Trump's Credit Report Instead of His Taxes

Pool via Getty

Trump's Credit Report Instead of Tax Returns?

Feb, 22nd 2017

Instead of demanding that presidents produce their tax returns, maybe we need to be asking for their credit reports instead.

After all, it's not what a person has, or what a person earns, that creates a real conflict of interest.  It's what -- or who -- that person owes. Debt is the "quid" in the quid pro quo.

Certainly, payments can lead to obligations. That's why it was absolutely relevant (and I'd say, very troubling) that Hillary Clinton earned $225,000 for a single speech to Goldman Sachs in 2013.  Who pays that kind of money without expecting something in return?

But far more troubling, I'd argue, is the reverse scenario: Imagine if Mrs. Clinton owed Goldman Sachs a pile of money.  A person who's been paid by an entity might be compromised; a person who owes a debt almost certainly is.

There is no question that Donald Trump is a unique president due to his large personal wealth.  That brings with it pluses and minuses. Some might question how he can relate to the middle class. On the other hand, being independently wealthy, he didn't have to rely on traditional donors.  He's rich, so he doesn't owe anyone anything.

Well, that's not quite true. He doesn't owe favors to the usual cast of Washington D.C. characters.  But Donald Trump owes a lot of people a lot of money.

It's reasonable to assume that Trump may be ushering in a new era of politicians who use money in ways that are unfamiliar (and unavailable) to most of the electorate, so the topic of who he owes is important, both to evaluate his presidency and to evaluate future leaders who might have the same kind of balance sheet.

Many of Trump's supporters are among conservatives who have a particular distaste for debt -- be it personal or public.  It's not uncommon to hear from America's heartland that credit card debt is from the devil, and mortgage papers are a thing to be burned at the first available opportunity.  So, it might be a bit surprising that they've embraced Trump, who has said he is “the king of debt,” and in fact has run entities that have declared bankruptcy.

At Trump's level, however, borrowing money is often not called debt.  It goes by the warmer and fuzzier name: leverage.  As in: a rich person like Trump can use the value of one property to leverage that (and multiply it) to borrow money to buy another property. And so on.  That makes it possible to play monopoly in Manhattan and acquire or build properties worth billions of dollars while investing only a tiny fraction of the money. Or, none at all.

All this works fine when values are going up -- does this explanation ring a bell at all? -- but if values reverse direction, bad things happen.  That's precisely what happened to Donald Trump in 2008. He had borrowed $640 million from a syndicate headed by Deutsche Bank to build a huge condo project in Chicago on the old site of the Sun-Times building. The residences would ultimately become the second-tallest building in the windy city. But in 2008, amidst a global recession, Trump's condos weren't selling. So, when a $40 million payment to Deutsche Bank came due, he didn't pay it. Instead, he invoked a 'force majeure' clause -- saying an act of God, akin to a Hurricane, meant he shouldn't have to pay. In fact, he countersued Deutsche Bank, claiming it had helped create the 'hurricane' by encouraging the housing bubble. He asked a court for $3 billion.  The two settled out of court. 

That would be the end of it, but curiously, Deutsche Bank kept on lending to Donald Trump. That's curious because -- well, imagine what would happen if you refused to make a mortgage payment to your bank.

It's also curious because Deutsche Bank is...unusual on the world stage right now.  The lender has a fairly unprecedented rap sheet, one so bad that there was talk last year that the German government would have to bail it out, and its stock dropped towards zero. This isn't your typical screw-people-out-of-homes rap sheet, though there's plenty of that. (The bank recently agreed to pay a $7 billion fine for housing bubble misbehavior to the U.S.).  Atop that is a $258 million fine the bank paid in 2015 for helping Iran, Libya and Syria evade U.S. sanctions.  The bank paid $2.5 billion in 2015 to settle charges that it rigged interest rates on mortgages and student loans (aka, LIBOR scandal).

But those are small potatoes compared to the bank's latest scandal: Its Moscow office helped Russians launder $10 billion out of the country, using a technique called "mirror trading." You should read Ed Caesar's compressive coverage of this movie-plot scandal, but suffice to say that very important and very rich Russians used Deutsche to sneak money into places like the British Virgin Islands, and into dollars.

Donald Trump owes Deutsche Bank money. A lot of money.

How do I know this?  It's on his "credit report" -- or rather his 104-page financial disclosure form, released by the Federal Election Commission in 2016.  There are three Deutsche Bank loans listed there. Because the form only requires that ranges of values are listed, we don't know the precise debt.  (The FEC didn't design the form for highly-leveraged individuals).  But there's a mortgage against "Trump National Doral" incurred in 2011 for over $50 million. There's a second mortgage on the property, the same year, of between $5 million and $25 million.  Then there's a $25 million-$50 million loan from 2012 to Trump International Hotel and Tower in Chicago. Yes, the one I mentioned earlier.  There's a second loan on that property in the disclosure or over $50 million, with the creditor listed as "Chicago Unit Acquisition LLC."  That's a pricey loan with a rate of Prime + 5 percent (the other loan is prime rate minus .50%).  Trump is listed as a "member/president" of Chicago Unit Acquisition" on his disclosure form.

In total, the form says Trump owes at least $315 million to 10 different entities.  The Wall Street Journal says that, if companies in which Trump holds a less-than-100% interest are included, his firms’ total debt owed is closer to $1.5 billion.  Calculating the president's real personal risk on such loans is tricky, however -- it could approach zero, if the loans are structured properly.  Even trickier is understanding the complex web of companies used to cloak such transactions.  Trump is listed as having an interest in (generally being an executive in) some 515 business entities on his disclosure form, in a section that’s 11 pages full of baseball-box-score-sized type.  It may not be unusual for high-net-worth, or highly-leveraged, individuals, but what computer scientists might call “security by obscurity” over transparency.

But sticking to Trump's own paperwork, he said in 2015 he owed at least $80 million to Deutsche Bank. (Bloomberg has pegged the amount at $300 million). That’s interesting at a time when that bank is in the middle of Russian scandal.   And that bank is now in regulatory cross-hairs around the world.

Trump's own Department of Justice will almost certainly have to negotiate with the bank as it digs out of the various scandals, and his financial regulators will have to monitor it for compliance.  This is no small matter. At one point, last year, observers believed the U.S. Justice Department had enough evidence of wrongdoing against the bank that it could levy a fine so large it could deal a mortal blow. Initial reports of a $14 billion levy were reduced to half that in the waning days of the Obama administration, and, if you believe the firm's stock, Deutsche will survive.

In recent days, journalists have renewed their interest in the Deutsche Bank-Donald Trump connection. There is news that Deutsche Bank, acting out of an abundance of caution, has performed its own internal investigation into any potential dots that might connect Trump and Russia via the bank (and found nothing). That didn't stop the Guardian from writing "How Donald Trump became Deutsche Bank's biggest headache" five days ago.

What does it all mean?  At the moment, nothing.  First of all, note that it was the Obama administration that recently saved the bank $7 billion by settling charges on its way out the door.  But back to my original proposition.  There is no clear quid pro quo between the bank, Trump, and Russia.  In fact, it's just as easy to imagine the opposite: the bank's fragility gives Trump interesting bargaining power in any discussions with Germany's Angela Merkel, who might have to bail out her national bank after all.  Meanwhile, it’s not entirely clear who benefitted from the money laundering scheme (clearly, rich Russians). Vladimir Putin has been trying hard to keep Russian money in Russia, so it can be taxed.  Was he for or against it scheme?  There’s speculation that Putin’s friends and family benefitted, and certainly, it’s hard to imagine that crime went on so long without government’s tacit approval.  But many things in Russia are not what they seem.

Most convincing to me: Trump clearly has no qualms about refusing to pay a debt to Deutsche Bank. He's done it before. What would he get out of a back-room deal with Russia, or the bank, aside from friendly refinancing terms?  It's quite far-fetched to imagine he'd risk his Presidency over that.

As I’ve said on many occasions: Extraordinary claims require extraordinary evidence, and there’s nothing of the sort here.

This is why it's helpful to understand Trump's debts. Imagine if journalists discovered on their own that President Trump owed an enormous sum of money to a bank that has helped Iran evade sanctions and helped Russians launder money.  That would have the potential be a months-long scandal. Instead, we've known about these debts for months, so there's time to put them in context.

So, on this count, I find myself agreeing with President Trump.  I’d certainly like to see his income tax returns, but I'm not sure what they would show.  Prior candidate’s returns were used primarily for “he pays a lower tax rate than you” embarrassment.  It's easy for me to imagine that future candidates' returns wouldn't be interesting at all. After all, Warren Buffett's income is relatively tiny.  Instead, future candidates should be required to provide a detailed accounting of their debts, so the American public can really examine who might pull the strings of their future leader.  Such a disclosure would require a serious update to the FEC financial disclosure form, so that entities even partly owned (and indebted) by the candidate would be included. 

I’d hope President Trump, the first highly-leveraged president, would be the first to complete that form.

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