Very good post from
https://x.com/3ndeveloper/status/1759306004087677379?s=46
Let's talk about Trump and the judgement against him for $350,000,000+ ($450M will pre-judgment interest).
Let's avoid bringing politics into this conversation.
Here is my understanding of the case that was argued against Trump:
- Asset valuations were grossly exaggerated to the extent that it was fraudulent
- Due to the severely increased asset values, Trump was able to obtain significant benefits that were "ill-gotten"
- These benefits include: 1) larger loan amounts; 2) lower interest rates on the loans; 3) lower insurance premiums.
Trump received "ill-gotten gains" by having banks lend him money at lower rates than they would have if they had known the true value of the underlying assets (e.g. 10%-12% instead of 4%-5%).
- Trump also received ill-gotten gains by profiting on developments that relied on construction loans, which he never should have received.
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Here is my understanding of Trump's defense:
- Asset valuations can never be objective, and were based on expert opinions
- Trump's lenders never lost a penny on these loans, and all of his loans were always paid on-time, and in full (remember, we're only focusing on the loans that were referenced for this case, and not the bankruptcy cases in the past)
I want to avoid the nuances in the case (e.g. the market value of Mar-A-Lago vs. assessor value, and the whether the covenant Trump recorded actually impaired its value), and just focus on the bigger picture here.
To me it appears that the crux of the Attorney General's case was entirely dependent on her argument being correct - due to increased asset valuations, Trump received loans and rates he should not have received.
This is where I struggle
Asset Values
Asset values are truly based on the eye of the beholder. The Buyer, and the Buyer's development plan, will create unbelievable variations in what an asset
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- Let's assume we have a 40k SF piece of land at the Main-And-Main corner of Times Square (NYC).
- Let's also assume there are only 2 real estate Buyers in this entire universe, and no one else exists
- Real Estate Buyer#1: 7-Eleven convenience store operator who plans to build a 3k SF store
- Real Estate Buyer#2: Highrise Developer partnering with Waldorf Astoria, and is planning a 75-story mixed-use development (hotel, residential condos, and retail on bottom floor), and has a pathway towards installing massive digital billboards on the building.
The convenience store operator may max out at $30M for the value of the land. There is only so much value he can extract from operating a convenience store at the site. Regardless of the extent of foot traffic, there is only so much profit that can be made by selling soda, chips, and cigarettes.
The highrise developer may max out at $400M (this figure is a guess).
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This is just an example, but it showcases that asset values are totally fluid, and really depend on who owns them.
Assets are absolutely worth more under certain owners than other owners.
Ill-Gotten Gains
The basis of calculating damages was based on ill-gotten gains (e.g. the difference in interest rates that were given vs. what should have been charged).
Assume we have a $10M loan:
- At a 12% interest rate - the annual interest expense is $1,200,000/year
- At a 4% interest rate - the annual interest expense is $400,000/year
The delta here is $800,000/year in interest expense. If the loan lasted for 10 years, then the total delta in interest expense would be $8,000,000 (I'm simplifying here).
On the road. Will complete in case you’re not able to access the x app
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This is just an example, but it showcases that asset values are totally fluid, and really depend on who owns them.
Assets are absolutely worth more under certain owners than other owners.
Ill-Gotten Gains
The basis of calculating damages was based on ill-gotten gains (e.g. the difference in interest rates that were given vs. what should have been charged).
Assume we have a $10M loan:
- At a 12% interest rate - the annual interest expense is $1,200,000/year
- At a 4% interest rate - the annual interest expense is $400,000/year
The delta here is $800,000/year in interest expense. If the loan lasted for 10 years, then the total delta in interest expense would be $8,000,000 (I'm simplifying here).
The Attorney General alleged that Trump's lenders would have charged him substantially higher interest rates if they knew that his asset values were actually lower.
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In our example, they should have charged him 12%, when instead they charged him 4%. Apply this across all of his properties, and substantially higher loan amounts, and that is why the damages became hundreds of millions of dollars.
I also struggle with this allegation for two main reasons.
#1) In my experience, banks do not lend based on asset values and, instead, lend based on how much income an asset generates (e.g. cash flow). Banks then apply a measure of safety (Debt Service Coverage Ratio), and then calculate the loan amount they can give. The nuance here is with assets that are not meant to cashflow (e.g. condo developments).
Banks will also review a Developer's previous projects, and assess how those assets performed post-construction.
This is also one of the reasons why many lenders are continuing to actively extend loans on commercial buildings - although the asset values have dropped, they are still cash flowing and paying the loan payments.
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#2) The AG alleges that the Banks would have charged Trump substantially higher interest rates (e.g. 12% instead of 4%).
From my experience, Banks are not hard money lenders, and do not give loans at 12%.
If the lenders decided not to give Trump a loan at 4%, or even 5%-6%, then they would have given the loan proceeds to another borrower at 4%-6%.
So how can we say that a bank would have charged 10%-12%, when their business is not conducted that way?
Independent Monitor
The Trump organization has been put under the supervision of an independent monitor for at least 3 years, who has final authority for business decisions made at the company.
In essence, the court neutered the family-company's ability to conduct any business without review/approval of this monitor.
If the Trump organization were a publicly traded stock, my perspective would be different, but this feels like the government is performing a coup on a private company.
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My Thoughts
I think Trump messed up in many ways, and many inconsistencies/inaccuracies were found in his financial statements.
Although, if I'm playing Devil's Advocate, I bet everyone's financial statements have mistakes in them if a team of attorneys/experts is paid to find mistakes (think of your own tax returns).
It appears that Trump may have exaggerated certain asset values, but it is truly impossible for a 3rd party observer (or even for a court) to accurately assess this.
From what I read, Trump's lenders never had issues with the loans they gave Trump, and were paid what they were contractually owed.
Who is Trump paying the $450M to?
To the lenders or to the government?
Makes you wonder about the underlying incentives behind this case. I tried searching for the answer to this question, but could not find it (maybe someone with legal expertise can chime in).
Overall, the case and the $450M judgement against Trump feels 'off' for me.
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