On November 22, 1991, Donald J. Trump testified before a Congressional Committee which was a Task Force created to solve the problem of banking liquidity. Link
At that time, Construction and Real Estate, both residential and commercial, represented 20% of our GNP (it was Gross National Product – back in the day). Obscure changes to the tax law killed this segment of our economy. In 1991, there was not a single high rise crane remaining in NYC.
Construction had all but stopped in the USA, causing the loss of 600K jobs, which rippled through the economy to cause a serious recession. As Trump recalls in his testimony, he spoke to H&H Construction, the largest in NYC, and they did not have a new building planned for the next two years.
In 1991, our motto was “Survive ’til ’95”, but frankly, we didn’t see ANY end to the problems in the real estate industry. So, what caused the problem? At the time, we were looking for ways to right the ship. Banking was stagnant. The only solution had to come from Congress… because Congress caused the problem.
As the story goes, the tax code was changed in 1986, called TEFRA. As heated negotiations for changes in tax code took place, the committees needed another 7 billion dollars of revenue to make the CBO score come in “revenue neutral”. A STAFFER suggested grabbing the deduction for “passive losses” on real estate (meaning income from real estate was NOT taxed as ordinary income and the losses could be shared among investors) — because the numbers, 7 billion, matched the magical number needed in Committee. There is speculation the staffer belonged to Ted Kennedy, since Ted wanted Capital Gains Taxes lowered to 20%, but the identity of the staffer has been lost to history. Well, the Congress got their 7 billion, and revenue neutral CBO score, but it cost the economy well over 500 billion in losses. Here is why.
More specifically, in TEFRA, passive income and losses were no longer allowed and the ability to syndicate real estate (meaning I could gather together a group of wealthy docs/dentists/execs to invest in a project and the investors would receive income as PASSIVE income) was no longer allowed. Additionally, depreciation schedules were lengthened substantially. Wealthy people, to avoid higher tax brackets, would invest in REIT’s (Real Estate Investment Trusts), to build shopping centers, apartment complexes, etc. As group of investors, the risks were also minimized. I sold REITs back in the 80’s. With the change in tax law, the investors went away. All those slick brochures went into the garbage can.
Readers might recall, TEFRA was also the act which eliminated deductions for interest on consumer spending but DID allow deductions for HOME interest — that was when every homeowner took out a home equity line of credit. Remember?
Well, when the act was passed, the impact on real estate projects was like a Cat 5 hurricane. People who HAD invested in the project, no longer had an incentive to invest and investors which had their money invested were caught in the maelstrom. What investors THOUGHT would be the benefits of their investment evaporated overnight. As projects failed, and the snowball created an avalanche, banks tightened up their restrictions on lending for real estate. With no one to finance construction, the industry came to a dead stop. No one working, no one buying equipment, no one buying carpeting, refrigerators, tile, cabinets, couches, dining room sets……., and a recession was born….. all because an academic staffer, with no real world experience in business, no way to imagine the consequences of his actions, needed 7 billion dollars to make his spreadsheet match up for CBO.
It was the idiocy of government on full display, and a successful citizen, Donald Trump, traveled to DC, to speak to Congress. He wanted to correct the problem, not just for himself, but for all of America.
The testimony is fascinating. At about 39:40 in the C-Span video, Helen Bentley, a Republican from Maryland, questions citizen Trump about another concerning issue – American manufacturing and her attempt to keep manufacturing companies from going overseas. She mentioned a local bank, who offered a 1% discount on a car loan if the consumer bought an American Car. Trump like the idea. She talked about FREE TRADE versus FAIR TRADE………, and that was 28 years ago.
At about 43 minutes in the video, Congressman Jimmy Hayes, a Dem from Louisiana, begins to explain the real problem, with help from Donald Trump. All construction has interim financing, a construction loan. When the project is finished, the developer (even for our little B&B) searches out permanent financing. Projects which were in various stages of building – for a decade, sometimes, were NOT grandfathered. So, a project was planned, land acquired, zoned, engineered, built………, and suddenly, the rules changed. Everything STOPPED. Hundreds of thousands went bankrupt, because they were still on the hook for the stream of payments due and caught in the midst of a sudden and drastic change in tax law.
As Congressman Hayes continues to explain……, with the changes in tax law, and not allowing the benefit of tax consequences of rents as passive income (no income tax), a building which might be completed and occupied at 100% is suddenly WORTH LESS….. because it’s not producing the great income (now taxed as personal income), tax free, any longer. A 5 million dollar apartment house might now, in 1990, only be worth 1 million dollars… which meant banks then required additional collateral from the owners, for EXISTING loans. Sometimes these owners had additional personal collateral and sometimes they did not. Thus, an owner of an apartment complex, could, find himself in a situation where they DID NOT miss a single payment……. but had their loans called by their banks. Again, bankrupting successful projects, clean projects, on EXISTING properties. It was a nightmare. Do everything right, and still go bankrupt.
But it gets worse…….. The lowering of assessed value of apartment buildings/shopping centers/commercial space all over the country…… meant that owners sought their property tax evaluations to be lowered……. which meant LESS property taxes being paid all over the country….. which meant localities had to search for OTHER means to raise taxes to meet the shortfall. Again, all because some bureaucrat staffer, with no experience in the real world, needed 7 billion dollars in revenue to make his spreadsheet match up for CBO.
During the election of 2016, much was made of Trump’s 4 business bankruptcies, as opposed to the list of 515 companies where Donald Trump is a principal owner.
The Taj Mahal Casino declared bankruptcy in July of 1991 and others in March of 1992. All of these losses center around the problem with TEFRA, building, and financing of real estate development. Trump took the hit for the mistake of government. Again, the projects were started prior to the change in of TEFRA in 1986. Link
The Plaza Hotel and two casinos declared bankruptcy in March of 1992. Some media outlets list a total of 6 bankruptcies but it’s really only 4, depending on a complete understand of tax code (and common sense), which the media does not comprehend. Link
Trump has filed Chapter 11 bankruptcy for his companies six times. Three of the casino bankruptcies came during the recession of the early 1990s and the Gulf War, both of which contributed to hard times in Atlantic City, New Jersey’s gambling facilities. He also entered a Manhattan hotel and two casino holding companies into bankruptcy.
Chapter 11 bankruptcy allows companies to restructure or wipe away much of their debt to other companies, creditors, and shareholders while remaining in business but under the supervision of a bankruptcy court. Chapter 11 is often called “reorganization” because it allows the business to emerge from the process more efficient and on good terms with its creditors.
To be clear, as the article fairly notes, President Trump has never filed for personal bankruptcy.
We can only speculate what these kinds of financial losses did to a man like Donald Trump. We know, there is no sunshine without rain. There is no happiness without sadness. There is no love without heartbreak…… but we choose to love, anyway. Prior to this time, Trump worked hard but was massively successful. As Fred Trump said, “Everything Donald touched turned to gold.”, but adversity was on the horizon.
During this time period, Trump had an affair. He divorced Ivana and the details of his personal life were splashed all over the news rags. Marla became pregnant and Trump, unlike other wealthy men, didn’t opt for an abortion. He married Marla and embraced Tiffany. I wonder, no, I believe, this time period is what made Trump the determined man he became. Trial by fire. Trump came out on the other side….. stronger.
One other note, another corporate bankruptcy came in February of 2009. Link If you were a regular homeowner in February of 2009, you were probably also struggling with foreclosure. Again, caused by bad government.
It’s an amazing coincidence, isn’t it? Congressmen never seem to lose their business or homes because of governmental failures. I recall Senator Chris Dodd even had a Countrywide Mortgage on his personal home. There’s never a consequence for a bad decision for a Congressman. No. It’s businesspeople who suffer the consequences of bad leadership and silly errors in governance.
I recall when I was transferred to Manhattan in 1984 and saw Donald Trump in a restaurant. He was larger than life but someone I would never consider being in my personal friend group. My aspirations in Gotham City were big but not quite as big as Donald Trump. Strangely, as I grew as a business person, I developed a great admiration for Trump as a businessman when the casinos went bankrupt in ’91-’92. It takes an extraordinary man to become a billionaire………. but to battle back……… and become a billionaire, again?
That’s one helluva man.
Think about it. In the Venn diagram of Earth’s population, how many of us become billionaires? In ’91-’92, Trump could have retired to an island, happy, and wealthy, with Marla and the kids. Yet, he didn’t. Trump battled back to the top of the heap……. again. Now, do the Venn diagram of those who become billionaires……. again, the diagram of those who reach a pinnacle….twice. Who has that kind of courage? Who has the tenacity, when quitting would be so much easier?
I can think of only one other such man who has a similar nature = Tiger Woods.
For both of them, Trump and Woods, there would have been no shame in retirement or quitting. Tiger reached an impossible dream, according to most men, and so had Trump. These men could have retired, rested, and the history books would have been effusive with praise. But they refused to rest……. When Tiger won the Masters in 2019, I had tears in my eyes. It wasn’t that he won the Masters, which is an extraordinary feat. Nothing about his win was ordinary. No, Tiger’s victory represented so much more. We all FELT Tiger’s win. He represented human determination. Similar to the way we felt when an American stepped on the moon. We were universally PROUD of Tiger Woods.
Tiger’s victory, and Trump’s battle back to the top of the heap in NYC, massive success in television, and winning the Presidency of the United States, represents a win for the human spirit. It says……,
“I’m not done, yet.
I want more.
I will not go quietly.
There’s more work to do.”
Yes, men like Trump and Tiger Woods are indeed rare men. These are men who inspire others. They are the very best of us. We wish we had more of them. We wish we were them. Men who don’t quit. We’re lucky and blessed to have one of them as President of the United States.
Gee, I wonder what Tiger Woods will be doing……. in twenty years……. when he’s 64?