What Donald Trump gets right about bankruptcy
As bizarre and almost shudder-inducing as it is to write, I must confess: Donald Trump is right about something.
Namely, he's right about the attitude, morals, and balance of sympathies we should bring to questions of debt and bankruptcy.
In last Thursday's GOP presidential debate, Fox News anchor Chris Wallace pressed Trump on the four bankruptcies his various enterprises have gone through over the course of his career. "With that record," Wallace asked, "why should we trust you to run the nation's business?"
On the face of it, this is a fair question: Trump's record of trying to actually make something new or run a complex operation — usually a casino, hotel, or resort of some sort — is hardly pristine. His biggest success has been as a salesman for his own personal brand, certainly in various television shows, and now as the ultimate performative, social-media-gestated presidential candidate.
The thing is, Wallace also brought up the losses Trump's lenders suffered in those bankruptcies — not once, but twice. "Financial experts involved in those bankruptcies say that lenders to your companies lost billions of dollars," and then, "lenders to your company lost over $1 billion" in a 2009 bankruptcy. That was the weird part.
Trump's line is that he's never personally gone bankrupt, which is technically true. The purpose of incorporation is to create a legal entity (or "person") who functions separately from individuals such as shareholders and management and so on. That way corporate bankruptcy — also known as Chapter 11 bankruptcy — functions separately from personal bankruptcy, and the failure of any individual business venture need not mean personal ruin for the people involved.
That said, the divide is not, and cannot be, total. Chapter 11 is like an amputation; it's supposed to save a corporation's life even if it means cutting off chunks of the business. Along with reducing the debt creditors will see paid back, management is often altered, and investments are sold off. If those latter sell-offs are big enough, they can threaten an equity holder with personal bankruptcy even if Chapter 11 itself is not personal bankruptcy. And Trump took a pretty hard hit with the 1991 failure of Taj Mahal in Atlantic City. His personal assets at stake may have been close to $900 million, and he had to sell off half his stake in the casino along with his airline and yacht to pay off the loans that remained after the restructuring.
In the remaining three bankruptcies — in 1992, 2004, and 2009 — Trump was savvier about how much of his personal assets he risked. But he still often had to sell off big chunks of his ownership stakes, lost management control at least once, and still had to pay off plenty of loans.
The point being, yes, Trump's lenders lost. But Trump lost too. And that's as it should be. Wallace's focus on the lenders plays into a deep-seated instinct in American culture that debt is a moral obligation, and thus must be repaid in full as a matter of honor. This is horse-puckey.
Debt is a two-way street, with both the borrower and the lender taking a gamble on an economic endeavor they hope will pay off sometime in the future. Both are equally responsible for making sure the risk they're taking isn't a stupid one, and both are equally obligated to eat the losses if things go south. Neither one is intrinsically more sympathetic or morally righteous than the other.
Where things get complicated is that there's no such thing as a bankruptcy code or articles of incorporation in the state of nature. How we strike the balance between the interests of debtors and creditors is instead a reflection of our tribal and moral instincts and all the other quirks that make us human.
America arguably does a better job of threading that needle than other European countries, and we go easier on debtors in bankruptcy filings. This is smart. If the costs of failure are high, people will take fewer risks, and in the economic realm that shakes out to less innovation and less wealth creation.
But because the balance between debtors and creditors is inescapably subjective and social, its also an arena in which power imbalances play out. You can see that in the 2005 bankruptcy reform passed by Congress, which was moralized as an attempt to roll back frivolous bankruptcies. But what it really seemed to do was extend the time and effort needed to file for bankruptcy, thus giving creditors more time to bleed debtors for more service payments on their debt. (As a general rule, creditors tend to be richer people and debtors tend to be poorer people.)
You can also see this in which forms of debt are easier to discharge in bankruptcy than others. It's actually much harder for a regular American to get out from under student loan debt than it is for a businessman like Trump to pull out of a nosediving deal. The same goes for mortgages.
As David Dayen pointed out, this imbalance in the law is mirrored by an imbalance in our cultural attitudes. When a high-rolling tycoon like Trump says "I've used the laws of the country to my advantage," people generally nod along and say fair play. But when regular Americans try to get out from under housing or student debt, they're savaged as dead beats and moral ingrates. Defaulting on their debt is equated with "failing the duties of citizenship."
"These lenders aren't babies," Trump said on Thursday, brushing off Wallace's concerns. "These are total killers." That's true! Bankers, financiers, and the whole CNBC crowd like to present themselves as savvy, chrome-plated badasses; they don't get to turn around and suddenly play the morally righteous simpleton the second a deal goes bad.
The thing to remember is this isn't just true of the people who lent to Trump. It's true of the people who lend to everyday Americans, too.