cubs believe next year’s batch of international players will be down, won’t other teams? Why is it guaranteed that the Cubs will be able to trade their pool space next year? I saw a comment above that the Rays took this strategy last year. I’d be curious to know what they’ve been able to do with their pool space that is available to them so far this year, have they been able to trade it for prospects?

  • DocPeterWimsey

    This seems to be a remarkably simple explanation for the seeming madness. (That’s a good thing from Occam’s Razor land.) It’s obviously a bit of a gamble by the Cubs, but it is improbable that nobody will want to acquire the pool limits that the Cubs will have to offer next year.

    Of course, we can bet that 12 months from now people will be gnashing their teeth over the 16-year old who would “guarantee” a WS for the Cubs as soon as 2015…..

  • Bilbo161

    I don’t think the Cubs strategy is necessarily to blow the IFA budget. They may well add more IFA space depending on what the market return for Garza gets up too. If the Cubs have two suitors with equivalent value in their deals they may well ask for IFA space to sweeten the pot and determine the winner.

  • http://Bleachernation Lou Brock

    Keep your eyes on Alberto Cabrera at AA for the next start to take Feldman’s place in the rotation. He is on the 40 man roster and has had 4 good starts in a row with 13 K’s in his last start on June 30th. He also has experience pitching at Wrigley.

    • MikeW

      This is who i was thinking might get that start.

      • college_of_coaches

        Same

  • tbone

    I hope you are right Brett as I think this is absolutely the best way to go for the Cubs. While these kids are unlikely to pan out at a high rate, it is still the way to go in my opinion. If you are going to invest heavily I would rather see it done on the prospect end. Overpaying for veteran players rarely works out (Dodgers, Angels, etc) unless there is also an infusion of young, farm developed talent to balance out a team. Maybe it’s a complacency thing. I think a surplus of expensive, highly regarded young players fosters a very competitive environment throughout all levels of an organization and gives young players a better environment to develop and prepare for the show psychologically as well as physically.

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