“Last year his income had been $980,000. But he had to pay out $21,000 a month for the $1.8 million loan he had taken out to buy the apartment…it came to $252,000 a year, none of it deductible, because it was a personal loan, not a mortgage (The cooperative boards in the Good Park Avenue Buildings like his didn’t allow you to take out a mortgage on your apartment.)”  – Tom Wolfe, Bonfire of the Vanities (1987)

I was reminiscing with friends recently about the late Tom Wolfe’s novels, and I remembered the above passage from Bonfire of the Vanities. Wolfe’s best-selling 1987 novel told of one Sherman McCoy, a New York bond trader, who whinged in detail about why he just could not make ends meet on a mere $980,000 per year in salary. This despite his self-ascribed status as a “Master of the Universe.” Today we would have to add a zero to that amount, or maybe two, but the whinging still sounds very current coming from some of these “underpaid” New York finance guys.

McCoy’s complaint about his non-tax-deductible house loan made me think of the similarity here to Donald Trump’s finances. While reporters have been clamoring to get a peek into Trump’s tax returns, I don’t think these will help illuminate Trump’s “Sherman McCoy” problem, and that is the subject of this post.

According to a 2016 published letter from his tax attorneys, The Trump Organization consists of interests in over 500 business entities, mostly sole proprietorships (and these most likely LLCs), and closely-held partnerships.  There are legitimate accounting reasons for setting up separate legal “special purpose entities” in the real estate business, although, as I noted in an earlier post, the very quantity of these arrangements and the opaqueness of their ownership structures, especially given the small relative size of the Trump Organization, start to look more like Enron in 2001. While officially these are usually set up to “wall off” the liabilities or negative cashflows from one project to another, in fact they are more useful for both obscuring the identity of partners and for sheltering from taxes.

This is why just making visible the Form 1040 income returns for President Trump in recent years won’t tell much. Behind simple profit-and-loss numbers for each of these 500+ businesses there are three big things you DON’T see. The first is “creative financing arrangements” that skirt conventional borrowing documentation like Tom Wolfe wrote about. The last two are the details of operational cashflows into and out of these many business entities.

Creative financing arrangements

We know that the Trump Organization has not been able to get much conventional financing help for projects ever since his Atlantic City bankruptcies. And yet it has been reported by the Washington Post that Trump claims several big recent property purchases were “for cash.” [1]

This raises red flags for several reasons. First, real estate projects like the ones Trump typically enters are simply not purchased for cash as standard industry practice. In order to be profitable, they typically need the leverage and tax shelter of mortgage debt. Second, several analyses of known cashflows to the Trump Organization suggest that there just has not been enough cash generated in recent years to float these purchases unaided. Finally, nobody in the finance world believes what Trump Organization people say anymore about their financial condition.

Here, then, is the likely “Sherman McCoy” financing. You can’t get a conventional, recorded mortgage from a reputable financial institution, so the money comes from more mysterious sources who wish to remain anonymous, and they are well-disguised behind layers of shell companies. Like Sherman McCoy’s “mortgage,” the collateral arrangements are not formally recorded, so the assumption is that there is a “collection agency” at the ready that is more powerful and effective than the U.S. court system at getting moneys owed. The identity of these lenders is an interesting conjecture.

We do know that Special Counsel Robert Mueller has brought into his team several of the best financial crimes investigative attorneys in the country. It will take that level of expertise to “pierce the veil” of the legal obfuscation created by Trump and his partners.

Cash Outflows

Related to the “creative financing” described above, there will need to be cash flowing out of some of these 500+ business entities that may or may not be recorded appropriately. If there is payback going to a hidden financing source, then “creative accounting” is often required to record cashflows going to the mysterious lien-holders. You don’t just write a check and call it “interest expense” if there is no recorded debt.

One common strategy in money laundering circles would be to purchase goods or services at inflated rates from a business entity that is tied, perhaps through a several-layers-deep chain, to the originating funder. These cash pathways take time and clever investigation to track down, but at some point, the money needs to enter the commercial banking system.

Cash Inflows

Ivanka, Eric and Donald Trump, Jr., have been the key point people in recent years in “pre-selling” properties in Trump-related developments. The normal process appears to have them finding buyers, usually not American, to commit to purchasing one or more expensive units, and then when a certain percentage of the units have been committed, the construction on the properties can proceed. The remaining units are then sold in the period before and after completion of the building (and sometimes not).

The problem here has been persistent reports that the buyers of these units, and the sources of their cash, are also deeply hidden by shell companies and international banking transactions, but tied to some shady sources. [2] And so, the cash coming into the Trump Organization or its affiliates for operational purchases requires some vetting of provenance as well by both tax authorities and the Special Counsel.

To be fair, a large number of property purchases in London, New York, Southern Florida, and other real estate “hotspots” in recent years have similar “cleanliness of money” issues. If it is any defense (and I don’t think it is) the Trump Organization has plenty of company here.

In the opening of The Bonfire of the Vanities, “Master of the Universe” Sherman McCoy gets caught in “the wrong part of town” with a mistress, a seemingly trivial sin which leads to a cascade of legal problems and financial ruin. Tom Wolfe’s story line now reads as prophetic.

Now it could be that all three of these cashflows described above are perfectly clean and legal for each of the 500+ Trump entities, with absolutely no tax problems or “funny money” in the stream. And it could be that all 500+ entities have nice positive cashflow so that there are no lien-holders in the shadows demanding cash through extra-legal enforcement methods. It could be.

Magic 8-Ball® says, “The probability is low.”

Notes:

1. O’Connell, Jonathan, et al. “As the ‘King of Debt,’ Trump Borrowed to Build His Empire. Then He Began Spending Hundreds of Millions in Cash.” The Washington Post, 5 May 2018.
2. Carroll, Rory. “Trump’s Panama Tower Used for Money Laundering by Condo Owners, Reports Say.” The Guardian, 18 Nov. 2017.