Donald Trump & Deutsche Bank's Complicated Relationship (w/ David Enrich & Ed Harrison)

Video Transcription:

  Donald Trump & Deutsche Bank's Complicated Relationship (w/ David Enrich & Ed Harrison)

ED HARRISON: When you were talking about all the different ways they can hit this 25% bogey, the one thing that I wanted you to say and that we're going to talk about is they could also go out the risk curve, and start dealing with customers who are riskier than others because to me, that's where Trump enters the picture. DAVID ENRICH: That's exactly where Trump enters the picture. The relationship between Deutsche Bank and Trump started in 1998, just as the bank was trying to carve out room for itself in the United States market. Basically, the way to do that for Deutsche Bank was they needed to find customers that were for one reason or another, not bankable or not banked by the better-established players on Wall Street or in the US market. ED HARRISON: Let me just drill down on that for a second. Because when you say that they needed to find customers who weren't banked by other banks, why is that? Why couldn't they go up to offer better rates to great customers? DAVID ENRICH: Because offering better rates isn't profitable. You want to offer high rates and you don't want to get into this bidding war with the rest of Wall Street where they have better relationships. They have deeper rosters of clients, and they have more employees. They've much greater sophistication and much greater reputations. You want clients who basically don't have a choice, you can charge them more, and they'll be really loyal to you. Trump at this time was just coming off a series of defaults in his Atlantic City casinos and his companies declared bankruptcy a number of times. Not surprisingly, those are things that do not make you particularly attractive as a potential borrower for a mainstream bank. He was really eager to be shifting his business from being this casino guy to being a big New York real estate developer. To do that, it was absolutely essential that he establish a good relationship with a major bank that would finance this what he was hoping was going to be a buying and development spree in Manhattan and elsewhere. He meets Deutsche Bank, and it is essentially a match made in heaven that he, Trump, gets what he wants, Deutsche Bank gets what it wants, and off to the races they go. ED HARRISON: What went wrong with that relationship? When you look through and uncovered how that relationship formed, it all seems he's now the president of the United States, Deutsche Bank was sitting pretty after the financial crisis. DAVID ENRICH: Well, within a couple of years of Deutsche Bank starting to lend hundreds of millions of dollars to Trump, the predictable begins to happen, which is that Trump as this is want to do at this point, starts defaulting on debt and the first time you did this, Deutsche Bank head arranged, I believe is a $400 million junk bond offer for one of his casino companies. It was a really hard sell for the Deutsche Bank sales guys who were doing this, they ended up having to really jack up the interest rates on the bonds to find buyers. Trump actually, that's one of my favorite little tales from this book. The sales guys have basically given up. They did a road show with Trump and there are no buyers for the bonds. Trump basically requests in a meeting with the sales team, which is granted, and he comes in he says, listen, guys, I know this is not the easiest deal to pull off but if you can do this deal, if you can sell these 480 million bonds, or whatever it was, you will be not only will you get paid, but you will be my personal guests for the weekend at Mar a Lago. Talking about incentives, these are bankers and sales guys who are getting paid a lot of money and yet this here is something that money cannot even buy. Being Trump's personal guests, being flown down there on his 727 and spending the weekend with him was something quite special and it actually did the trick. The bankers did the deal. Afterwards, just as an aside, the guy who's running this desk, reminded Trump, he said, we pulled this off, now don't forget what you promised my guys. Trump is like, what did I promise? He tried to wiggle out of the agreement, he did eventually come through and he flew everyone down to Mar a Lago. It was a great weekend together. Then a few months later, he defaults. That doesn't cost Deutsche Bank money, but it means that all of the customers to which they had just sold these bonds get screwed and that is the end of this particular arm of Deutsche Bank doing business with Donald Trump going forward, but it doesn't derail the overall relationship with a bank being there. Within Deutsche Bank, remember, people are compensated not based on the entire company's performance, their comp is based on a much narrower band which is their personal performance or their team's performance. This has not changed the equation for people, in this case in the commercial real estate business at Deutsche Bank, which are still very eager to strike up a profitable relationship with Trump. In 2005, they do it once more, they do this 640-million-dollar loan to finance the construction of the huge tower in downtown Chicago. Once again, Trump is wining and dining with the bankers and showing them a great time and they do the deal and everyone's happy for about two and a half years and then the financial crisis hits in 2008 and Trump asks for a six-month extension, which he's granted. Then the final due date comes in November of 2008 and Trump owes a lot of money, including 40 million that he had personally guaranteed to those connected to his personal assets. What does he do? He looks around. Alan Greenspan had just referred to the financial crisis as a credit tsunami. Trump asked his lawyers go through the fine print of the loan documents and in the loan documents is this very typical provision, an act of God provision, that means that if there's an unanticipated natural disaster or something like a tsunami, for example, it can void aspects of the contract. Trump sues Deutsche Bank claiming that the credit tsunami that Greenspan have just described constitutes a contract voiding act of God. He then sues Deutsche Bank for seeking $3 billion in damages, accusing Deutsche Bank of having caused the financial crisis and of having engaged in predatory lending practices against him, Donald Trump, by trying to collect on the loan that he owed them. Once again, we have an arm of Deutsche Bank, in fact, this time, it was really the whole bank saying, this is humiliating. We're done with Donald Trump and eventually, the litigation gets settled and Trump agrees that by 2012 or so, he has to repay a substantial portion of what he still owes, including the $40 million that he personally guaranteed. Trump is once again in a situation where he needs to find another bank and he's going to continue building and buying stuff. If he's not going to use his own money to repay Deutsche Bank, he needs to find a bank and no one's going to touch him because he keeps defaulting in a very public way. What does he do? Well, he goes to a third arm of Deutsche Bank, in this case, the private banking division, and strikes a yet another relationship and gets Deutsche Bank in this-- ED HARRISON: What year is this? DAVID ENRICH: This is 2011. The private banking division, which is what caters to the richest of the rich basically wants to reestablish a relationship with Trump. This goes up the chain of command of the bank and a huge fight erupts because the investment banking and the commercial real estate guys and the sales and trading guys are saying, no way can you do this and not only don't do it, because it's not smart, but this is humiliating for us like we have already been burned by this guy repeatedly at this point. Why on earth would you do this? The CEO, Joe Ackerman, still finally gets to him and he says, go ahead, do it. The first loan that Deutsche Bank does in this new relationship is a $48 million loan to Trump that he uses to repay what he still owed this other arm of Deutsche Bank for the defaulted loan. That is, I've never seen anything like that. One arm of the bank giving 10s of billions of dollars to a guy who's already defaulted to repay this other arm of the bank. That is, most institutions would not, in fact, I think almost any financial institution would not do that in a million years. ED HARRISON: Well, let me play devil's advocate here for a second and what I mean to say is, is that maybe this is when you look at deregulation, and all these things and the fact that Deutsche Bank was trying to get into the US market, this is a microcosm of what was happening in the US that the lax regulatory environment and their need to get customers caused them to do that, that if it were in, say, Germany or the UK, it wouldn't have happened. DAVID ENRICH: I don't know. I think this, look, it's certainly true that regulators were nowhere to be seen. Deutsche Bank is a great parable for this epic failure of regulators in the US, in Germany, the UK less so actually, but it at least in this particular case, and yeah, this is a peculiarly American saga at this point, because this is a foreign bank trying to make a name for itself with the richest of the American rich, in the middle of New York and people don't know Deutsche Bank's name. They couldn't pronounce it. They've really struggled to make a name for themselves, and here comes Donald Trump, the guy who is the star of the apprentice and is very famous for good reasons and bad and it's very enticing if you're a foreign bank trying to make it name for yourself and establish yourself in a country like the US to throw caution to the wind. I think the better argument in Deutsche Bank's defense here is that this last batch of loans that Deutsche Bank did, which went from 2011 through 2015, so leading up to his presidential campaign, there's about $350 million of loans over that four- or five-year period. Those loans, actually, were probably not horrible credit risks. Trump, one of the concessions that Deutsche Bank extracted out of him for these final series of loans was that he had to provide personal guarantees, basically, comprising the vast majority of the loans. Through a combination of pledging his personal properties as collateral, or just having 10s of millions of dollars in wealth management accounts of the bank that were presumably seasonable if he were to default on loans, from a purely credit risk standpoint, these loans were probably pretty safe and indeed, there's no reason-- We don't actually know what their status is today in 2020, but we have no particular reason to think that he hasn't kept up with the payments other than the fact that that's been a pattern of his of not keeping up with the payments, but probably from a purely dollars and cents standpoint, those were prudent loans. They weren't very high interest rates. In fact, they're quite low but they charged a lot in fees. Trump had to keep a bunch of money in wealth management accounts at the bank, which also generated fees for the bank. What that pure dollars and cents calculation does not count for at all are the reputational risks associated with doing business with someone who is a consistent default risk and who, at the time these loans were made, was exhibiting some personality traits that frankly, were not desirable for other banks and whether he was engaging in demagoguery, he was accusing Obama at that point of not being American born and therefore being an illegitimate president. Those are things that other banks when Trump would come by periodically to see if he could get money, they were aware of the public profile this guy had and especially after the financial crisis, banks would become much more attuned to the reputational risks associated with doing business with people that were going to be in the headlines for the wrong reasons. Trump triggered those red flags. For Deutsche Bank, they were so interested in-- they're viewing this, first of all, through an entirely financial prism, not a reputational one at all. They were really looking at it in the short term once again, and from a short-term financial perspective, these loans made sense.