Donald Trump’s bankruptcies reveal how fat cats win

REUTERS/Gretchen Ertl
Donald Trump speaking at a campaign rally in Keene, New Hampshire, on Wednesday.

Donald Trump has declared bankruptcy at least four times. No, that sentence isn’t exactly true. Four times during his business career, Trump has availed himself of the protection of the bankruptcy laws so that businesses he owned could continue operating without paying all their debts. The businesses went bankrupt and the people to whom they owed money got screwed. Very likely Trump could have paid the debts from his own multi-billion-dollar fortune, but the deals were structured so that his fortune was not at risk.

This pattern came up early in his candidacy and Trump — accurately — blew off the suggestion that he had ever gone bankrupt. In fact, this fact is consistent with Trump’s claim that he is a sharp businessman who knows how to do a deal, in fact how to do a heads-I-win-tails-you-lose deal so that his fortune was not at risk.

What should we make of this?

In a post on his eponymous blog and an article in Politico, former Labor Secretary Robert Reich suggests what we should make of it. Bankruptcy was designed so a person who couldn’t pay his debts could start over, Reich writes. The creditors would get a portion of what they were owed, the debt would be cleared, the bankrupt person could avoid debtor’s prison and try to make a life despite the blot on his credit record, which would shadow him for years.

The Constitution explicitly puts Congress in charge of legislating bankruptcy law for this purpose. Nowadays, sharp operators like Trump have expert help who can structure deals so they get to keep their fortunes and spread the pain of a failed business around to others. Reich goes further, suggesting that this is another prime example of how big business, through its lobbyists and money, has rigged the game, freeing them up to take risks with the shareholders money and avoid consequences. Wrote Reich:

“In the last few decades, these changes have reflected the demands of giant corporations, Wall Street banks, big developers and major credit card companies who wanted to make it harder for average people to declare bankruptcy but easier for themselves to do the same.”

He illustrates it with the way things worked when Wall Street crashed the economy in 2007-8:

“The real burden of Wall Street’s near meltdown fell on homeowners. As home prices plummeted, many found themselves owing more on their mortgages than their homes were worth, and unable to refinance. Yet chapter 13 of the bankruptcy code (whose drafting was largely the work of the financial industry) prevents homeowners from declaring bankruptcy on mortgage loans for their primary residence.”

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Comments (7)

  1. Submitted by Hiram Foster on 10/01/2015 - 10:27 am.

    Bankruptcy

    If I take the position that availability of bankruptcy is a good thing, and I do, I am sort of stuck with the idea that it’s good for both fat and skinny cats. Something to understand about bankruptcy is that it is a sort of legal overlay for a situation for a situation that already exists. Businesses don’t struggle because of bankruptcy, and if we were to repeal the bankruptcy laws, struggling businesses would not suddenly prosper. Trump wise, what I expect you would find is that Trump was not personally responsible for the debts that became subject of the bankrupt proceedings, and that if bankruptcy did not exist, those debts would still go unpaid. What bankruptcy can do, is to impose some regularity and order on a turbulent system, that might although not necessarily will, benefit all the participants.

  2. Submitted by Ray Schoch on 10/01/2015 - 10:27 am.

    Them that has

    …gets. Them that don’t, don’t.

    Or, phrased differently, life is unfair.

    Indeed, it is, but should that dichotomy be written into law, and more specifically, should it be written into law at the behest of people (remember, corporations are now legally people in the public forum) who will derive financial advantage from that circumstance at the expense of many more people who will suffer from that same circumstance?

    Mr. Reich, far more eloquently than I, would argue that the answer should be “No,” and I certainly agree. Many of those in Congress, however, are both wealthy individuals themselves – so, insulated from much of the financial pain that ordinary citizens routinely suffer – and dependent upon the campaign contributions of those corporate “citizens” who benefit directly from this sort of legislation.

    When future historians look back on this era, they will find few examples of corruption – perhaps more accurately, the corrosive and corrupting power of money – than this.

  3. Submitted by Connie Sullivan on 10/01/2015 - 12:06 pm.

    Thanks for making this distinction clear–more people need to know how Mr. Trump confuses personal versus business bankruptcy for his political purposes. And, who actually loses when businesses declare bankruptcy.

    • Submitted by Paul Brandon on 10/01/2015 - 08:32 pm.

      Since his business

      recently has consisted mostly in selling the use of his name, there really isn’t any difference between his personal and corporate finances.

      And no respectable cat,
      no matter how fat,
      would have hair like that!

  4. Submitted by RB Holbrook on 10/01/2015 - 01:33 pm.

    Bankruptcy

    The bankruptcy “reform” act that made it much more difficult for individuals to declare bankruptcy was shepherded through Congress by then-Senator Biden (possibly at the behest of hometown banking interests). At the time, there were a lot of anecdotes about “deadbeats” with a wallet full of credit cards skipping out on thousands of dollars of debt, with no consequence to themselves.

    That may have happened in a few cases, but the on-the-ground reality was different. I handled a fair number of consumer bankruptcy cases back in the day (mid- to late-80s). I can think of only two or three clients whose problems were due to their going crazy with credit cards. Some people lost jobs, some people were seduced by easy credit lenders, and most of them had a good stack of medical bills to add to the mix. In fact, in a lot of cases, unreimbursed medical bills were the reason for the filing. The credit card and other bills may have been manageable, but the tipping point was thousands of dollars in doctor or hospital bills that could not be paid (I think especially of the young couple whose daughter had managed to run up $25-30,000 in medical bills in the year-and-a-half since she had been born).

    These people were the “deadbeats” Donald Trump, on the other hand, is an astute businessman, using a legitimate business planning tool. He avoids personal liability because the debts were incurred by his company (owned and operated by him), and not him personally. He (excuse me, his company) has stiffed creditors for millions, if not billions, yet his commercial acumen qualifies him for the presidency.

    Yes, it’s one heck of a system.

  5. Submitted by Jon Kingstad on 10/01/2015 - 03:47 pm.

    Reich’s point

    “Purchase money mortgages” are one of the primary forms of debts which a bankruptcy cannot touch or impair. I think this is the primary legacy of the US Government’s attempt to level the playing field between mortgagors and mortgagees in the 1930’s Frazier-Lemke Farm Bankruptcy Act held unconstitutional by the US Supreme Court.

    https://en.wikipedia.org/wiki/Frazier%E2%80%93Lemke_Farm_Bankruptcy_Act

    Things should have been different in 2008 and 2009 when the entire financial system, built by then on the shaky foundation of subprime mortgages, teetered on collapse. Reich’s point I think is that if the government represented the interests of the public, the quid pro quo from the banks for TARP money should have been a concession to allow mortgages to have been written down in bankruptcy or otherwise so that the economy could recover and those owning “under water” homes could at least get out from under or keep their homes. The deal we got was that the banks got the TARP and in many instances also got the properties through foreclosure. Life is unfair and “them that gots, also gets”, but here is a fine instance of how our plutocracy works to ensure the people making the laws don’t make laws that help the public that they supposedly serve.

  6. Submitted by Neal Rovick on 10/01/2015 - 04:48 pm.

    Carly Fiorini

    Another fat-cat leaving a trail of bankruptcies.

    How about her life as a super-star at Lucent?

    http://fortune.com/2010/10/15/carly-fiorinas-troubling-telecom-past/

    Turns out she sold Billions of dollars of equipment from Lucent to a company grossing 100 Million dollars a year via financing from Lucent. Did her part to break Lucent via vendor financing of unqualified buyers. You never hear about her time at Lucent, do you?

    And we’ve all heard about her time at HP.

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