Tuesday, June 14, 2016

Trump Not Pro-Business, Just Pro-Trump

The New York Times ran the article How Donald Trump Bankrupted His Atlantic City Casinos, but Still Earned Millions last weekend. It's an interesting piece that provides a look at Donald Trump's east coast casino experience.  The article is, as one might expect, critical of his dealings and notes that Trump made money even when his ventures when bankrupt.  

Though I will not defend any of Trump's dealings, there are few issues raised that I think are worthy of a some discussion and clarification.1  The post that follows suggests how to consider Trump's business history and place that history in a political context.

The Times article states: 

[E]ven as his companies did poorly, Mr. Trump did well. He put up little of his own money, shifted personal debts to the casinos and collected millions of dollars in salary, bonuses and other payments. The burden of his failures fell on investors and others who had bet on his business acumen.

I am not sure what it means to say he "shifted personal debts to the casinos," but that seems like it could be improper. We'd have to know what it means to "shift" personal debt into the entity. As described, that would seem to be a breach of fiduciary duty by using the company assets for personal gain.  The article says that Trump's company, in 1993, "sold more junk bonds, adding another $100 million in debt to the Trump Plaza casino. More than half of the new money went to pay off Mr. Trump’s unrelated personal loans." 

I am not sure what that means, but that does sound bad.  The fact that there were no repercussions, though, suggests it was not actually paying off personal debts with company money.   I mean, we all know you can't do that. Right? 

Maybe Trump had personal debts that the board decided to adopt  to induce him to be their CEO, taking on the loans as a bonus or other compensation.  Absent some form of self-dealing, it's entirely right to say that the cost of his "failures fell on investors and others who had bet on his business acumen."  They made the bet, and lost.  The reporting sure makes it sound like self-dealing, but I have to think there must be more to it, as I can't imagine the bondholders and shareholders would have missed this. (That said, the New York Times reports that bankruptcy lawyers a missed 2004 Trump transaction that University of Pennsylvania Law School Professor David Skeel said "sound[ed] like a fraudulent conveyance.” Maybe I am wrong.)

Later, the article returns to the idea of Trump "shifting" risk of loss.  The piece notes:

After narrowly escaping financial ruin in the early 1990s by delaying payments on his debts, Mr. Trump avoided a second potential crisis by taking his casinos public and shifting the risk to stockholders.

This use of the term "shifting" here is more problematic to me, even if it is still technically (or colloquially) accurate. My problem with it is that it suggests that Trump somehow made the shift on his own. Unlike the first example, where it may be true that he and/or his board did that, in this case stockholders directly accepted the risk2 of buying stock in a IPO of a debt-ridden entity that had recently delayed loan payments. Trump made an offer, and the investors accepted.  Trump raised $130.5 million, selling 10-million shares at $14 per share (the underwriter's fee is the difference in money earned versus raised).  

In the above instances, some or all of what Trump is accused of doing was likely legal (and to the extent it wasn't, that hasn't been shown, though it should have been if it were.) Legality does not mean that many potential voters don't like it, though. People should analyze Trump as they wish, but from a business perspective, it's not just the legality of his dealings that should be weighed in the analysis.

And it's not just that these are regular "business dealings," either. I fear that a more general anti-business rhetoric might skew the proper analysis of Trump's record, making it look like his dealings are "business as usual." They are not, but recent reports suggest that politically, some folks see this the same business-in-politics argument.

Last week, The Hill published an article stating: Democrats bring out the Romney playbook against Trump. The article explains, "Democrats are preparing to use Donald Trump's business career against him in the general election, following the playbook used against Mitt Romney in 2012." Maybe, but I'd suggest the playbook is (or should be) a little different.3  That is, the Obama campaign was able to get some traction with some voters with their criticism of Romney's work with Bain Capital. (Side note: I don't actually think this is what cost Romney the election in any real sense.  I think Romney ran a worse campaign, was a worse communicator, and got "out charisma'd."  That and the 47% thing.) 

I'm no Romney apologist, but I do think that the criticism of Trump should be different than Romney.  The 2012 playbook painted Romney as an investor who looked to break apart companies for the benefit of investors, to the detriment of employees and communities.  As one report stated

[President Obama's] campaign has for months argued that Romney [sic] actions at Bain showed a cold-blooded disregard for American workers, either by outsourcing jobs as companies were being restructured or simply selling off failing investments.

"If you're head of a large equity firm or hedge fund, your job is to make money. It's not to create jobs. It's not even to create successful businesses. It's to make sure you're maximizing returns for your investor," President Obama said during an interview with CBS in July, seeking to create a divide between Romney's private success and his potential to manage public economic policy.

Romney faced similar criticism during the Republican primary debates, when Texas Gov. Rick Perry accused Bain of engaging in "vulture capitalism."

 The Obama 2012 playbook conceded it was Romney's job to try to maximize returns for his investors. Some voters may not like that way of doing business, but at least it is doing for your investors what you set out to do (and what you said you would do).  

Note that the critique of Trump is not that the has ruthlessly made his investors wealthy, and himself along the way. Rather, Trump seems to have made a lot of money at the expense of his investors.  Despite filing for bankruptcy of the Taj Mahal, Plaza, and Castle casinos, Trump says of that era: “Early on, I took a lot of money out of the casinos with the financings and the things we do. Atlantic City was a very good cash cow for me for a long time.”

The business critique of Romney in 2012 was a debate about kind of  business Romney was in and whether that was something that made him trustworthy and ready to run the country. Obviously, the intent was to have voters use Romney's way of doing business as a proxy for how he viewed the country and what the country needed.  This is reasonable, of  course, and it goes to basic political philosophy.  

Trump's business dealings, though, tell a different story.  They don't show a record of growth or of wealthy investors doing well in some investments. Trump is not running on his record of analyzing markets, assessing risks, and making more returns than losses.  Trump is asking voters to buy the same argument he made to investors for that 1995 IPO for Trump Plaza.  As the New Times reported

In marketing the deal, the underwriters had emphasized what they viewed as the magic of the Trump name in drawing casino patrons, and emphasized that the name could be invaluable in starting casinos in areas newly opened to gambling. 

In this sense, Trump is not running on ideology or philosophy or business model.  He is saying, again, "Trust Me. The Trump name is magic."  And although he has never served as a politician, that argument has a track record.  And it isn't a good one.  


1 Speaking personally (and not for the blog or anyone else), I want to be clear that regardless of how one analyzes the economic arguments, I believe that Mr. Trump's positions and statements on race, nationality, gender, and religion make him unfit to represent this great nation.

2 I concede that in both cases stockholders took the risk, but I think there is a notable difference between risk linked to the underlying financials of an entity and the risk that you invested with a person or persons of questionable morals who take your wealth for themselves.  That is, in the former case, the risk of a bad investment choice is one we all take when we invest, and there's not a lot that should be done about that. In that latter case, where self-dealing appears it could be part of the problem, it may well be proper for courts and/or regulators to step in to help.  

3 In fairness, some of the pro-Clinton forces are framing this differently, but this news analysis suggests the Romney and Trump playbooks are the same.  Despite saying it is the same playbook, the Hill article quotes Justin Barasky, communications director for the super-PAC Priorities USA as saying, “Trump University, more than anything else, proves that Donald Trump is a con man who profited off of other people’s misery. . . .One of the way he runs his business is willfully and personally taking advantage of people who are down on their luck.”


Behavioral Economics, Corporate Governance, Corporations, Current Affairs, Joshua P. Fershee, Securities Regulation | Permalink


Isn't Trump's argument that he's a savvy businessperson? In some respects, his business failures would strengthen his argument. It would go something like this, "even when the market turned against my businesses, I'm so savvy that I still made money. I'm so smart that I was able to get rich even when others lost their shirts on the same underlying deal."

Posted by: Matthew Bruckner | Jun 14, 2016 6:59:50 AM

I think you raise a good point, Josh, at the outset of your post: that any savvy Trump may have is directed to feathering his own nest. That strategy--looking out for yourself and enhancing your own financial and reputational capital at the expense of others who are "on your team"--would be a problematic trait in a leader of any kind. Thanks for sharing.

Posted by: joanheminway | Jun 14, 2016 1:15:34 PM

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