Like nearly every facet of the U.S. economy, real estate took a hit from the spread of the coronavirus pandemic, with home purchase applications plunging and
Was Deutsche Bank played by Donald Trump into granting him loans he had no intention of repaying?
In my time at the bank, I decided to start lending to Trump for a simple reason: he had a deal that was unquestionably a home run, and we could charge him a huge fee because other banks were hesitant to get involved.
A little context would be useful. Back in the 70s and 80s, loan agreements were unique to each lender. Many left open the possibility of the property getting dragged in to bankruptcies or problems with other properties, or the developer himself. By the late 90s. Securitization (taking packages of loans and placing them into a trust, then issuing securities off that trust) standardized loan documents and processes. Every property was held in a single purpose entity, an LLC quarantined from the developer personally, and from his other properties. Cash flow often went through a “lock box” – a special bank account that collected all rents and revenues, and from which mortgage interest, taxes and other expenses got paid before a penny could be taken out by the owner. All of this had to pass the scrutiny of the bankruptcy lawyers and the ratings agencies. So, if a developer with a checkered past had a great deal, banks could still lend, as long as they were certain the terms would be honored. In Trump’s case, he was a loudmouth, but he wasn’t a criminal. He wasn’t going to steal money out of the building account and go to jail. Nor would the bank allow it.
That first deal, 40 Wall Street, was a fabulous office property in need of a renovation. With $125 million invested, we estimated it would be worth maybe $300–350 million or more, and the rental income would cover the loan debt service, expenses and property taxes by a wide margin, even based on super conservative occupancy and rents. Because he had problems in the past, we were one of the only banks that would deal with him – but far from the only one. Also, build out loans were not something most big banks did for anyone. He had gotten an $18 million loan from a major NY lender to construction projects – Union Labor Life Insrance Co (ULLICO) AND if memory serves, a $40 million loan from a Japanese bank’s US subsidiary already, but he needed more. The Japanese bank was having issues with their management, so Trump was brought to us by a top broker. All my underwriters loved the deal, and I took it to get Board and Credit approval. We charged Trump 2.5X our normal fee, and he did the deal, a little grumpy about the fee, but pleased. That loan was paid as agreed, and the building was valued at $550 million by Bloomberg in 2016.
Trump then showed me a new deal, a building site across First Avenue from the United Nations, that was SPECTACULAR. It was the first super-tall condo in the world. there was nothing like it in NYC, which, thanks to rent control laws, always had a severe shortage of rentals, and few new, high-quality residential condominiums. Buyers in NYC often have to go through co-op board approvals that make Congress’ inquiries look like a game. For foreigners, athletes and celebrities, this is usually a non-starter. They don’t want the nosy boards looking at all their personal info, and the boards don’t want paparazzi outside day and night, or parties and noise. In a Trump condo, all a buyer needed was cash.
So, Trump had a 90-story (height – 72 finished floors), 900,000 square foot plan ready to go, at a cost of about $300 a foot (with a big garage and retail space as well). But a $300 million construction loan was hard to come by. We estimated the market for this kind of building to be at least $500–600 per square foot. Most of its floors would have incredible views over the East River, and the high floors would be phenomenal. I sorted out a way to do the loan (we didn’t do construction loans) together with another German bank and a Life Insurance company (we took all the market risk, they took the risk Trump could get the thing built — which AGAIN shows that banks were perfectly willing to take Trump risk but not real estate market risk) – and once again charged Trump a really big fee. In fact, I had negotiated a participation in the profits, but the Bank turned it down (stupidly). I believe the debt was paid off before the building was even occupied, and Trump and his partners undoubtedly made hundreds of millions in profit.
Trump then asked us to look at refinancing his casinos. We turned down three of four, but offered him refinancing on one property – the Marina. Trump was unable to buy back the existing debt, so he never took our loan proposal. There was a minor disagreement in the Credit department at the Bank – the negligent credit analyst was replaced. One reporter tried to turn this into a scandal – it was no such thing, and, in any event, Trump could never complete the deal.
After this, the first global financial crisis (Russia defaulted, then Long Term Capital collapsed, causing a massive panic in the credit markets) hit a few months later, and everything stopped. DB announced it was cutting back on all risk capital. I had been recruited from Goldman to make DB a factor in commercial real estate. Within 9 months, I had started and built a department that was the equal of any on Wall Street, beating out the likes of Goldman, JP Morgan, Merrill, Lehman, Morgan Stanley for deals and cracking the “bulge bracket” as a top 3 or 4 manager of securitizations, AND we were the most profitable department in the US sub, and perhaps the entire fixed income operation. But, the global retrenchment of the entire industry was on, and the Division manager wanted his buddies from Merrill to run the most successful businesses in his global domain. 40% of the department was laid off (with all performance and incentive pay for the year paid out in full at the highest multiple.)
Ironically, the guys who took over made some truly horrendous decisions. Somehow, even though the commercial real estate department had said no, the high yield department (I believe reporting to a banker who wound up running the bank) evidently agreed to refinance all of Trump’s casinos, and the deal quickly cratered. Then, they agreed to make a huge loan to another developer I had flagged as a no fly zone after one very successful deal in Florida (it was so good no one could screw it up) – this one on a new casino in Las Vegas. I was stunned when I heard about it. To absolutely no one’s surprise, it rapidly failed, and turned into one of the worst loans EVER made by ANYONE – the Cosmopolitan Casino Hotel. I think the bank lost close to $2 billion all in. It was so bad, that when they foreclosed, the two heads of the department had to get licensed by the Gaming Commission in Nevada! The re-structured hotel’s marketing slogan was “Just the right amount of wrong,” with women in bondage outfits. We joked it should have been “Just Absolutely, Totally Wrong,” with women in fire gear burning huge stacks of cash.
A long answer. I really don’t know what happened after 1998, but I can say assuredly that Trump didn’t play anyone on the first couple of deals, and in fact I felt like we had played him. Had the Board taken the equity participation in the Global Tower, the Bank likely would have made 5–10x more than our simple fee. Even so, we made 2–3x our normal fees for loans I felt had almost no risk at all, and worked out spectacularly. He was a terrific client, even if he was only 1 or 2 percent of our business.
I can also say that it is enormously unlikely Trump would seek loans with no intention of repaying them. The DB guys I knew were all smart and seasoned pros – it seems that the Chicago deal got sideways thanks to the Global Financial Crisis of 2008/9. From what I have read, Trump and his team really worked hard to work out a solution – even if their “clever” lawyer took a wacky shot at getting a court to get him a break, calling the subprime collapse an “act of God” – some creative inanity quickly disposed of by the courts.
Of course, I didn’t know any of the Private Bank people, and have no idea why they would be doing any real estate lending. From what I read, those loans to Trump are all performing, though.