Since debt was invented in ancient Sumer, there will surely have been people who have become rich with bad investments. The trick is to make those investments using other people's money.
Suppose, for example, that a dealer uses borrowed funds to make risky investments in New Jersey casinos. If the investments end up making money, you can pocket the profits. But if the investments fail, it is possible that – if he has been shrewd in writing his loans or manages to convince his creditors not to claim his other assets – he will get away and let others carry the dead. That is, he wins if he comes out heads and the creditors lose if he comes out tails. He could also siphon off some of the borrowed money, for example, by having casinos pay him or companies he owns large sums for various services before they go bankrupt.
As readers may have guessed, this is not a hypothetical example. It's the story of Donald Trump's casino empire in New Jersey, a business that ended in multiple bankruptcies and was a disaster for outside investors, though it appears to have been quite profitable for Trump. The problem for someone who wants to play that game is how to convince lenders to go with the flow, why would anyone risk their money on such shady ventures?
Well, there are a couple of ways to pull this off. One, perhaps the main argument in the case of casinos, is the sheer power of persuasion, backed perhaps by a cult of personality: convincing creditors that these shady deals are actually good investments or that one is an exceptionally competent businessman who can turn straw into gold. Another possibility is to try to persuade bondsmen that they are not at risk by offering guarantees that seem sufficient to protect them, but are not, because you have inflated the value of the assets you contribute and possibly also inflated your personal wealth to make it appear that you are both a brilliant entrepreneur and a reliable payer.
That is why it is illegal to make false claims about the value of the assets one controls. And on Tuesday, Judge Arthur Engoron ruled in New York that Trump did, in fact, persistently commit fraud by overvaluing his assets, possibly by as much as $2.200 billion. As I have read, Trump and his lawyers made three main allegations against the fraud allegations.
First, they argued that the value of real estate is, to some extent, subjective. Indeed, if you own a building, you don't know for sure what it's worth until you try to sell it.
But, although there is some margin when it comes to valuing real estate, this margin has a limit. And Engoron ruled that Trump far exceeded that limit, creating a "fantasy world" of indefensible appraisals. For example, the Trump Organization considered rent-regulated apartments to be worth the same as unregulated rental apartments. The judge placed particular emphasis on Trump's claim that he owned a residence of 2,787 square meters in New York, when the actual size was only 1,022; Square footage is not subjective.
Second, Trump's lawyers argued that he paid back the money the banks lent him in full, so there was no harm. Naturally, that wasn't true for lenders caught up in Trump's previous bankruptcies. As a general rule, playing "heads wins, tails loses" based on fraudulent valuations is not legal, although sometimes the coin falls heads.
Finally, Trump declared on social media that his civil rights had been taken away and that the money was lent to him by "experienced Wall Street banks" that presumably would not have been easily fooled by a scam. If one is aware of Wall Street's attitude toward Trump, the argument has its grace. For years, only one major financial player, Deutsche Bank, was willing to deal with him, raising many questions about that bank's motives. And in the end, Deutsche Bank also turned off the tap, claiming that it harbored suspicions about its financial assets. Trump managed to pay off that debt, though it's a mystery where he got the money. But, as I just explained, being lucky is no excuse for fraud.
The most striking thing about Engoron's ruling that Trump committed large-scale fraud (it is now a sentence, not a mere indictment) is what it says about the man who became president and about the voters who supported him. As early as 2016, some observers warned mainstream political analysts that they were underestimating Trump's chances because they didn't appreciate how many Americans believed he was a brilliant businessman, a belief based largely on his role on the reality show The Apprentice. What we now know is that the old joke was, in Trump's case, the plain truth: he was not a true business genius; He only played one on television. But the truth is, for anyone willing to see, this was clear from the moment Trump began his political rise.
I wish I could predict that this ruling will eventually destroy Trump's public image, although in reality his supporters will likely ignore this ruling, in part because they will see it as the product of a conspiracy on the left, in part because, at this point, few of those who supported him will be willing to acknowledge that they were duped by a charlatan. But they were. And the fact that so many Americans were and continue to be deceived should lead to serious national soul-searching.
Paul Krugman is a Nobel laureate in economics. © The New York Times, 2023. Translation of News Clips
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