Ever since debt was invented in ancient Sumer, there have probably been people enriching themselves through bad investments. The trick is to make these investments using other people’s money.
Suppose, for example, that a wheeler-dealer uses borrowed funds to make risky investments in New Jersey casinos. If the investments somehow end up making money, he can pocket the profits. But if the investments fail, he may — if he’s been tricky about the wording in his loans or manages to persuade his creditors not to go after his other assets — be able to walk away and leave other people holding the bag. That is, it’s heads he wins, tails the creditors lose.
He may also be able to siphon off some of the borrowed money, say by having the casinos pay him or businesses he owns large sums for various services before they go bust.
As readers may have guessed, this isn’t a hypothetical example. It is the story of Donald Trump’s New Jersey casino empire, a venture ending in multiple bankruptcies that was a disaster for outside investors but appears to have been quite profitable for Trump.
The problem for someone who wants to play that game is how to persuade lenders to play along. Why would any people risk their money in such dubious ventures?
Well, there are a couple of ways to pull this off. One, perhaps the main story with those casinos, is sheer power of persuasion, perhaps supported by a cult of personality: Convince lenders that these dubious ventures are actually good investments or that you’re a uniquely effective businessman who can turn straw into gold.
Alternatively, you can try to persuade lenders that they’re safe by offering collateral that seems sufficient to protect them but isn’t, because you’ve inflated the value of the assets you put up and possibly also inflated your personal wealth to make it seem you are both a brilliant businessman and a reliable borrower.
Which is why making false claims about the value of assets you control is illegal. And on Tuesday, Justice Arthur F. Engoron ruled in New York that Trump did, in fact, persistently commit fraud by overvaluing his assets, possibly by as much as $2.2 billion.
Trump and his lawyers offered, as I read it, three main defenses against accusations of fraud.
First, they argued that the value of real estate is, to some extent, subjective. Indeed, if you own a building, you don’t know for sure what it’s worth until you try to sell it.
But while there’s some wiggle room in valuing real estate, it’s limited. And Engoron ruled that Trump went far beyond those limits, creating a “fantasy world” of indefensible valuations. For example, the Trump Organization treated rent-regulated apartments as being worth as much as noncontrolled apartments. The judge made special note of Trump’s claim that he had a 30,000-square-foot residence in New York, when the true number was only 11,000; square footage isn’t subjective.
Second, Trump’s lawyers argued that banks that lent to him got repaid in full, so there was no harm done. Of course, that wasn’t true for lenders caught up in Trump’s earlier bankruptcies. More generally, playing heads-I-win-tails-you-lose based on fraudulent valuations isn’t legal even if sometimes the bets come up heads.
Finally, Trump declared on social media that “my Civil Rights have been taken away from me” and that he borrowed money from “sophisticated Wall Street banks” that presumably wouldn’t have been easily deceived by fraud. If you know anything about Wall Street’s attitudes toward Trump, that’s a real hoot. For years, only one major Wall Street player, Deutsche Bank, was willing to deal with him at all, leading to much puzzlement about that bank’s motives. And eventually Deutsche Bank also pulled the plug, citing concerns about his financial claims. Trump did manage to pay off that debt, although it’s a mystery where he found the cash. But as I just explained, getting lucky is no excuse for fraud.
What’s remarkable about Engoron’s finding that Trump committed large-scale fraud (it’s now a ruling, not a mere accusation) is what it says about the man who became president and the voters who supported him.
Back in 2016, some observers warned conventional political analysts that they were underrating Trump’s chances because they didn’t appreciate how many Americans believed that he was a brilliant businessman — a belief based largely on his role on the reality TV show “The Apprentice.” What we now know is that the old joke was, in Trump’s case, the simple truth: He wasn’t a real business genius; he just played one on TV.
But the truth is that this was obvious, to anyone willing to see, from the beginning of Trump’s political rise.
I’d like to predict that this ruling will finally destroy Trump’s public persona. In reality, however, his supporters will probably brush this ruling off, partly because they’ll view it as the product of a left-wing conspiracy, partly because at this late date, few of those who backed him will be willing to admit that they were taken in by a charlatan.
But they were. And the fact that so many Americans were and remain fooled should lead to some serious national soul-searching.