“More than anything else, I think deal-making is an ability you’re born with,” Donald Trump wrote in his 1987 book “The Art of the Deal.” “It’s in the genes… . It’s about instincts.”
But according to a renowned economist, Trump’s success in real estate investing had less to do with innate talent and more to do with the developer’s penchant for leverage and his using his properties as “a home equity credit line.”
The reason Trump’s net worth grew so quickly throughout the 1980s was that he managed to extract cash from his properties by continually borrowing on their assessed value, which was rising, despite the fact that most of his buildings had negative cash flow, Hyman Minksy said in a 1990 speech. The speech was analyzed in a 2015 paper by Kevin Capehart, a professor of economics at the American University of Paris, and resurfaced in a blog post by economist J.W. Mason last month, which was then picked up by Slate.
Minsky – the late Washington University in St. Louis economist best known for his breakdown of the dynamics of financial panics – called the rise in Trump’s wealth “one of the puzzles of the 1980s.”
He pointed to two factors that made Trump’s success unusual: He made his fortune in a time of high real estate rates, and just a handful of his properties had positive cash flow.
What made the whole jerry-rigged machine work, Minsky argued, was that Trump’s properties were located in the New York and New Jersey submarkets, where land prices were growing rapidly over the period compared to other parts of the U.S.
“The efficiency with which Trump managed these properties was more or less irrelevant,” Minsky said. As long as property prices increased faster than the interest rates on the money Trump was borrowing, he could use new loans to make payments on his old loans.
The maneuver is reminiscent of what Minsky elsewhere referred to “Ponzi financing,” according to Capehart. It also brings to mind the behavior of borrowers during the mid-2000s housing bubble, who refinanced their properties multiple times as values rose, pocketing the cash.
Trump’s bankruptcies and near-bankruptcies, then, were no accidents, Minsky argued. The system was bound to blow up eventually, when price increases slowed down.
And so it did in the early 1990s, when Trump was forced to refinance many of his loans, and nearly defaulted. His net worth declined by roughly $1 billion from 1989 to 1990, according to Forbes. Trump denied that assessment at the time.
According to Minsky, it was gullible bankers who made it all possible.
“Lenders failed to recognize that the arithmetic of his cash flows was virtually identical with that of the developing countries;” the economist said in the speech. “In effect, Trump was Brazil in drag.”
Trump’s bankers ultimately wrote off hundreds of millions of dollars in debts, but only after granting Trump bridge loans and taking larger stakes in his properties.
Still, he survived.
“[Trump’s] reemergence can perhaps be attributed to some ability that he had all along,” Capehart admits.
“Look,” the GOP front runner wrote in his “The Art of the Comeback,” in 1997, paraphrasing himself. “I can tie you guys up for years–in court proceedings, bankruptcy filings, and the other legal maneuvers I’m good at–when forced. But I’m willing to do something else.”
Correction: A previous version of this article misstated the publication year of “The Art of the Deal.” It was 1987.