Will a President Trump Still Be the King of Debt?
The presumptive Republican nominee for president has spent the last several days scrambling to clarify his self-contradictory statements on everything from tax reform and the minimum wage to interest rates and the national debt.
“I am allowed to change,” Donald Trump told ABC’s George Stephanopoulos when queried about some of this flip-flopping.
Give Trump his due, though. However inconsistent he has been on matters economic, he has been on message about his policy credentials, repeatedly telling interviewers that his financial expertise derives from a singular reality: He’s the “king of debt.”
Speaking with CNN’s Wolf Blitzer last week, Trump said the U.S. shouldn’t bail out Puerto Rico, which is struggling to meet payments on about $70 billion in sovereign debt.
“Don’t forget, I’m the king of debt, I love debt,” he told Blitzer. But, Trump advised, Puerto Rico would be better off declaring bankruptcy than meeting its obligations.
“As a very successful person, I would buy companies, throw them into a chapter, bankrupt it, negotiate -- I would do great deals,” Trump said. “I know more about debt than practically anybody. I love debt. I also love reducing debt, and I know how to do it better than anybody.”
Let’s put aside a discussion of whether sovereign entities like Puerto Rico should have access to the financial and social benefits bankruptcy reorganizations provide (they don’t), and focus instead on Trump’s recollection of his own days as “the king of debt.” (Disclosure: Trump sued me in 2006 because I wrote a book, “TrumpNation,” that questioned the size of his fortune. The suit was later dismissed.)
First, Trump doesn’t have a long history of buying and selling companies, and then throwing “them into a chapter.” During the brief period when he did try to buy major companies -- about 30 years ago -- it ended badly.
In 1985, Trump bought out his Atlantic City partners to take control of a casino that became Trump’s Castle; a year later he took control of another Atlantic City casino, renaming it Trump Plaza. Trump larded both properties with debt, and by 1992, they were bankrupt.
In 1988, Trump borrowed heavily to pay $407.5 million for New York’s Plaza Hotel. Four years later, the hotel was forced into bankruptcy. In 1990, Trump opened yet another Atlantic City casino, the Taj Mahal, on the back of another mound of debt. That casino was bankrupt a year later. Trump also bought an airline at the time using lots of borrowed money and then watched it coast into oblivion.
During this spree, Trump personally guaranteed about $900 million of the $3.4 billion or so that he owed, even though he didn’t have $900 million (and despite warnings from his father never to personally guarantee any debt at all). That guarantee left him careering toward personal bankruptcy.
Second, Trump didn’t choose to reduce his debts, nor did he “know how to do it better than anybody.” Some of the country’s biggest banks at the time -- including those that later became JP Morgan and Citigroup -- forced Trump to forfeit large portions of his real estate and casino holdings.
How did Trump ultimately avoid personal bankruptcy? A former hotel executive and financial savant by the name of Stephen Bollenbach helped Trump realize that none of his creditors actually wanted to take permanent possession of his toys. Bollenbach’s insight was that creditors needed Trump on board to salvage his businesses. After all, what was a bank going to do with a casino or a yacht?
The Trump-Bollenbach strategy went something like this: Having gorged on debt and become too big to fail, use that leverage to escape some perilous corporate IOUs. It’s an approach that later helped Trump weather two more Atlantic City casino bankruptcies in 2004 and 2009, but also effectively left him forever out of the mix as a gambling mogul and major New York real estate developer.
If this seems like an unsettling strategy for, say, Puerto Rico, Trump’s recently articulated theories about how best to manage the U.S.’s $19 trillion national debt border on the alarming.
Trump’s been alternately dovish and hawkish on interest rate policy. But last week, he told CNBC that he was against a rate hike because it would undermine the U.S.’s ability to make its debt payments.
“It’s a real dilemma, and we have to be very, very careful,” Trump advised. But he was confident he could steer the nation in the right direction: “I am the king of debt. I do love debt. I love debt. I love playing with it.”
Pressed for more detail, Trump offered some additional personal history.
“I’ve borrowed knowing that you can pay back with discounts. And I've done very well with debt,” Trump said. “Now of course I was swashbuckling, and it did well for me, and it was good for me, and all that. And you know, debt was sort of always interesting to me.”
Super interesting. Trump acknowledged that avoiding his own loan and bond payments wasn’t the same as managing $19 trillion of debt as the country’s chief executive.
“Now, we are in a different situation with a country, but I would borrow knowing that if the economy crashed, you could make a deal,” he said. “And if the economy was good, it was good, so therefore you can’t lose. It’s like, you know, you make a deal before you go into a poker game.”
Poker night at the Treasury Department?
“I don’t want to renegotiate the bonds, but I think you can do discounting. I think, depending on where interest rates are, I think you can buy back,” Trump said. “You can buy back at discounts.”
Although the U.S. has never defaulted on its debts (and because of that the country can sell its bonds cheaply and ubiquitously when it needs to raise money -- unlike, say, Puerto Rico), Trump seemed to suggest that he would still put the reputation and credit of the U.S. at risk by telling global bond investors that he plans to cut our national debt by giving them trillion-dollar haircuts.
Trump’s approach didn’t win many backers from the bond market. As one strategist told Bloomberg News, the possibility of Trump telling America’s creditors that he’d pay them far less than what they’re owed was “stupid,” “ridiculous,” “ludicrous” and “never going to happen.”
On Monday, the king of debt said he never meant to suggest that his White House would consider defaulting on the national debt. The only thing he said he was recommending was that we find a way to refinance the national debt at lower rates. He told CNN’s Chris Cuomo that anybody interpreting his statements to mean that he might play hide-and-go-seek with the national debt was “crazy.”
Then, to calm everyone down, Trump proceeded to say something that was, well, a little bit crazy.
“This is the United States government,” he advised Cuomo. "First of all, you never have to default because you print the money, I hate to tell you, OK?”
Lots of countries have spent generations trying to get past the Weimar Germany model of printing wheelbarrows full of cash to meet debt payments for the simple reason that it’s massively inflationary -- and massive inflation is bad for the economy.
Perhaps more importantly, it violates Step 10 (“Contain the Costs”) of an 11-step formula for business success as outlined in the one document to which Trump has shown remarkable loyalty: his 1987 bestseller “The Art of the Deal.”
“I learned from my father that every penny counts, because before too long your pennies turn into dollars,” Trump wrote. “The point is that you can dream great dreams, but they’ll never amount to much if you can’t turn them into reality at a reasonable cost.”
Of course, Trump wrote the book before a wave of bankruptcies washed over him, so maybe his thinking has evolved.
But as the presidential campaign grinds along, remember that whenever Donald Trump says that he’s the king of debt, it may just mean that the emperor has no clothes.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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