Op-Ed | Trump’s Bankruptcies In Perspective

The following op-ed originally appeared in The Globalist.

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U.S. presidential candidate Donald Trump has publicly described his business empire’s four bankruptcies in the following terms: “I have used the laws of this country…the [bankruptcy] chapter laws, to do a great job for my company, for myself, for my employees, for my family.”

Because his businesses entered “Chapter 11” bankruptcies – named for the provision of the U.S. legal code that allows businesses to restructure without closing shop and liquidating – he sees the four episodes in utilitarian and strategic terms, not as failures.

While I am not defending Donald Trump’s view of his practices, one key question needs to be answered: Are Trump’s business bankruptcies really worse than other corporate legal manipulations and practices?

Gaming the system

True, Chapter 11 bankruptcy is uncommon by comparison to other maneuvers through American business and tax law. Certainly bankruptcy still carries a bit of a scarlet letter stigma even if the risk is somewhat controlled, and so it is generally avoided.

But is manipulating corporate bankruptcy law really worse than those other tactics? Major U.S. companies use and abuse legal provisions constantly to evade and avoid taxes to the government.

Trump, by contrast, used the law to avoid creditors at major investment banks and funds (and most of them came out the other side of his restructurings with lucrative deals).

Some U.S. companies do complicated maneuvers like “offshore reincorporation” and other tax-avoidance mergersa loophole Trump has actually criticized on the campaign trail.

The entertainment mogul used Chapter 11 for cashflow management purposes (and to slash hundreds of millions of dollars in company debts). If companies use the U.S. legal code to boost their profits and cashflow via tax avoidance, how is that less dubious than using Chapter 11 bankruptcy?

Donald Trump made business deals on the (correct) assumption that he could fall back on restructuring laws. Other firms make deals based on assumptions that they can fall back on tax loopholes.

Firm defenders of American business law might dismiss the existence of business law loopholes as irrelevant either way and might prefer to judge his record solely on what these bankruptcies says about his ability to run businesses responsibly.

Poor financial management

Well, what about comparing it to popular and trendy legal maneuvers that are questionable long-term business practices? Many U.S. companies have been borrowing heavily to reward their shareholders, instead of using it to invest in expansion.

This practice effectively means shareholders are profiting against the company’s future financial health, rather than from current (or future) returns on its previous (or current) investments. That means literally raiding the companies’ future earnings to generate payout cash now.

Such a company will eventually have to pay back the borrowed money with interest. In the meantime, it will not have gained anything from that borrowing because it was used to rain money down on shareholders instead of actually growing the company’s operations.

The vast majority of American stock is held by a very small number of people with a lot of money to throw around. This means companies are putting themselves deeper into a long-term hole, even as wealthy shareholders rake in money in the short-term.

Trump may be incorrect when he asserts that “virtually every person” at the top of the business world has made use of bankruptcy protections. But his claim might simply be a bit ahead of its time – given the short-termist (mis)management of so many major U.S. companies today.

Down the line, by borrowing to benefit shareholders, a lot of American companies could have very high debt burdens. They would also be very underdeveloped compared to foreign competitors who invested in keeping up with the times and growing their long-term potential earnings.

That will make them uncompetitive, as well as vulnerable to bankruptcy or Japanese-style zombification.

And even all of this is to say nothing of the Wall Street debacles in 2008 that would have forced massive bankruptcies were it not for backstop loans by the Federal government.

Trump, business law exploitation pioneer

Sure, Donald Trump flew closer to the sun (and did so sooner) than these other future Icaruses, but the effect may eventually be the same. Singling him out would be mistaken, if not hypocritical.

Once again, as with his xenophobic appeals, one finds that Trump is merely reflecting back a refined and purified vision of what America has become in its re-expanding dark corners – in this case corporate America and the wealthiest 1%.

Those corners of our society exercise financial and political power in a dangerous direction. But he did not make it that way, and he is not the exception.

There is a separate set of rules in the United States accessible only to the very wealthy and their mega-corporations that allows them to evade and avoid debts and taxes that are seemingly inescapable for average Americans.

That lack of fairness in the rules is undermining voter confidence in the political and economic governance system. Ironically (and worryingly), that mix of frustration and apathetic helplessness has created the opening for someone like Trump to step into the breach.

The tax policy of Trumponomics

A recent New York Times headline blared “Republicans Wary of Donald Trump’s Populist Tone on Taxes.”

On the one hand, this development is hilarious because he’s slamming a huge wedge into the Republican Party. On the other hand, oddly enough some (though not all!) of these tax proposals are pretty legit, at least in theory.

He has threatened to increase taxes on the compensation of hedge fund managers. And he has vowed to change laws that allow American companies to benefit from cheaper tax rates by using mergers to base their operations outside the United States.
[…]
“The one problem I have with the flat tax is that rich people are paying the same as people that are making very little money,” Mr. Trump said. “And I think there should be a graduation of some kind.”

 
Implementing his “ideas” is of course another matter, and he would undoubtedly do that wrong if he were actually to become president.


Previously on AFD on this topic:

– Op-Ed (for The Globalist) | Pfizer: Tax havens or bust!
Treasury Dept acts to discourage tax avoidance mergers
Are Trump’s bankruptcies worse than other business law manipulations?

Are Trump’s bankruptcies worse than other business law manipulations?

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The Washington Post earlier this month described Trump’s business bankruptcies:

The 69-year-old real estate tycoon has never filed for personal bankruptcy and has for years portrayed the Chapter 11 bankruptcies of his glittering hotels and casinos as calculated, even shrewd maneuvers, and facts of life in the high-stakes worlds of mega-development and commercial finance.

The Trump-tied bankruptcies have all been filed under Chapter 11, a provision allowing troubled companies to stay in business while restructuring their business model or reducing their debts. In the business world, those filings are far more common, and far less disastrous, than Chapter 7 bankruptcies, in which companies are liquidated to satisfy debts.
[…]
An estimated 5 percent of the 500 biggest U.S. companies have filed for bankruptcy in the past two decades, Georgetown law professor Adam Levitin said.

 
While I am not defending Donald Trump’s view of his activities, I do have to ask: Are Trump’s business bankruptcies really worse than other corporate legal manipulations?

True, Chapter 11 bankruptcy is uncommon by comparison to other maneuvers through American business and tax law, but is it worse? Major U.S. companies use and abuse legal provisions constantly to evade and avoid taxes to the government. Trump used the law to avoid creditors — at major investment banks and funds, so let’s not weep too hard (and most of them came out the other side of his restructurings with lucrative deals).

Some US companies do complicated maneuvers like “offshore reincorporation” and other tax-avoidance mergers. He used Chapter 11 for cashflow management purposes. If companies use the US legal code to boost their profits and cashflow via tax avoidance, how is that better than Chapter 11 bankruptcy?

Trump made business deals on the (correct) assumption that he could fall back on restructuring laws. Other firms make deals based on assumptions that they can fall back on tax loopholes.

Perhaps you are both unswayed by moral arguments and unpersuaded by his argument that he was using the system to his advantage like everyone else. Perhaps you would prefer to judge his record solely on what these bankruptcies says about his ability to run businesses.

Well, what about comparing it to popular and trendy legal maneuvers that are questionable long-term business practices? Many companies have been borrowing heavily to shower money on their shareholders, instead of using it to invest in expansion:

This practice of borrowing to pay shareholders instead of borrowing to invest, as you might guess, basically means shareholders are profiting against the company’s future financial health, rather than from current (or future) returns on its previous (or current) investments. That means literally raiding the companies’ future earnings to generate payout cash now. The company will eventually have to pay back the borrowed money with interest, but it will not have gained anything from that borrowing because it was used to rain money down on shareholders instead of actually growing the company’s operations. This means companies are putting themselves deeper into a long-term hole, even as wealthy shareholders […] rake in money in the short-term.
[…]
Down the line, a lot of American companies could have very high debt burdens while also being very underdeveloped compared to foreign competitors who invested in keeping up with the times and growing their long-term potential earnings. That will make them vulnerable to bankruptcy and other problems.

 
Maybe it’s true that Trump flew closer to the sun (and did so sooner) than these other future Icaruses, but the effect will eventually be the same.

Once again, one finds that Trump is not the epitome of evil. He is merely reflecting back a refined and purified vision of what America has become in its re-expanding dark corners. Those corners of our society exercise financial and political power in a dangerous direction. He didn’t make it that way. This is our country. We allowed this to happen.

Aug 19, 2015 – Ep. 139: Interview with Amb. Nicholas Burns

Posted by Bill on behalf of the team.

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Topics: Guest expert Ambassador Nicholas Burns on the Iran nuclear deal. And: Discussion of the Republican debate and Planned Parenthood. Hosts: Bill, Kelley, Nate. Produced: August 14th and 16th, 2015.

Discussion Points:

– The details and benefits of the Iran deal from Ambassador Nicholas Burns, former lead U.S. negotiator
– Nate, Kelley, and Bill discuss the first Republican debate and the Trump phenomenon
– Kelley explains the latest opposition to Planned Parenthood

Episode 139 (56 min):
AFD 139

Guest Bio: Nicholas Burns

Ambassador Burns is the Roy and Barbara Goodman Family Professor of Diplomacy and International Relations at the Harvard Kennedy School of Government. He is Director of the Future of Diplomacy Project and Faculty Chair for the Programs on the Middle East and on India and South Asia. The Diplomacy Project focuses Harvard’s students, fellows and faculty on the importance of diplomacy in the 21st century global environment. He is also a member of Secretary of State John Kerry’s Foreign Affairs Policy Board, Director of the Aspen Strategy Group, and Senior Counselor at the Cohen Group.

As a career Foreign Service Officer, he was Under Secretary of State for Political Affairs from 2005 to 2008; the State Department’s third-ranking official when he led negotiations on the U.S.–India Civil Nuclear Agreement; and was the lead U.S. negotiator on Iran’s nuclear program. He has also served as the U.S. Ambassador to NATO and Greece and State Department Spokesman.

Related Links for Segments 2 and 3

CBS News: Trump on Iraq and Jeb Bush
Business Insider: “Jeb Bush: ‘Taking out Saddam Hussein turned out to be a pretty good deal'”
AFD: “The surge is a lie. A really dangerous lie.”
AFD: “When The Party’s Over: The 1820s in US Politics”
Washington Post: “Ben Carson’s tortured defense of his fetal tissue research”
Washington Post: “How Planned Parenthood actually uses its federal funding”

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