Free Agent list looks thin.
I would bring back Andy for 1 more year as you cannot have too much pitching and one year contracts do not hurt the Yankees.
I would pursue a trade with Houston with our young spare parts for Super Two Arbitration eligible Hunter Pence. He has some pop and appears to be a good fielder with a great arm.
The Astros have holes and age everywhere and their farm system is not great at the moment. We can offer them a selection of players from a list that includes Cervelli (C), Romine (C), Laird (3b), Pena (SS/UT), Shelley Duncan (RF/1b), Juan Miranda (1b), Ian Kennedy (SP), Brian Bruney (RP), Kei Igawa (SP), Ivan Nova (SP), Jonathan Albaladejo (RP), Edwar Ramirez (RP) or even Chad Gaudin (SP). Stats for these prospects.
Most of these are spare parts or bench players. I know Kei is not worth much, nor Duncan but like many of the others are major league ready in theory. I would only give up one of Cervelli, Romine, Pena or Kennedy.
Assuming we do not pull off a trade, I would offer Matsui and Damon one year deals and take back only one of them. I am leaning toward Matsui but Damon plays the field. Both put up really good numbers. My hopes would be that Matsui could play 30 games in left and 80 as DH and give us a great bat of the bench for 50 games. This still lets Posada drop to 100 games at catcher and 55 as DH and leaves 25 games for A-Rod as DH. Basically once a week. Assuming Cervelli is not traded I would let Molina walk but offer him a really good minor league deal to be a play coach at whatever level Montero is at. He is the big power hitting catcher prospect that could use all the instruction Molina could give him. I would have Pena be one of our utility men. He plays 2b,ss,3b & OF. I would consider bringing Hairston back but I am not worried about it.
For the starters this gives us CC Sabathia, AJ Burnett, Andy Pettitte and then Joba, Phil Hughes, Wang, Gaudin & Kennedy competing for two spots. Ideally Wang and either Hughes or Joba would win the spot and the other would be in the bullpen. Gaudin would be our long guy and Kennedy would return to Scranton for seasoning.
Rivera, Joba or Hughes, Robertson, Marte, Phil Coke, Gaudin would be the bullpen with one spot open for a large number of people.
So I see no reason to pursue Jason Bay, John Lackey or Matt Holliday. They will all get big contracts and are not really great fits. Keep in mind that Austin Jackson could be on the team and starting in Center by June. We could use a right fielder, a left fielder is useless except on a one year contract. Ideally either by trade or Jackson pushing Melky to Right, Swisher takes over left. The infield of course is set and set for several years.