So Donald Trump apparently lost almost $1 billion in 1995, and hasn’t supposedly paid any tax since, yet is, according to popular belief, a very wealthy man. But how did he do it and if he did become President would it come unravelling?
When Warren Buffet, the world’s most successful investor, said a monkey could have done better at investing than Donald Trump, not that many people seemed to notice. While many Americans are voting for him because of his business acumen, it is odd that little attention is paid to the words of a man whose business acumen is without equal.
Trump has got where he is today partly because he started with a fortune.
Well, it is not fair on Mr Trump to say he inherited his wealth. His father died in 1999. According to the New York Times at that time, his father’s estate was valued at around $250 million and it was inherited by his family. No one seems to know – except for insiders who are keeping mum – how much of that money Donald Trump received. During the Presidential primaries, his rival Marco Rubio said that Donald inherited over $100 million. The Don denied this.
But, what is clear is that Mr Trump was already wealthy. In 1982 Forbes estimated that Donald was worth $200 million – so that was 17 years before his father’s death.
But the point is, Mr Trump did make his money at the outset through the running of his father’s business.
And it does appear he became rich largely because property investment can be highly lucrative when you use leverage, partly because property investment is favoured under US tax laws, and partly because Mr Trump reduced the risk to himself by running his empire via a number of limited companies, some of which did go bust.
To understand why property investment combined with leverage can be so lucrative consider this simple example. Let’s say property increases in value by 50% every five years. Let’s say that every five years you restructure your portfolio, so that 75% of your portfolio is in the form of debt. Let’s say you start with $100 million, and leverage up to buy $400 million of property. After five years, your property portfolio is worth $600 million, after paying off debt you have $300,000. You have trebled the value of your equity, even though the underlying assets upon which your portfolio was based only rose by 50%. By following this approach, you could increase the net value of your portfolio three-fold every five years. Within 20 years, your $100 million would be worth around $9 billion.
Property investment is unusual, and can be lucrative, simply because it is much easier to gain leverage when your assets are in property.
And the more often you re-structure your portfolio with greater leverage, the more money you make, but the higher the risk you are taking. But the risk can be mitigated against by spreading your portfolio across a multitude of limited companies. When the odd risk fails, the loss does not have the potential to bring down the entire portfolio, because of limited liability.
No one is sure how Mr Trump was able to supposedly lose so much money in 1995 and yet carry on accruing wealth, but it is thought something along the following lines may have happened:
In the US, under tax law, if you, or a business, owes money to creditors, you can restructure the debt, negotiate a settlement of say ten cents in the dollar to creditors, but use the full loss for tax purposes, and then use that loss against other businesses you own to reduce overall tax liability.
So just because Mr Trump allegedly reduced his tax bill via a near $1billion loss, it does not necessarily mean that he physically lost that amount of money.
These days, his income comes from property, licensing the Trump name and book royalties.
It does seem that if Mr Trump becomes president, Janet Yellen the chair of the Fed will resign.
In a recent televised debate with Hilary Clinton, he said: “We are in a big, fat, ugly bubble. And we better be awfully careful. And we have a Fed that's doing political things. This Janet Yellen of the Fed. The Fed is doing political -- by keeping the interest rates at this level. And believe me: The day Obama goes off, and he leaves, and goes out to the golf course for the rest of his life to play golf, when they raise interest rates, you're going to see some very bad things happen, because the Fed is not doing their job. The Fed is being more political than Secretary Clinton.”
So Mr Trump does not like low-interest rates, which is odd because low-interest rates are what have pushed property prices upwards, boosting the value of the Trump fortune.
He says he knows how to fix the tax system so that people like him won’t be able to reduce taxes.
He also seems to want to initiate the kind of foreign policy that would make him the most unpopular US president abroad ever.
Let says he does what he says he will do: puts pressure on the Fed to increase rates, remove the advantageous tax treatment of property investors, and introduce foreign policy to make the rest of the world fear him. That may not be such good news for property investors, and people who own golf courses and casinos trading off the name Trump.