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Donald Trump Speaks the Truth

posted by Adam Levitin

I never thought I'd write this, but Donald Trump speaks the truth, at least as far as bankruptcy is concerned. 

There's plenty to criticize regarding Donald Trump, but I really wish the media would back off the bankruptcy angle of his career, or at least be smarter about it.  

Let's start with the facts. Donald Trump has never filed for personal bankruptcy. But companies that he owns have filed for Chapter 11 four times. The mere fact of these filings is somehow imputed to be a personal failing of Donald Trump. I have never heard anyone suggest that the filings were because of Trump's bad management. Perhaps they were, but a bankruptcy filing is not in-and-of-itself a sign of any sort of moral failing, lack of business acumen, etc. Sometimes businesses go bankrupt because they're poorly run, and sometimes because of factors beyond their control. The Donald wasn't filing for bankruptcy like 50 Cent to attempt to avoid paying an intentional tort judgment. And indeed, how, much, if at all, was Trump involved in the management of the companies? I wouldn't be shocked if he was basically licensing his name.

In any event, Trump's response about his companies' bankruptcy filings is "what's the big deal? I took advantage of the law. So do lots of people." (My paraphrase.)

You know what? He's right. Bankruptcy is a background term to every contract.  It's an embedded option.  Lenders price for it.  This is old news to bankruptcy scholars, even if it still shocks some people. (Sanctity of contract, they wail, forgetting that contracts are written against the backdrop of bankruptcy!) Trump had every right to file his companies for bankruptcy, and no one should weep for his lenders having lost money.  They were sophisticated parties ("sharks" he called them, but that's a bit harsh, I'd just say "consenting adults"), who presumably priced for Trump's bankruptcy risk and had diversified portfolios. Frankly, Trump would be a fool if he hadn't filed for bankruptcy. 

What ticks me off about the media questioning is that it suggests that Trump's move of "taking advantage of the Chapters" (spoken like an old bankruptcy hand...) imputs some sort of moral turpitude, while an entire business model—private equity—that is often touted as a pinnacle of American ingenuity (see Mitt Romney) is built on the idea of "heads I win, tails bankruptcy". That's the story of the leveraged buyout. Is that gamble really any different from Trump's? Leveraged gambling seems to be the story of America.  

It's frankly quite refreshing to hear the Donald's honesty about bankruptcy. Makes me wonder if President Trump would have supported cramdown in 2009...


OK, but did you also get that he was basically proposing that the US deal with its national debt in the same way a corporation with more liabilities than assets would deal with its debt? That would implode the entire world financial system, resulting in mass cannibalism.

The delicious irony here is that the last Republican nominee made his fortune using LBOs which often used bankruptcy filings as a key profit strategy. No hand-wringing then from Fox News.

The question of how a sovereign nation deals with its deficit spending should now be up to speed; there are almost a decade of articles on the subject. Speaking of a sovereign government's debt as though it were tied to the rules of cost accounting is totally erroneous. Randall Wray does a great job of debriefing on the subject:
http://www.levyinstitute.org/pubs/wp_778.pdf. Government debt is the private sector's savings-reductions in the public sector's spending results in reductions in the private sector's savings. Except that the private sector will then borrow more via credit cards, loans, new mortgages, and drawing down savings accounts.

I'm not sure that Adam has his facts straight, although I agree with his theory.

IIRC, Trump sold the bonds to retail--knowledgeable investors wouldn't touch them. That may be legal, if he did his SEC disclosures correctly. But it's still pretty shark-like.

Let me be clear: I'm not defending Trump. But I do find it strange that he's being savaged for the same business behavior that was praised with Mitt Romney.

Ebenezer: I'd be curious in hearing more. There aren't a lot of retail bond investors around any more. In any case, who was placing the bonds? I assume it wasn't Trump, but some i-bank.

Except that trumps bankruptcies involved tens of millions that were taken out in excessive compensation. And terrible management of the casinos. And frankly they put the lie to the idea that he's such a brilliant businessman. Oh - and he got out of two of them by giving guarantees backed by his trust fund.

What Bob and Ray said. Yes, the media are hyperventilating over nothing, or at least over the wrong things. That's about as shocking as when Captain Renault discovered there was gambling going on at Rick's. The media, after all, aren't there to deliver news to an audience; they're there to deliver an audience to the advertisers. Within their personnel and mission constraints, they probably aren't even capable of serving up the real issues, such as that Trump was born on third base and pretends he hit a triple, that he has a history of over-extending projects with other people's money and then skating, or that he has a profound ignorance of sovereign finance that outstrips even Merkel's.

To me, the newsworthy part of the Trump bankruptcies has nothing to do with morality, and everything to do with his boasts about his impeccable management skills. To wit: how do you go bankrupt running the one business in the world where the house is guaranteed a high winning percentage as a definition of the business model?

Is there any evidence of business skill? It seems like he did one thing, make leveraged bets on real estate. Has he actually beaten that market? I think the answer is "no," but he goes to such lengths to conceal his true activities. There was a book about it in the 90s, I think, the jist of which was that he's been inflating his net worth since the 70s, and doesn't actually own what he claims to when capital structure is taken into account.

Even though bankruptcy has become a part of modern finance, it still carries a stigma among individuals that somehow someone is getting a free ride and not honoring their obligations.

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