Gross Over-Reach

A property that could be seized by New York (Le Monde)

At one of my previous employers my job was to price loans, leases, and equity to corporations who were our customers. The corporations always put the best face on the assets we were advancing money on, and one of my department's jobs was to ascertain those assets' realistic value in the event of a default and ultimate liquidation of the property.

Another task was to price the risk we were taking. In addition to the value of the assets we had to look at the financial strength of the borrower and assess the likelihood of being repaid if the business functioned under stress. The higher the risk, the higher the rate we would charge.

Often we would spend hundreds of thousands of dollars analyzing and negotiating terms that were acceptable to both parties. Larger deals, such as the loans made to Donald Trump's businesses, would go to senior management committees for their approval, and hundreds of thousands of dollars would be spent on legal documents that captured the nuances of the deal.

It's possible for financiers to lose a lot of money on loans, of course. None of them put the coronavirus lockdown in their models, or the permanent shift to working from home, or the cessation of downtown foot traffic, or the inability of cities to protect properties because of police defunding. And it's still possible to defraud sophisticated lenders with the inclusion of fake properties or fake financial statements.

Judge Arthur Engeron ruled that sophisticated lenders were fooled by fraudulent Trump financial statements and calculated the fine based on the additional rate the Trump organization would have paid had the lenders not been misled. For example, Deutsche Bank would have charged 400 basis points more:

The memo indicated that for Trump Chicago, the Commercial Investment Bank Division would be willing to provide a loan on a non-recourse basis (i.e., no personal guarantee) at LIBOR plus 8%, and that the private wealth division would be willing to provide a loan on a full recourse basis (with an unconditional personal guarantee) at LIBOR plus 4%.

Judge Engeron misunderstands, perhaps wilfully, the give-and-take of commercial real estate finance. If Deutsche Bank had smelled a rat, it would have priced the loan, say 100 bp higher at LIBOR plus 5%. If it had regarded a Trump guarantee as worthless, it would have reverted to LIBOR plus 8%, which is extraordinarily expensive given the collateral, and Trump would have gone elsewhere. All these dynamics are familiar in business-to-business finance, which is not the same as business-to-consumer where one party has a distinct knowledge advantage. The bottom line: Trump would never have paid the LIBOR plus 8% on which Judge Engeron based his penalty calculation.

Today the appeals court reduced Trump's fine:

Donald Trump needs to pay just $175 million to put his $454 million civil fraud judgment on hold during his appeal, a New York appellate court ruled, giving the former president a crucial win on the cusp of a financial deadline.

From the point of view of fair dealing, especially since neither borrower or lender were harmed, there should have been no fine. But New York Attorney General Letitia James found a unique New York law that allowed her to impose a financial death penalty on Donald Trump's organization. To this humble blogger it's a gross over-reach of prosecutorial power, but then again I'm no lawyer.