Sale of the Century: The Yankees Bought Babe Ruth for Nothing

 

On January 5, 1920, the New York Yankees announced that they had purchased the contract of Babe Ruth from the Boston Red Sox. The next morning’s New York Times erroneously reported the sale price as $125,000. The actual purchase price was $100,000, payable in four annual installments of $25,000 at 6 percent interest. New York had made the first payment on December 19, 1919. Including interest, the Yankees paid $108,375 for Babe Ruth. Or so it appeared.

Any serious baseball fan would agree that the Yankees got the best of that bargain. Indeed, as research has shown, New York earned an astounding financial return on Ruth.1 When The Babe left Boston for the Bronx, he already was a two-time American League home-run champion. Ruth bashed a major-league-record 29 homers in 1919, a mark he would eventually shatter.

Not surprisingly, Red Sox fans have cursed Harry Frazee’s name for a century over that sale. But what if they knew all the details surrounding this transaction? Details that reveal just how sweet the deal really was for New York. It turns out that Harry Frazee, a theatrical agent and producer, actually paid Yankees co-owner Jacob Ruppert to take Ruth off his hands.

Two parts of the deal led to this unfortunate (for Red Sox fans) outcome. The first one involved the three-year contract at $10,000 per season that Ruth had signed before the 1919 season. The second involved a loan. Both issues were known at the time, though the specifics were not. And as they say, the devil is in those details.

Even before the sale took place, Ruth had been making noise about wanting to renegotiate his contract. When the sale was announced, Ruth renewed his demands for a new deal and also called for a share of the sale price. While he did not get the latter, he did get the former. Anticipating just such a demand from Ruth, the Yankees had made provisions with the Red Sox to cover a salary increase.

Fearing their new ballplayer might threaten to hold out, the Yanks negotiated to have the Sox pay half of any salary increase or bonus that New York offered to Ruth for the duration of the deal, up to $5,000 per year. Indeed, the Yankees agreed to raise Ruth’s compensation to $20,000 per year for the remaining two years. Because of this agreement, the Yankees actually paid Ruth only $15,000 per year through 1921, with the Red Sox reimbursing the Yankees for $5,000 each of the two years. Technically, the Yankees structured Ruth’s new salary as the same $10,000 base salary, with another $10,000 in bonuses each year.

Considering this salary-sharing agreement, the Red Sox, in effect, returned $10,000 of the purchase price for Ruth to the Yankees, who in turn passed it on to Ruth in the form of higher compensation. Since it was the Yankees, and not the Red Sox, who negotiated this new contract with Ruth, the Yankees had to pay for it. Savvy negotiating by Ruppert got the Red Sox to chip in, effectively reducing the purchase price for Ruth from a total (with interest) of $108,375 to $98,375. But that was only small change compared to the impact of the loan.

When news of the sale first broke, there were reports that the deal was more complicated than the simple cash transaction announced by Colonel Ruppert.2 Rumors began to crop up about a second part to the deal: a loan from the Yankees to Frazee in an amount ranging between $300,000 and $400,000. In this case, the rumors proved to be true. On May 25, 1920, Ruppert made a personal loan to Frazee for $300,000, with Fenway Park as collateral. Because Frazee owned the Red Sox and Ruppert owned half of the Yankees, and the collateral for the loan was Fenway Park, it was very much a part of the Ruth transaction.

The original terms of that loan called for Ruppert to lend the funds at 7 percent per year, with interest to be paid semiannually for five years. At the end of that time, Frazee would repay the $300,000 or forfeit the rights to the Fenway Park mortgage, allowing Ruppert to dispose of the park as he saw fit.3

The loan was not repaid in five years. And Jacob Ruppert did not sell the mortgage. In fact, he held the mortgage to Fenway Park for 13 years.4 The loan was finally retired on July 29, 1933, by Thomas Yawkey, who had purchased the Red Sox earlier that year from Robert Quinn, who had bought the team from Frazee 10 years before that. Through the last three years of the Frazee ownership, the entirety of the Quinn ownership, and the first few months of the Yawkey era, Fenway Park belonged to Jacob Ruppert. And twice each year during that time, Jacob Ruppert cashed checks for $10,500. Beginning in May of 1925, Ruppert had the option of continuing to cash the checks, or auctioning Fenway Park to the highest bidder. As history shows, he elected to keep the income stream.

Actually, Harry Frazee never owned Fenway Park. Instead, the ballpark was owned by the Fenway Realty Trust, established in September of 1911, when then-Red Sox owner General Charles Taylor transferred the land that would become the site of Fenway Park to the trust and capitalized it with 1,000 shares at $300 each. Taylor and his son, John I. Taylor, owned most of the shares, and arranged for a lease of $30,000 per year between the Red Sox and Fenway Park.5

On May 24, 1920, owners of all 1,000 shares of Fenway Realty Trust stock voted and agreed unanimously to approve a $300,000 mortgage that, if foreclosed, would allow for the holder of that mortgage (Ruppert) to sell it. The trustees then turned over all 1,000 shares to the Jacob Ruppert Corporation, wholly owned by Jacob Ruppert, as collateral on the loan.6 The Trust retained the rental income from the Red Sox, along with the responsibility of paying the property taxes and insurance. Ruppert earned $21,000 per year in interest while holding a mortgage on a very valuable asset – making the loan a solid investment.

To better understand the circumstances surrounding the loan, we need to return to October 1916, when Harry Frazee purchased the Red Sox from Joseph Lannin for $662,000. The price included Lannin’s half of the shares in the Fenway Realty Trust. The Taylors held the other half of the shares. The deal involved a note for $262,000 from Frazee to Lannin, with shares in the Fenway Realty Trust held by Lannin as collateral. As a result, Frazee owned the Red Sox, but not Fenway Park, though he would own half of the ballpark when he retired the note.7

Three years later, Harry Frazee was strapped for cash. He was simultaneously trying to pay off his note to Lannin, buy out the Taylor interest in Fenway Park, and purchase the Harris Theater on Broadway. Frazee had valuable assets. While he was not necessarily broke, he certainly didn’t have enough cash on hand to buy the additional assets he wanted. Thus, the necessity for the loan that was negotiated with Jacob Ruppert in December of 1919 at the same time that the deal for Ruth was finalized.

On May 3, 1920, Frazee retired the note he owed Lannin, securing his share of Fenway Realty Trust stock. That same day, he purchased Taylor’s shares of the Trust after nine months of negotiations. He now controlled all of the stock free and clear of any encumbrances and promptly gave up the control as collateral on the loan from Ruppert, which was finalized on May 25.8

If the loan had been paid off on the original date five years after the loan, the total interest paid would have been $105,420. In addition to the $10,000 that the Red Sox had agreed to pay the Yankees to help cover Ruth’s salary, the total amount of money flowing from Frazee to Ruppert and the Yankees as a result of the Ruth deal was $115,420, or $7,045 more than the Yankees sent to Frazee for Ruth. But the Red Sox weren’t done paying yet.

As noted earlier, the loan was not repaid until July of 1933. While the mortgage record does not show how much Yawkey paid to retire the debt, if he paid the entire $300,000, then Ruppert would have received a total of $276,920 in interest payments over the 13-year period of the loan. One reason he may have been willing to hold the mortgage for 13 years was that the 7 percent interest he was receiving was better than he could have earned anywhere else on a similarly risky asset. And, of course, the terms could have been renegotiated to raise the interest rate. There would have been no reason for Ruppert to negotiate a lower interest rate because he controlled the fate of the ballpark as of May 25, 1925, when the original five-year loan was not repaid. It really does not matter why Ruppert held the mortgage for so long. Doing so was a personal financial decision. And the point here is that five years after purchasing Ruth, Frazee had paid more to Ruppert and the Yankees in the Babe Ruth deal than he received. By the time the deal finally closed, Ruppert had actually received nearly three times as much from the owners of the Red Sox as he paid for Ruth, making it the sale of the century, or, as some saw it, the steal of the century.