With a net worth in the billions of dollars, you would never have guessed it. But, lo and behold, Donald Trump has filed his businesses for bankruptcy four times since 1991. Was this a mistake? Did the billionaire Trump make a fatal error that caused his corporations to collapse? Just the opposite, in fact. Trump says that every bankruptcy filing was strategic. He even goes further to expand his strategy to the business community, in saying that every high-level business man should take advantageous of the laws, including the laws of bankruptcy. To understand Trump’s decisions, we fist must understand the full situation behind his actions.
While Trump’s businesses have filed for bankruptcy (on his behalf, of course,) Trump himself has never filed for personal bankruptcy. From 1991 onward, four of his businesses have filed for Chapter 11 restructuring. For a more in depth look at Trumps bankruptcies, take a look at a review of his bankruptcies. On a high level, here is how the Chapter 11 filings turned out:
1. Trump Taj Mahal, 1991
Trump had initially financed the establishment by selling north of $1 billion of “junk” bonds, with a promised return of 14 percent interest. When the economy tanked, the Trumpt Taj Mahal was over $3 billion in dept. What Trump then did, to make amends with his lenders, was giving up half of his ownership state and selling his plane and yacht.
2. Plaza Hotel, 1992
In 1988, Trump put in $390 million for the Plaza Hotel in New York. Four years later he found himself in the middle of a difficult divorce, and filed the Chapter 11 for a second time. In doing so, Trump forfeited 49-percent of his ownership to Citibank and removed his salary. In the next three years, Trump sold the Hotel to pay off his creditors.
3. Trump Hotels and Casino Resorts, 2004
Trump Casino Resorts and Hotels began initially as a holding company for Gary, Ind, and the Trump Plaza. In 1995, when it went public, it also acquired the Trump Taj Mahal, Trump Marina, and the Trump 29 casino. Trump then gave up 20 percent of his ownership, and put $72 million into the company from his own pocket.
What then, were the factors that enabled Trump to create his fortune?
Trumps father has created a massive real estate company worth $200 million by the time he passed away in 1974. The money was split between each of his five children. Trump received roughly $40 million. A mere eight years later, Trump had an estimated net worth of $200 million. Today, Trumps net worth hovers around $3billion.
Here is the interesting part. Rather than go off and become and tycoon entrepreneur, had Trump merely invested his father’s money into a regular index fund like the S&P 500, he would have roughly the same amount that he has today. In other words, Trumps personal investments would have been better off placed in the stock market.
Here are a few things we can take away from Trump’s story:
Never over-leverage your business. Never take out large loans to develop an entity, because you could fail to repay your creditors.
Don’t assume that Trump’s chapter 11 filings set a precedent. In fact, in the last couple of decades, only 5% of large companies have filed for even one bankruptcy, much less four bankruptcies.
Focus on your personal brand. Despite his mistakes in investment, Trump is a celebrity and a brand. Trump has earned money for his name and fame.
Spread your name and your greatness. Trump has created his own leverage by building up his brand, and convincing people of his high net worth.
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