With all his properties and deals in the United States and around the world, Donald Trump is heading to the White House burdened with multiple conflicts of interest. But the biggest ones may not be about what Trump owns, but rather what he owes.
The United States has had wealthy presidents before. Vice President Nelson Rockefeller held a piece of possibly the greatest American fortune, and the Kennedy family wealth may have been more than $1 billion. The question these leaders faced was whether they would use their powerful offices to bolster their own assets and enrich themselves.
That concern exists with Trump, but he presents a unique problem when it comes to conflicts of interest: He and his companies have borrowed hundreds of millions of dollars. These are loans that potentially afford his lenders leverage over Trump. This creates the possibility that Trump may find himself in the position of choosing between US interests and his lenders' interests. There's no better example of this than the $364 million Trump owes the struggling Deutsche Bank, which is staggering under fierce pressure from US financial regulators who want the bank to pay for its misdeeds during the run-up to the 2008 mortgage crisis. (Trump is in a real estate partnership that borrowed $950 million from a group of banks including a subsidiary of Deutsche Bank and the state-owned Bank of China.)
As it has hit trouble, Deutsche Bank's stock has fallen in the past year to levels so dangerously low that the German government was reported to be considering stepping in to prop up the bank. But on January 20, the newly inaugurated President Trump will have the ability to remove all that pressure on one of his most loyal creditors.
"I know of no case where a president has come in with hundreds of millions of dollars of indebtedness, to an entity that is under investigation for these types of alleged misconduct and in the midst of a negotiating a settlement that could put the president's principal lender out of business," says Norm Eisen, a former special counsel for ethics in the Obama administration. "The conflict is so blatant."
Eisen and Richard Painter, who served as George W. Bush's ethics lawyer, have called on Trump to divest fully his assets—not just withdraw from the operations of his businesses, as Trump has suggested he might do. If he sells off his business interests, these loans would follow the assets and no longer pose a direct conflict of interest.
Eisen says that even if Trump acts with the best of intentions but still retains his assets, there will be political appointees and career employees within the federal government who could feel pressure to please their boss and who may hesitate to threaten the president's personal business interests by getting tough with a bank he owes so much.
The problem started with Deutsche Bank's role in the 2008 financial crisis. Like many big banks, it issued and resold bad residential mortgages that helped lead to the global economic collapse. Under the Obama administration, the Justice Department has pursued various Wall Street banks for their roles in the crisis, but it has allowed these banks to negotiate settlements to pay civil fines and fees to resolve claims that they misled investors. Earlier this year, Goldman Sachs paid $5.1 billion to settle a case, and in 2014 Bank of America paid $17 billion in a similar settlement. In September, the Justice Department announced it was seeking as much as $14 billion from Deutsche Bank, an amount that vastly exceeded the $2 billion to $3 billion that bank officials had assumed it might have to pay.
The prospect that Deutsche Bank would be forced to settle for anything close to $14 billion set off a minor panic, sending the company's stock spiraling down and forcing German Prime Minister Angela Merkel to make a statement denying the German government had a plan to intervene. As various rumors about the bank's ongoing negotiations with the Justice Department leaked out, its stock price swung back and forth, but it shot up after Trump's election. Negotiations are continuing, and there is no sign of when a settlement could be reached. As president, Trump presumably won't be directly involved in the talks between the Justice Department and the bank, but the chief executive of the federal government does generally set the tone regarding how aggressive or conciliatory the Justice Department is toward banks.
Part of the recent optimism on the part of investors may be due to speculation that a Trump administration will be friendlier to banks. But investors also know that Trump's businesses are deeply entwined with Deutsche Bank. Trump has four large mortgages with Deutsche Bank, borrowing against three of his most prized possessions: the Doral golf resort in Florida, his Chicago tower, and his brand new Washington luxury hotel. For the Washington hotel, Trump has a $170 million line of credit from Deutsche Bank that was granted in 2015, just as his presidential campaign was kicking off. According to a bank spokeswoman, all four of the loans were obtained from Deutsche's "private bank"—a division that caters exclusively to high-net-worth individuals and that can lend separately from the corporate side of the bank.
The corporate side of Deutsche Bank previously loaned to Trump, but the relationship fell apart around the time of the financial crisis. In 2005, Trump borrowed $640 million from Deutsche Bank and several other lenders for the construction of his Chicago hotel tower. When he failed to pay back the money on time in 2008, the banks, including Deutsche Bank, demanded he pay the $40 million he had personally guaranteed. In response, Trump sued Deutsche Bank for $3 billion, saying the project's financial troubles were the fault of the economic recession, which he claimed the bank had helped cause. He accused Deutsche Bank of undermining the project and his reputation. The lawsuit was eventually settled.
Deutsche Bank's long-term health is important to Trump's business interests. In recent years, it has been one of the only banks still willing to lend to him (at least as of his presidential run). Most other Wall Street banks, some of which loaned Trump billions of dollars in the 1980s and 1990s, essentially stopped lending to him years ago.
It's not clear if Trump has personally guaranteed any of the loans his businesses have with Deutsche Bank. He did personally guarantee the Deutsche Bank loan involved in the lawsuit over his Chicago project. The New York Times has reported that Trump may be personally liable for up to $26 million on a mortgage he has taken out from another lender on his 40 Wall Street tower in New York City. Trump's attorney, Alan Garten, did not return a request for comment.
Eisen says another possible area of concern with the Deutsche Bank loan is the emoluments clause, the provision of the Constitution that prohibits top federal officials from accepting gifts from foreign governments. Several ethics experts have pointed out that a loan from a state-owned bank may qualify as a gift, and red flags have popped up over the Bank of China loan. Eisen says that if the German government were to take a stake in Deutsche Bank in an effort to shore up the distressed bank, it would raise a similar constitutional problem for Trump.
Trump's massive Deutsche Bank loans are uncharted and dangerous territory. "It's staggering," Eisen says. "And the most staggering thing is that it's only one of a host of similarly complicated conflicts. We've never seen anything like this."