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The Art Of The Inside Deal: How Regulators Rescued Trump

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The Art Of The Inside Deal: How Regulators Rescued Trump

U.S. Republican presidential candidate Donald Trump reacts as he is introduced during a campaign event in Concord, North Carolina March 7, 2016. REUTERS/Chris Keane

Published with permission from The Washington Spectator

Americans wouldn’t be imagining today what a Trump presidency might be like were it not for a crucial moment more than 25 years ago when government saved Donald Trump from his own profligate spending. In fact, it was one carefully calculated response by one of his attorneys that saved Trump from financial collapse—just two years after Trump had proposed himself as a vice-presidential running mate for George H. W. Bush.

That moment, when New Jersey’s Casino Control Commission decided that Trump was too big to fail, was rich with lessons not just about Trump, but about how government can favor some people over others—and about how lots of journalists, then and now, don’t understand Trump.

From 1985 until 1990 Trump was awash in greenbacks. Over those four and a half years profits at his enterprises flowed into his pockets at the rate of $10,000 an hour in cash, around the clock.

At the time, Trump told me and everybody else that he was worth $3 billion. It was a dubious claim for a simple reason. If he was that rich, why was he unable to pay his bills as they came due?

In February 1990 Trump quit paying many of his personal bills. Reporting then for the Philadelphia Inquirer, I got his personal financial statement, which showed that he expected his income to fall to $748,000 in 1992 and to $296,000 the year after. That’s a lot of money to most people, but not to a “billionaire” with a personal 727 jet to maintain.

In April casino regulators made public a document showing Trump was down to his last $1.6 million.

Payments on more than a billion dollars of bonds on his three Atlantic City casinos came due every 90 days, but as the next payments loomed Trump lacked the money to make them.

About 100 vendors at the newly opened Trump Taj Mahal casino had not been paid. Many contractors took legal action to protect their interests. And the Trump Shuttle, equipped with what Trump said were gold sinks, was down to $1 million cash, not enough to pay employees and keep the fleet of Boeing 727s fueled, or to pay for constant repairs, since almost all the planes were more than 20 years old.

As April ended, I broke the story that Trump’s own personal financial statement showed he was worth far less than he claimed.

All this and more forced the New Jersey Division of Gaming Enforcement (DGE) to do something it had failed to do for years—examine Trump’s finances, to see if he met a critical legal requirement to own a casino, namely that he was financially stable.

The basic standard was simple: the ability to pay bills as they came due. If you had to roll over old debt into new, that was fine with casino regulators, so long as you did not miss payments. The law put the onus on Trump to establish his financial stability by “clear and convincing evidence.”

As the DGE moved in, Trump’s bankers had an accounting firm go over his finances. I summarized their report showing he had a negative net worth of $295 million this way: You may well be worth more than Donald Trump. That story ran above the masthead of the Inquirer’s front page with the headline “Bankers Say Trump May Be Worth Less than Zero.”

The morning that story ran was the critical moment for Trump. Near Trenton, the Casino Control Commission listened to testimony about whether Trump was financially stable. If it ruled he was not, his casino license would be rescinded.

The case that Trump should keep his licenses was made not so much by Trump’s own lawyers as by state employees at the DGE, who asked questions shaped to gloss over the growing gap between the revenue Trump was taking in and the bills he had coming due. It was a curious proceeding, as the DGE was supposed to investigate casino owners, workers, and the games themselves to ensure integrity and financial stability, not defend the owners.

A report by the Kenneth Leventhal accounting firm showed that Trump’s financial situation was deteriorating rapidly. Instead of ending the year with $24 million in cash, the accountants’ revised estimate showed he would run dry before the year’s end.

DGE’s own 111-page report noted that of the $3.2 billion Trump owed (not owned, but owed) he had personally guaranteed $833.5 million. Absent an agreement by all creditors, Trump faced an uncontrolled domino-effect chain of bankruptcies in which if one creditor moved against one Trump property the others would follow.

More than 1,000 lawyers working for Trump and his creditors (who already billed almost $11 million) had worked out a “fragile” deal to keep Trump going, hoping to minimize losses on the loans they had extended without checking his finances carefully.

The deal required approval by at least four of the five Casino Control Commission members. After two commissioners asked skeptical questions, Trump attorney Nick Ribis called for a break.

The dozen reporters in the front row stood up, a few looking bewildered. “They’re rehearsing the answer to the next question,” I advised my colleagues. “When they come back, they’ll have the witness say Trump will be torn apart by the bankers unless the commission votes immediate approval of his deal with them.”

Minutes later, Thomas Cerabino, a Trump lawyer at the center of the private bankruptcy negotiations, took the stand. The next question came not from Trump’s lawyers, but from DGE’s Thomas Auriemma.

What would happen, Auriemma asked, if the commission delayed approving the deal?

Unless the commission acted immediately, Cerabino testified in slow deliberate words, “the banks will move apart and take whatever steps they think are appropriate to protect their interests.”

With that warning from one of his lawyers, Trump avoided the B word, but it was made clear to commissioners that an uncontrolled bankruptcy was one day away. Only two other reporters wrote stories explaining what Cerabino had said—how he managed to convey, without saying it directly, that Trump was on the verge of ruin. That’s because most reporters merely quote people accurately, often with little understanding of the issues.

Before the hearings resumed the next day, several reporters rushed up to me, one clutching my big front-page headline, asking when I would retract my story. They said that Ribis, Trump’s casino lawyer, had just told them my story was wrong. I marched over to Ribis, asked a series of short questions whose answers established that my story was correct, and got him to confirm to my peers that no retraction of even correction would be requested.

When the commissioners entered the room they faced a choice. They could approve the “fragile deal” with the banks or go with the evidence showing that Trump was financially unstable and rescind his license.

That’s when four of the five political appointees used their power to take Trump’s side. The commission told the bankers they were free to foreclose on Trump. However, while they would be in possession of three large seaside hotels, there would be no gambling because the banks lacked casino licenses.

The commission’s action was extraordinary because state law provided for such a circumstance, allowing the commission to seize financially unstable casinos and keep them going with the existing staff until a new buyer could be found. Instead, the state of New Jersey took sides, favoring Trump over the interests of his bankers and the people who had put their money in those banks.

Four months later, as Christmas 1990 approached, Trump was again running out of cash. “Donald will need $180 million more from the banks to make it,” a source intimately familiar with the details of Trump’s finances told me back then.

It was the beginning of Trump having to relinquish his stakes in a host of enterprises—and by 1991 the Trump Taj Mahal was in Chapter 11 bankruptcy, the first of what would become four business bankruptcies. He later sold stock in his casinos, where investors not only lost their shirts, but during the fourth bankruptcy case creditors successfully demanded that Trump get lost. These days Trump licenses his name for much of his revenue.

Today Trump shrugs off the four bankruptcies, saying it’s a standard business tactic to restructure debt. But back in 1990 he was as afraid of that word as he is today of taking another tough question from Hugh Hewitt or Megyn Kelly. And but for government saving Trump by taking his side against his bankers, his business would have been tied up in years of litigation and we almost certainly would not be imagining the prospect of Donald Trump living at 1600 Pennsylvania Avenue. Because Trump would have been sunk beneath a sea of red ink.

David Cay Johnston is a Pulitzer Prize-winning investigative reporter. His most recent book is an anthology, Divided: The Perils of Our Growing Inequality.

Photo: U.S. Republican presidential candidate Donald Trump reacts as he is introduced during a campaign event in Concord, North Carolina March 7, 2016. REUTERS/Chris Keane

David Cay Johnston

David Cay Johnston won a 2001 Pulitzer Prize for his coverage of taxes in The New York Times. The Washington Monthly calls him “one of America’s most important journalists” and the Portland Oregonian says is work is the equal of the great muckrakers Ida Tarbell, Lincoln Steffens and Upton Sinclair.

At 19 he became a staff writer at the San Jose Mercury and then reported for the Detroit Free Press, Los Angeles Times, The Philadelphia Inquirer and from 1995 to 2008 The New York Times.

Johnston is in his eighth year teaching the tax, property and regulatory law at Syracuse University College of Law and Whitman School of Management.

He also writes for USA Today, Newsweek and Tax Analysts.

Johnston is the immediate past president of the 5,700-member Investigative Reporters & Editors (IRE) and is board president of the nonprofit Investigative Post in Buffalo.

His latest book Divided: The Perils of Our Growing Inequality an anthology he edited. He also wrote a trilogy on hidden aspects of the American economy -- Perfectly Legal, Free Lunch, and The Fine Print – and a casino industry exposé, Temples of Chance.

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  1. Dominick Vila April 28, 2016

    The possibility of a reckless investor and businessman, prone to lying, exaggerating, and enjoying a lifestyle that is inconsistent with his assets, managing the U.S. economy and finances is terrifying.
    Not surprisingly, the master of make believe and deceit has managed to convince, once again, that he is an experienced and wise investor as a result of being able to gamble and convince friendly regulators that what most people would consider financial ruing was actually evidence of wealth…simply because he said so or projected an image of success where only failure exists.
    Unfortunately for us, our Treasury is not a casino, and the domestic and foreign investors that hold trillions in Treasury bonds, the billions of dollars in obligations to Social Security recipients, and the billions of dollars in dollar holdings by foreign countries, may not be as sympathetic or complicit as friendly government regulators were to Trump’s shenanigans in the 1990s.

    1. TZToronto April 28, 2016

      Yes. What happens if Trump becomes President is going to be Yuuuge! It’ll be like Dubya. When pre-presudent Dubya had problems, there was always someone to bail him out–until he won the White House, and there was no one to save his skin. More likely than not, President Trump will not complete even one term as President. His policies will fail, even if they win approval from Congress, and he’ll get tired of not being able to sell his brand any more. He’ll either resign,, claiming that he’s saved America from the immigrants, or he’ll be impeached by a Republican Congress that sees him as the ruin of the party. If Bill can get impeached for trying to deny an affair, Congress won’t have much trouble “trumping” up some charges to get rid of the guy who ruined the two-party system. For those who will ask what Trump would have done to deserve impeachment, don’t bother asking. The charges don’t have to be related to anything real. Failure to protect the party is sufficient.

      1. Paul Bass April 28, 2016

        Bill wasn’t impeached, the Senate voted to acquit.

        1. TZToronto April 28, 2016

          Bill was impeached by the House but not convicted by the Senate. If he hadn’t been impeached, the Senate would not have had to vote to convict or acquit. . . . Of course, if McConnell had been the majority leader in the Senate, maybe he would have put off the vote until the next president was in office.

        2. itsfun April 28, 2016

          The House impeaches and the Senate holds a trial to remove or not.

    2. itsfun April 28, 2016

      Casinos are closing in Atlantic, The REVEL, SHOWBOAT, THE ATLANTIC CLUB and TRUMP TAL MAHAL. Since 2009 Donald has not been involved in the running or control of casinos using his name. The company running the Trump casinos is named Trump Entertainment Resorts. Donald does not run or control this company. He does have a 10% stake in the company which does allow the company to use his name. He has since sued the Trump Entertainment Resorts to remove his name because of them letting the casinos go into disrepair and not keeping up to the Trump standards of excellence.

      He is a very successful businessman. He loves to deal, which is one reason I believe he is running for President. What bigger stage is there for him to deal on?

      1. The lucky one April 30, 2016

        Did you actually read the article?

        1. itsfun April 30, 2016

          I was replying to Dom.

          1. The lucky one April 30, 2016

            OK, I deleted my 1st sentence. Sorry for the sarcasm.

          2. itsfun April 30, 2016

            Thank you not a problem

      2. The lucky one April 30, 2016

        ” the Trump standards of excellence.” Surely you jest!

        1. itsfun April 30, 2016

          Nope, I just stated what he said in the lawsuit.

          1. The lucky one May 1, 2016

            I wonder how long it took them to stop laughing.

          2. itsfun May 1, 2016

            I have never been to any Trump creation. I understand his golf courses are great, but out of my price range.

  2. FireBaron April 28, 2016

    Almost makes you wonder if he should adopt the old Lennon-McCarthy song, “I’m a Loser” as his personal anthem.

  3. idamag April 28, 2016

    Four bankruptcies and he thinks he can run a country?


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