One of the interesting bits of cognitive dissonance in Donald Trump’s campaign is that he relies on his business career to validate his ability to run the country. In Trump’s mind, and in the mind of many of his supporters, he has a veritable Midas touch. The facts suggest just the opposite. Virtually every project Trump is involved in that doesn’t merely consist of licensing his name to someone else is a smoking lump of fail:
Trump Airlines– bankrupt
Trump Vodka– folded
Trump Casinos– bankrupt
Trump: The Game– folded
Trump Magazine– folded
Trump Steaks– folded
Trump University– fraud-o-rama
This is not to say he hasn’t had some success, but he has had more than his fair share of failure. Now we have another entrant to the list that not only demonstrates his lack of management skill but his deficiency of strategic timing: Trump Mortgage.
As some economists and Wall Street traders began to sense danger ahead of the crippling housing market collapse of 2008, Donald Trump waved away the worries and offered a concrete expression of confidence in the industry.
In the spring of 2006, the tycoon hosted a glitzy event at Trump Tower to introduce Trump Mortgage LLC, a new firm that specialized in selling residential and commercial real estate loans. He devoted a floor of the Trump Organization headquarters at 40 Wall Street to the new business. And his picture appeared atop the company website with the instruction: “Talk to My Mortgage Professionals now!”
“I think it’s a great time to start a mortgage company,” Trump told a CNBC interviewer in April 2006, adding that “the real estate market is going to be very strong for a long time to come.”
Within 18 months, as the experts’ worst fears began to pan out and home prices began to dip, Trump Mortgage closed, leaving some bills unpaid and a spotty sales record that fell short of Trump’s lofty predictions. Trump distanced himself from the firm’s demise, saying at the time that he had not been involved in the company’s management and that its executives had performed poorly.
As a presidential candidate a decade later, Trump says he would use the skills that made him successful in real estate to fix Washington. His decision to embrace the mortgage business illustrates the potential dangers of a business philosophy that has relied in part on a willingness to put aside the advice of experts and take risks.
What was happening in the mortgage market as Trump was promising it was “a great time to start a mortgage company”?
- c. 2005-2006: Head CDO trader at Deutsche Bank, Greg Lippman, calls the CDO market a ‘ponzi scheme’. With knowledge of management, he bets $5 billion against the housing market, while other desks at Deutsche Bank continue to sell mortgage securities to investors.
- The Securities and Exchange Commission ceases an investigation of Bear Stearns “pricing, valuation, and analysis” of mortgage-backed collateralized debt obligations. No action is taken against Bear.
- Robert Shiller gives talks warning about a housing bubble to the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. He is ignored, and would later call it an incidence of Groupthink. That same year, his second edition of Irrational Exuberance warns that the housing bubble might lead to a worldwide recession.
- Federal Reserve Governor Edward Gramlich raises concerns over subprime lending practices, says mortgage brokers might not have incentives for careful underwriting and that that portion of the subprime industry was veering close to a breakdown, that it’s possible that it is a bubble but that the housing market did not qualify for specific monetary policy treatment at this point.
- The Bank of International Settlements warns about the problems with structured financial products, and points out the conflict of interest of credit rating agencies – that they are being paid by the same companies they are supposed to be objectively evaluating.
- February: The Office of Thrift Supervision implements new rules that allow savings and loans with over $1 billion in assets to meet their CRA obligations without investing in local communities, cutting availability of subprime loans.
- June: At Lehman Brothers, Mike Gelband & friends make a push to get out of the mortgage market and start shorting it. They are ignored and later fired. Dr Madelyn Antoncic, ‘2006 risk manager of the year’, is shut out of meetings by CEO Dick Fuld and Joe Gregory; she is fired in 2007.
- June: The International Swaps and Derivatives Association smooths the process of creating credit default swaps against ABS CDOs; a boon for hedge funds.
- August: Raghuram Rajan delivers his paper “Has Financial Development Made the World Riskier?”, warning about credit default swaps, at the Jackson Hole Economic Symposium. His arguments are rejected by attendees, including Alan Greenspan, Donald Kohn, and Lawrence Summers.
- September: The Mortgage Insurance Companies of America send a letter to the Federal Reserve, warning about ‘risky lending practices’ in US real estate.
- Fall 2005: Booming housing market halts abruptly; from the fourth quarter of 2005 to the first quarter of 2006, median prices nationwide drop 3.3 percent.
- 2006: Commerzbank begins to stop building its massive subprime position
- Early: AIG gets scared and stops selling credit protection against CDOs. The Monolines (AMBAC, MBIA) continue to sell, though.
- May: The subprime lender Ameriquest announces it will cut 3,800 jobs, close its 229 retail branches and rely instead on the Web.
- May: Merit Financial Inc, based in Kirkland, Washington, files for bankruptcy and closes its doors, firing all but 80 of its 410 employees; Merit’s marketplace decline about 40% and sales are not bringing in enough revenue to support overhead.
- Mayish: Merrill Lynch fires Jeff Kronthal, who had formerly worked under Lew Ranieri at Salomon Brothers, and his team, because they made a presentation outlining the risks of the mortgage CDO market.
- Middle: Merrill Lynch CDO sales department has trouble selling the super senior tranche of its CDOs. Instead, it sets up a group within Merrill to buy the tranches so that the sales group can keep making bonuses.
- Middle: Magnetar Capital starts creating CDOs to fail on purpose, so that it can profit from the insurance (credit default swaps) it has bought against their failure. Their program is so large that it helps extend the credit bubble into 2007, thus making the crash worse.
- August: U.S. Home Construction Index is down over 40% as of mid-August 2006 compared to a year earlier.
- September 7: Nouriel Roubini warns the International Monetary Fund about a coming US housing bust, mortgage-backed securities failures, bank failures, and a recession. His work was based partly on his study of recent economic crises in Russia (1998),Argentina (2000), Mexico (1994), and Asia (1997)
- Fall 2006 J.P. Morgan CEO Jamie Dimon directs the firm to reduce its exposure to subprime mortgages.
- December 2006 Goldman-Sachs claims after the fact that it began reducing its exposure to subprime mortgages at this point. It also begins betting against the housing market, while continuing to sell CDOs to its clients. Others claim these risk decisions were made in the spring and summer 2007.
When Trump was asked why he was getting into residential real estate and “liars loans” at the very moment that many major players were pulling back, he responded with some familiar sounding stuff:
He batted away skepticism from CNBC anchor Maria Bartiromo, who cited a 10 percent decline in new home sales in one recent month.
“I think the market is very good,” Trump responded. “We’re going to have a great company. It’s Trump Mortgage and trumpmortgage.com. And it’s going to be a terrific company,”one he predicted would quickly become an industry leader.
Trump derided economists during the broadcast, saying they were often unable to predict significant events.
“I went to the Wharton School of Finance. I was actually a very good student, believe it or not, but I’ve never been a huge believer in forecasting what’s going to happen because you really never know what happens down the road,” he said.
And, naturally, Trump has lied, massively and repeatedly, about his actions on the campaign trail:
Recently, as a candidate, Trump has presented himself as a truth teller who sounded an early alarm about the pending mortgage crisis. He told MSNBC last July that he had known the housing market “was a bubble that was waiting to explode.”
“I told a lot of people,” Trump said. “And I was right. You know, I’m pretty good at that stuff.”
Trump’s real problem is that he has little strategic sense and, as he demands to be the smartest guy in the room, this has dire consequences for his ventures. The old saying is that “A level talent hires A level talent; Bs hire Cs.” God only knows what kind of dross Trump hires. When you combine low-talent executive staffing with a decision-maker who disregards anything that doesn’t fit in with his desired course of action, you don’t need a business school case study to figure out what is going to happen.
Naturally, no tale of Trumpian incompetence would be complete without the human wreckage left in his wake:
Jennifer McGovern, who had been a mortgage seller, filed suit, saying she was fired before receiving $238,000 of promised compensation for a commercial real estate deal she negotiated.
McGovern, a mother of three, won a judgement in 2008 by a New York State Supreme Court judge, who ordered that she be paid $298,274. But the bill was not paid. “The company was set up in a way that we could never recover what we were owed,” she said.
In addition to McGovern’s unpaid claim, Trump Mortgage owed $3,555 in unpaid taxes, according to a Treasury Department tax lien filed in 2009.
The idea that the company would fail to pay her or others seemed unfathomable to McGovern in 2006, she said. She recalled her excitement after meeting with Trump for a pep talk at the Trump Mortgage headquarters on Wall Street. “He told us if we worked hard we would all do well,” she said.
Does any of this sound familiar?