Donald Trump has £245m conflict of interest with Deutsche Bank

President-elect's business has large debt with troubled lender

Stephen Bierman,Irina Reznik
Friday 23 December 2016 09:21
The President-elect's fractious relationship with the financial backers his government will soon oversee is troubling ethicists.
The President-elect's fractious relationship with the financial backers his government will soon oversee is troubling ethicists.

For years, Donald Trump has used a powerful tool when dealing with bankers: his personal guarantee.

Now that guarantee – employed to extract better terms on hundreds of millions of dollars of loans to the Trump Organisation – is at the centre of a delicate loan-restructuring discussion at Deutsche Bank, which is under investigation on several fronts by the US Department of Justice.

The bank is trying to restructure some of Trump’s roughly $300m (£244m) debt as part of an attempt to reduce any conflict of interest between the loan and his presidency, according to a person familiar with the matter. Normally, the removal of a personal pledge might lead to more-stringent terms. But there is little normal about this interaction. Trump’s attorney general will inherit an investigation of Deutsche Bank related to stock trades for rich clients in Russia – where Trump says he plans to improve relations – and may have to deal with a possible multi-billion dollar penalty to the bank related to mortgage-bond investigations.

Whatever terms a restructured loan might include, they will reflect the complex new relationship spawned between Germany’s largest bank and its highest-profile client. Ethicists say this concerns them.

‘Looks Terrible’

“When you have political appointees making decisions about banks that the President owes a lot of money to, it looks terrible,” said Richard Painter, a law professor at the University of Minnesota who was the chief ethics lawyer for President George W. Bush. “The US government is dealing with regulatory and criminal issues with the big banks all the time, and if he owes them a lot of money, there might be an incentive to favour less regulation and less enforcement for the banks.”

Deutsche Bank declined to comment. Alan Garten, general counsel of the Trump Organisation, said the loans are modest in the context of Trump’s multi-billion dollar empire, and the effort to shift away from a personal guarantee isn’t significant because the loans were structured to become standard debt eventually, following completion of the projects.

The scramble to restructure is the latest chapter in Trump’s fraught relationship with Deutsche Bank, one of the few financial institutions on Wall Street that still does deals with a man long known as a publicity-seeking and unconventional real-estate developer who didn’t hesitate to sue his lender eight years ago.

Deutsche Bank also lends to Trump’s extended family, including his son-in-law Jared Kushner. Weeks before the election, the bank refinanced most of the $370m of debt against retail spaces Kushner’s company owns in midtown Manhattan.

Angry Bankers

Trump’s dealings with Wall Street stretch back decades to his attempt to build an Atlantic City casino empire. That badly timed push forced him to renegotiate with creditors when he couldn’t pay back billions of dollars in loans. His major backers in that era included Citibank, Chase Manhattan Bank and Bankers Trust – a bank that was acquired by Deutsche in 1999 – and the debacle left a trail of angry lenders.

Deutsche Bank’s relationship with Trump actually predates its Bankers Trust purchase. In 1998, a small group of its real-estate bankers led by Mike Offit underwrote a $125m loan for renovations on Trump’s building at 40 Wall Street. Trump showed up at Offit’s office, his reputation badly bruised. Deutsche Bank’s fledgling property business – in operation for only a year at the time – was the only group willing to take on Trump, Offit said in an interview.

“I had one way to succeed – that was to make this thing big and profitable,” said Offit, who is now retired and has written a novel about Wall Street. “If I was super conservative and wasn’t willing to do some unusual stuff, how was I going to compete?”

Best Client

The bank’s real-estate business became one of the most active lenders in Manhattan. Trump was his best client, Offit said, always professional and well-versed in the details of his projects. In the 1990s, Offit and a team led by loan officer Eric Schwartz financed the construction of Trump World Tower on the eastern edge of Manhattan and backed his failed bid to redevelop the site of the New York Coliseum.

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When Offit left Deutsche Bank in 1999, Schwartz became a linchpin for the relationship with Trump, including his attempt to buy out a partner at the General Motors Building in 2001, according to people involved in the deals. Schwartz, who left Deutsche in 2009, declined to comment.

In 2005, the bank approved a $640m construction loan so Trump could build his name-sake tower in Chicago. The tower, with dozens of multi-million dollar condos, broke ground at the height of the real-estate boom. As the project neared completion, the financial crisis hit, sending the global real-estate market crashing. And when part of the loan came due, rather than pay it, Trump sued a lending consortium led by Deutsche Bank for $3bn.

Force Majeure

His suit argued that the financial crisis was equivalent to an earthquake, triggering a “force majeure” clause, which allows for a payback extension in extraordinary circumstances. Deutsche Bank countersued, claiming Trump owed a $40m payment, which was a personal guarantee on the debt. The two later settled and, surprisingly, continued doing business together.

Today, the president-elect owes about $300m to the bank, nearly half of his outstanding debt, according to a July analysis by Bloomberg. That figure includes a $170m loan Trump took out to finish his hotel in Washington. He also has two mortgages against his Trump National Doral Miami resort and a loan against his tower in Chicago. All four debts come due in 2023 and 2024. Garten said the Chicago loan no longer has Trump’s personal guarantee because the project has been completed.

The most recent batch of loans originated out of Deutsche Bank’s private-wealth management unit, where Trump deals primarily with Rosemary Vrablic, according to two people familiar with the matter.

Vrablic joined the group in 2006 after stints at other companies, including Bank of America. Her other clients include Herbert Simon, owner of the Indiana Pacers basketball team. Simon didn’t return calls seeking comment.

Largely Unknown

Vrablic, who is largely unknown on Wall Street outside of private-banking circles, was thrust in the spotlight earlier this year after Trump uttered her name in public.

The loans, before restructuring, appear to be a good deal for both sides. Trump locked in a low interest rate, around 2 per cent over the benchmark, and has relative freedom to do what he wants with the money. In return, Trump personally guaranteed the loans.

As the bank scrambles to restructure the loans, it has options. It could remove the personal guarantee, which could require increasing the interest rate or laying out restrictions on how the money is used. Trump also could put assets such as stocks and bonds into an escrow account, which would effectively act as the guarantee.

Meanwhile, Deutsche Bank has been negotiating a multi-billion dollar settlement with the Department of Justice for mishandling the sale of mortgage bonds to other banks. If not settled by then, the department will be overseen by a political appointee of Trump’s after 20 January.


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