Trump: The Fall

Once a symbol of cocky '80s wealth, Donald Trump is now tarnished by marital scandal, mired in debt and negotiating with banks to retain control of his empire. Even if he succeeds, the Trump "mystique' may never recover.

You live by the glitz, you die by the glitz -A former banker and friend of DONALD TRUMP'S who approved some of his early loans.

For a high-rolling decade, Donald Trump was the King of Glitz. He built sumptuous casinos and gleaming apartment buildings, bought world-famous hotels and a fleet of planes--and plastered his name over everything. He presumed to lecture America on "The Art of the Deal"--and the book became a best seller. Like a modern-day Gatsby, he lived as lavishly as he spent: the 10-acre weekend escape, the 110-room mansion in Florida, the $29 million yacht, not to mention the jet-black helicopter. He reveled in celebrity, chumming it up with Frank Sinatra and Mike Tyson, schmoozing courtside at the U.S. Open, even buying a football team. And all the time he was mouthing off, picking fights with New York Mayor Ed Koch, telling people how he'd deal with the Japanese. "There is no one my age who has accomplished more," he bragged at 41. "Everyone can't be the best."

It's hard to believe that was only three years ago, just as Trump was becoming a national emblem of cocky'80s wealth. Now just as suddenly, he's become a national object lesson in how fast those heavily borrowed fortunes and the fame that came with them can fade. "The 1990s sure aren't anything like the 1980s," Trump said recently--and he should know. In just a few months, he's watched his marriage break up in the pages of the tabloid press. He's had to manage without two top executives who died in a helicopter crash last fall. There have been intensifying rumors about his business troubles: contractors who haven't been paid; stories of Trump nervously prowling the tables at his Atlantic City casinos to see how the high rollers were doing. Last month Forbes magazine, which for a decade has charted Trump's rise in its annual list of richest Americans, estimated that increased debt and a drop in real-estate values caused him to lose more than two thirds of his net worth last year--a nose dive from $1.7 billion to $500 million (page 40).

For months Trump denied that anything was wrong, and even boasted that the divorce headlines were good for business. Then last week came hard evidence that his financial woes are much more severe than he had let on. For several weeks, sources from several New York City banks confirmed, Trump and advisers have been meeting daily in Trump Tower with about 25 bankers and their lawyers to figure out how to renegotiate much of his hefty $3.2 billion debt. At least some of the lawyers are specialists in bankruptcy and corporate restructuring, according to banking sources. Some sources called the atmosphere cordial and said Trump had asked for the meetings; other reports had the two sides growling at each other. In either case, the talks conjured up a truly startling image: Trump, the self-proclaimed master of the deal, negotiating the terms of his financial survival with, as one observer put it, "stranger in business suits."

While the New York tabloids had their usual field day with the stories (UH-OWE! read the Post), Trump was uncharacteristically mum, declining to talk to NEWSWEEK. Only a day before The Wall Street Journal first reported on the meetings with bankers, Trump did attend a session of the American Booksellers Association in Las Vegas to promote his new book, called "Trump: Surviving at the Top," a title that provoked a few chuckles. The book is scheduled to be published in October but may be rushed out earlier now. Trump joked at a breakfast: "We may have to end certain chapters with a question mark. We may have to end the whole book with a question mark."

Few are predicting that the last chapter will be Chapter 11. Unless the talks break down completely, Trump seems likely to avoid the worst-case scenario: failure to make his next payment on bank loans and junk-bond interest this week, which could allow his creditors to force him into bankruptcy protection. Although he had already put the Trump Shuttle, his East Coast air service, and his yacht, the Trump Princess, up for sale, his spokesmen insist he will not have to sell other prized properties like The Plaza hotel to cover his debts (page 43). As the week ended, sources said, the talks were narrowing in a deal in which Trump could give the banks more collateral or a stake in many of his properties--an outcome that could cut down on his interest payments and perhaps even allow him to borrow more, but could significantly diminish his control over the empire. Banking sources also reported that Trump's lifestyle was on the table. "The boat, the mansions, the planes-they may all have to go," said one banker.

Yet even if Trump negotiates his way out of this immediate financial squeeze, his name will never carry the same mystique. Much of his success has been built on convincing lenders--and the public--that simply putting the word "Trump" on a building or an airplane would immediately increase its value. Now the name isn't just associated with "quality" (Trump's favorite word) but also with the whiff of marital scandal and the growing scent of financial distress. A real-estate broker, who says Japanese investors once called only to ask for "a Trump apartment," says some are now turned off by the divorce. Smelling blood, potential buyers for Trump's properties are sure to drive hard bargains.

Fickle as ever, the public is now just as hungry for tidbits about Trump's fall from grace as they once were for his pearls of wisdom (page 44). Raye Nelson, a retired teacher in Houston, says she used to admire Trump. "I read his book and I thought, 'What a wonderful young man to have done all he's done'." Now, she says, "it seems like he built his empire on sand rather than rock. I believe he just got greedy and needs to go back and acquire some more character somewhere." Even business associates are coming out of the woodwork to say, "I told you so." One lawyer and professed friend who has worked with him over the years insists Trump's troubles reveal what was behind the emperor's clothing. "Donald has never had the net worth he claimed," he says. "What he did have was trophy properties, brass balls and a big mouth. "

Ultimate humiliation: That people are now making fun of Trump's financial acumen may be the ultimate humiliation. After all, Trump was the self-proclaimed dealmeister himself, the man who built a reputation starting in the mid-1970s as a smart, risk-taking developer who could turn a seeming dog of a property into gold. His first big project, and the cornerstone of his New York empire, was the rebuilding of a dilapidated old hotel next to Grand Central Terminal. The city gave him a $120 million tax break and he got the banks to lend him $70 million. Up went the Grand Hyatt Hotel, which today is among his few properties showing a profit after paying interest costs.

Trump later erected Trump Tower, the Fifth Avenue building that pushed him into national attention with its marble lobby and impressive waterfall. A mixture of stores and million-dollar apartments, it became an attraction that drew hordes of tourists-and became a resounding financial success.

The first signs that something might be awry in Trump's empire started surfacing, ironically, as the press started reporting on his personal problems earlier this year. His breakup with his wife, Ivana, and his reported affair with model Marla Maples attracted a blizzard of publicity, distracting him at a time when his newest, most expensive Atlantic City casino, the Taj Mahal, was due to open. Says a friend, "As he found out, this kind of publicity can come back and bite you in the rear end." While Marla went into hiding, the spouses skirmished through dueling press releases and the public argued over whether their nuptial agreement was fair. (It gave Ivana $25 million, which according to almost any estimate was only a small fraction of Trump's assets.) Forbes magazine soon weighed in with its cover story putting his assets at only $500 million, and calculated that he was some $40 million short of paying his creditors each year.

Trump called those figures nonsense. Yet the impression that something was amiss grew stronger when he disclosed that he was considering selling the Shuttle, which he bought from Eastern only one year ago. The reason. he insisted: cash is king. He said he wasn't hurting for money but merely wanted to be ready to seize new opportunities as property values fell. He even insisted the marital publicity was actually helping his businesses by attracting curiosity seekers.

In some cases, it had the opposite effect, claims one banker. Japanese buyers, a mainstay of some Trump properties, appeared to shy away from some of his residential buildings. The Japanese, the banker says, "would tell us, 'We want something in a Trump building. We don't care what it costs.' Now, forget it. They don't like the publicity."

The roots of Trump's cash crunch go far deeper than a scarcity of Japanese apartment buyers. In his heyday, Trump's projects were largely in-and-out deals: he erected apartment buildings and sold units as condominiums, charging the premium prices his name allowed, and walked away with hefty profits. "He wasn't a cash-flow builder," says one of his former bankers. That changed when he bought such properties as the casinos, The Plaza hotel and the Shuttle airline. These were operations that required skillful management on a daily basis to produce profits. More crucially, Trump needed to generate huge cash flows to pay the enormous interest costs he incurred in borrowing to buy the properties.

Track record: Based on his track record, the banks opened their wallets to Trump, seemingly without undertaking the normal financial analysis. A lawyer who has worked with Trump says, "Donald Trump could have walked into any bank and said, "I want $25 million,' and nobody would ask for a financial statement. They'd say, "Donald Trump, $25 million? Done!'" James Grant, a business observer and editor, says the banks were feeding Trump's speculative purchases. "All this occurred," he says, "three, four or five years after it was clear to anyone that this same style of lending had brought ruin to the big Texas banks." Trump's major banks, Chase Manhattan, Citibank, Bankers Trust and Manufacturers Hanover, declined to comment.

Not only was it the magical Trump the banks were lending on; it was a time when market values had been rising almost non-stop since the late 1970s. If the cash flow from the various properties didn't cover the debt payments, it didn't really matter. Like a homeowner, Trump could mark up the value of a building on paper and borrow against it through second mortgages. Trump also took out personal lines of credit that were unsecured and sometimes used them to make interest payments. "The banks," says a lawyer who has known Trump since his first project, "created their own monster."

The monster got bogged down when Trump miscalculated on a number of things--some none of his own doing. The real-estate market flattened, making lenders less willing to refinance properties based on speculative values. In April Trump reportedly tried to refinance his stake in the Grand Hyatt and a Chase Mahattan mortgage on Trump Tower, but deals went nowhere. By now, even banks that might have wanted to give Trump more money had become constrained; the savings and loan crisis had caused federal regulators to monitor bank ending practices more closely. Says one real-estate lawyer, "You can't do the 'wink and keep on lending' routine."Meanwhile, the Japanese stock market had plunged, drying up potential sources of financing there. Trump even tried raising money by selling his Princess yacht in a $5115 million deal to Japanese investors that, too, fell apart.

Suddenly Trump found himself walled in by looming interest payments and a bunch of properties with large cash-flow demands. Chief among them are his three Atlantic City casinos, on which Trump had counted to support his other enterprises. Trump moved aggressively into Atlantic City in the mid-1980s, first with the Trump Plaza and then Trump's Castle. His biggest gamble came in 1988 when he engineered the purchase of the unfinished Taj Mahal from former talk-show host Merv Griffin. At the time itseemed like another brilliant Trump stroke. He paid a low-ball $278 million, leaving Griffin with the Resorts Internaional casino, which eventually ended up under bankruptcy protection. The Taj finally opened in April, adding about 20 percent capacity to the city's gaming business at a time when growth in the market was slowing considerably.

Despite the immense ballyhoo surrounding its opening, the prospects for the Taj's profitability remain unclear. In May it grossed $36 million, but analysts question whether the casino can maintain that level after the initial excitement subsides. It needs to rake in roughly $1.3 million a day to break even,analysts say. Trump has a more immediate concern on June 15, when he's due to make a $42 million payment to Castle bondholders. While he is likely to make that payment, some of his banks are described as worried. They are concerned that paying the bondholders might stretch too tight to make payments on their bank loans.

Underlying the casinos' problems is a management team in turmoil. Last October two of Trump's most respected casino managers, Stephen Hyde and Mark Etess, died in a tragic helicopter crash. Last month Jack O'Donnell quit as president of the Trump Plaza, Trump's most profitable casino, complaining that he didn't want to work for Trump anymore. O'Donnell didn't say much more until this week, when he learned of recent disparaging remarks Trump had made about the effectiveness of the two deceased executives. In an interview with NEWSWEEK, an embittered O'Donnell criticized Trump, saying he used the customer lists of the Plaza to feed the Taj Mahal. "Even if there hasn't been a violation of the law, and I think there has been, Donald is totally void of morals in business," he said.

As O'Donnell painted it, Trump sometimes makes decisions about his casinos on personal whims. In one case, Trump insisted on constructing a $1 million oyster bar in the Trump Plaza, despite his managers' contention that a retail store was far more profitable. The managers think they know why. Marla Maples had been known to order lots of seafood from room service, they said. Trump has said the oyster bar better complemented a nearby ice-cream parlor.

Trump's intense push for casino profits was never clearer than on one weekend in May. A Japanese high roller who had won $6.2 million in February was back playing at the baccarat pit at the Plaza casino. O'Donnell said an employee told him, " "Donald's in the pit carrying on. He's going to drive the guy out of here'." Trump was pacing near the gambler, who was winning at the time. It was a violation of an old gambling rule. Says O'Donnell, "When the customer is beating you, you never sweat it out, you never let on that it bothers you." As it turned out, the gambler eventually lost $10.3 million, but Trump cut him off before he had a chance to recover. Furious, the gambler left, O'Donnell says, in a limousine driven by executives of the competing Caesars casino.

Late paying: Trump has still more problems in Atlantic City. The construction manager who helped build the Taj contends he is late in paying more than $50 million to subcontractors. Trump's troubles have caught the attention of the New Jersey Casino Control Commission. A spokesman said the division of gaming enforcement is examining his financial wherewithal on a day-by-day basis.

Trump casino officials hastily arranged a press conference at the end of the week to try to paint a different picture. Edward Tracy, who oversees all three casinos, insisted business was "fabulous." He confirmed that about 120 Taj Mahal employees had been laid off but denied reports that an additional 2,500 of the 6,500 Taj's workers would soon lose their jobs. Tracy also acknowledged that payments to vendors were knowingly delayed at times but attributed it to a cash-management strategy. As for Trump's money problems, Tracy stoutly denied that any of the three casinos are up for sale.

That's not the case for the Trump Shuttle, another disappointing acquisition. Trump bought the Shuttle from strikebound Eastern Air Lines for $365 million--with its market share less than 30 percent. Trump refurbished the planes and managed to bring the market share up to about 50 percent. But even then he couldn't turn a profit. The Shuttle, Trump executives realized, is extremely expensive to operate--thanks to standby planes and crews--and as a result is not throwing off enough cash to meet interest payments. After Trump announced he was thinking about selling the service (he even did away with free coffee), Pan Am said it was putting up its East Coast shuttle for sale. Analysts now think Trump would be lucky to get back the $365 million he paid.

Trump's experience with his "ultimate trophy," The Plaza hotel, is much the same. He paid a price, about $400 million, that analysts think was too high; then he spent even more bringing the property up to its former glory--all with borrowed money. The hotel now looks great, and revenues are up, but not enough to cover the interest payments of about $40 million a year. Earlier this year a confident Trump contended he had turned down an offer from the Sultan of Brunei for about twice what he had paid.

Trump's biggest frustration lies in a large, undeveloped tract on Manhattan's West Side along the Hudson River. After paying $115 million for it in 1985, Trump unveiled a massive development plan that would include the world's tallest building (150 stories) and residential housing. But West Side community activists, never appreciative of Trump's taste anyway, have tied up the project in a tangle of environmental protests. Meanwhile, Trump is incurring about $12 million a year in interest costs.

Long term: As his friends view it, Trump simply got caught in a economic downturn at a time when his wallet was stretched. His most recent projects, like The Plaza and the West Side development, all require substantial upfront spending--and time--for their value to improve. One builder portrays Trump as a Japaneselike businessman who was developing projects for the long term-only to be cut down by shortsighted bankers. As one executive close to Trump put it, "If we had two more years of the 1980s he'd have been OK."

Maybe so, but to others Trump is not a magician but a speculator who was bound eventually to get knocked down by debt and normal business cycles. Irving Fischer, chairman of HRH Construction, which has built Trump developments from the start, hails Trump's brilliance but also points out, "He took a 10-year run and rode the crest of the wave."

Of course, many Trump properties are valuable trophies--once you take away the debt he poured on them. If Trump is able to get fresh capital from the banks, he could use that money to buy back--on the cheap--some of the now deflated bonds he issued to build his casinos. That could save him millions in interest costs. Some properties, like the vacant West Side lot, he may want to sell outright; he may want partners for others. His problem now is that potential buyers know all this. "What Donald has to do," a friend says hopefully, "is to find people not out to screw him."

As for Trump himself, associates say he's holding up well under the strain and actually looks as r up as they've seen him in a long time. Says an executive, "He feels that anyone can be a hero when things are good. The test of a person's mettle is when things aren't so rosy. He's a good c, and this is the toughest deal of his life." Others say the diminution of his empire is bound to change him, perhaps even transforming him into a humbler, less publicity-hungry conservative businessman. One acquaintance suggests with tongue in cheek that Trump could surface from his bankers' meetings "with Billy Graham on his arm proclaiming he doesn't need fast cars, yachts, big houses, and announce he will build housing for the poor in the Brox." If that happens, you'll know the 1980s are really over.

Forbes estimates--which Trump disputes--show his net worth plummeting this year after a decadelong rise. Acceleration: He built casinos and started hosting fights Ignition: In the early '80s Trump cultivated New York Mayor Koch (far left), built a hotel with city tax breaks and bought a USFL football team (left) 1982 - $100 m 1983 - $200 m 1984 - $400 m 1985 - $600 m 1986 - $700 m 1987 - $850 m 1988 - $1 b 1989 - $1.7 b 1990 - $500 m HOW MANY TROPHIES MIGHT HE HAVE TO SELL?
Trump is already trying to raise cash by selling his yacht and the Shuttle airline. Some analysts thinl he may eventually want to relinquish The Plaza hotel, although Trump's aides deny any such plans. What analysts think these properties might fetch:
Trump Princess - $40 Million
Trump Shuttle - $350 Million
The Plaza Hotel - $400 Million

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