Morningstar Magazine - October/November 2016 - 17

Dispatches Trump and Clinton The U.S. primary system produces bad presidential candidates. THE OLD SQUIRREL Ralph Wanger Donald Trump is a singular figure in American political history. With no political experience, and with little interest in building a team of skilled advisors, he was able to win the nomination for the Republican Party, a task that few people in the country thought was remotely possible a year ago. Trump, however, has dissipated the momentum that brought him the nomination, and his actions have made it clear to me that he has no qualifications to be president. Trump claims to be a successful businessman and a great deal-maker. We are in the financialservices industry, and we can see that his claims are false. There was a brilliant story about his career in the Atlantic City casino business in The New York Times.1 Usually, I am very skeptical of New York Times stories on political events, but in 1990, I was a financial analyst following the gaming industry, and the The Times' story was well researched and in line with my recollections of the events. Trump built three casinos in Atlantic City. Just going into the casino business is a cynical thing to do, because the casino industry lives by bankrupting its best customers. Any 1 2 3 4 5 6 casino owner knows that every year some of his players will become gambling addicts, and a gambling addict will ruin himself and his family. Every casino has a customer loyalty program to give perks to the best customers. As the gambling addict spends more and more on his habit, he is treated like a prince-until all his money is gone. own debts. The Taj was continually in bankruptcy court.3 Trump skated away, boasting of the money he made in Atlantic City. In other words, as a businessman, Trump was incompetent and untrustworthy. The Wall Street Journal summarized all this as "Trump is morally unfit for any office, high or low."4 Trump had plenty of cynicism, but not enough capital. He did not put enough equity into his projects, so he had to sell junk bonds at 12% to 14% to pay for construction costs. The fixed cost of the debt was too high to make the casinos profitable. This was pointed out at the time by Marvin Roffman, an analyst at Janney Montgomery Scott. He published a report dissecting the balance sheet on the Taj Mahal casino, showing that interest payments required $1.3 million of income per day and that no Atlantic City casino had ever been able to win that much. Trump, reading this, might have decided that Roffman was correct and sold $2 billion in common stock to create a survivable balance sheet. Instead, he called up Janney and demanded that Roffman be fired. Janney Montgomery Scott, to their eternal shame, caved in and fired him.2 Trump was not the only real estate mogul to build a giant portfolio on borrowed money. The banks loved to finance these guys. But in 1986, the U.S. tax code was changed, ending the tax shelters on real estate. Without these tax shelters, the value of commercial real estate plunged, so 1988-92 was a disastrous period for real estate operators. As building prices came down, the same banks that loved their borrowers on the way up now panicked and called all their real estate loans, good and bad. Many real estate firms went bankrupt, and many desperate operators had to do "whatever it takes" to survive. In other words, Trump was in trouble, but so was everybody else. Trump might have had a plan to open his casinos on leveraged equity and, as the Atlantic City casino business continued to grow, sell equity to the public at a high price. If Trump had a strategic plan to refinance the Taj, it never happened, because in 1990, Atlantic City's gaming market stopped growing and made the sale of new equity impossible. Trump, the genius, had broken his own rule by personally guaranteeing some of the Taj debt, so when his three casinos went broke, he nearly suffered the same fate. He solved the problem by taking money out of the three casinos to pay his How About Hillary? It's big news when The Wall Street Journal doesn't support the Republican candidate, and it's big news when The Atlantic doesn't like the Democratic candidate. The title says it all: "Why Can't Hillary Clinton Stop Lying?"5 The article mentions the habitual lying by Clinton that has been a feature of her entire career and now especially so in the matter of her mishandling classified information as U.S. Secretary of State. The article concedes her lies, but then concludes that just lying isn't as bad as what Trump is up to. However, this approach ignores the question of what Clinton was lying about. She was denying the commission of serious accusations. Her daily email routine potentially violated the Espionage Act and related federal statutes. Her actions continued for years.6 When caught, Clinton Russ Buettner and Charles V. Bagli, "How Donald Trump Bankrupted His Atlantic City Casinos, but Still Earned Millions," The New York Times, June 11, 2016. Roffman sued Janney and got a substantial cash settlement. I ordered my firm to stop doing business with Janney. Roffman went on to have a successful career as a financial advisor. Its fifth reorganization occurred in 2014. The new owners just announced in August that the Taj Mahal would be closed for good in September. Bret Stephens, "To the Go-Along Republicans" The Wall Street Journal, Aug. 1, 2016. Ron Fournier, "Why Can't Hillary Clinton Stop Lying?", The Atlantic, Aug. 1, 2016. Clinton has been and is subject to the laws governing classified information. As first lady, senator, and Secretary of State, she was under these laws. To be guilty of mishandling classified documents, the government does not have to prove any damage to the United States or that the act was done intentionally. Just leaving a classified document on your desk overnight is an infraction. Such infractions have been punished. The Gen. David Petraeus matter is a good example. global.morningstar.com/Morningstarmagazine 17 http://global.morningstar.com/Morningstarmagazine

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