How Donald Trump's Campaign Spending Shows He's Not A Serious Contender

Donald Trump, in the first debate, made a telling comment. “Well I’m a natural negotiator and I like leverage, to be honest with you.”

The Donald Trump candidacy has been from before inception a highly leveraged operation. Trump shrewdly has leveraged his celebrity, his novelty, and his authentic personal charisma into hundreds of millions of dollars of free publicity (called by politicos “earned media”). Meanwhile Trump has expended a reported low single digit millions of his own money on the campaign.

That’s leverage of 100-1, more or less, in Trump’s favor. It’s a big win-win for Donald Trump. Even if his campaign were to subside or collapse valuable exposure is money in the bank for a businessman whose main business lies in leveraging his brand.

Trump leases his brand name out to casinos, hotels, golf courses, and other ventures. These ventures typically entail no downside risk to him. When the Trump International Golf Club Puerto Rico recently filed for bankruptcy CNBC reported :

“We merely licensed our name for a fee and have nothing to do with the ownership, development or entity,” Eric Trump, executive vice president of The Trump Organization and son of Donald Trump, said in a statement.

Still, leverage has intrinsic risks. As People Magazine reported in 1997 leverage has put Trump far under water.

How far? How about $900 million?

Trump was secretly romancing Maples as he found ways to temporarily ditch Ivana and their kids, Donny, now 19, Ivanka, 15, and Eric, 13. But as l’affaire Marla became public, his world began crashing. On the heels of headlines reporting Marla’s “The Best Sex I Ever Had” ballyhoo came word that Trump’s empire was overextended by junk bonds and easy bank loans. By 1991 he faced $1 billion in debt and had lost his Trump Shuttle and 282-foot yacht, the Trump Princess. …Trump once told the Daily News that while he and Maples were walking, “I pointed to a homeless man and said, This guy is worth $900 million more than me’ [a reference to his debt]."

Trump, with a candor rooted, thus far, in impunity, has stated that he likes to game the system. As Phoenix Bankruptcy Law News reported in 2011:

ABC News reports that Trump businesses have actually gone through Chapter 11 bankruptcy four times – in 1991, 1992, 2004 and most recently in 2009. So like many other companies, Trump’s businesses have had their ups and downs over the past couple decades.

The first time a Donald Trump business declared bankruptcy was in 1991 when his Atlantic City casino, the Taj Mahal, was in billions of dollars of debt. After a trip to bankruptcy court, Trump was eventually able to reorganize the company’s debts and make a financial comeback after developing a budget.

The three other bankruptcies also involved the reorganization of debts and complying with a court-approved reorganization plan. Bankers stepped in and even put Trump on a monthly budget for a while.

Perhaps the Trump bankruptcies can be seen as a strategic business decision and not necessarily a financial failure. As Trump said to ABC News, “I’ve used the laws of this country to pare debt. … We’ll have the company. We’ll throw it into a chapter. We’ll negotiate with the banks. We’ll make a fantastic deal.”

According to CNN :

“I have used the laws of this country … the [bankruptcy] chapter laws, to do a great job for my company, for myself, for my employees, for my family,” he said during the first Republican presidential debate on August 6.

Trump claims that successful businesses file for bankruptcy all the time. At the debate he said “virtually every person that you read about on the front page of the business sections, they’ve used the [bankruptcy] law.”

But the facts don’t back that comment up.

There is nothing immoral about declaring bankruptcy. Creditors willingly assume risk and if they are sufficiently bedazzled by Trump’s glamour so as to assume excessive risk, so be it. That said, this has implications for the Trump candidacy.

It’s crucial to the prospects of a presidential candidate to win, or at least place, in the early contests in Iowa, New Hampshire, and South Carolina. We now watch Dr. Ben Carson, even inside a relative media blackout on his campaign, pulling closer to Donald Trump in Iowa. As CNN Politicsobserves : “Trump’s lead also evaporates when the field is narrowed to just him and Carson. Asked about a head-to-head match-up between those two, Republican voters picked Carson over Trump, 55% to 36%.”

Falling to number two, even in Iowa, could rupture a core element of Trump’s narrative: that he a Winner. Leverage even could turn negative.

Trump may not much longer be able to rely on the 100-1 leverage that has taken him this far. Whether deleveraging or facing negative leverage Trump almost certainly will have to start laying out real money to sustain his campaign.

Trump is investing in additional campaign staff. Yet sustaining his momentum is likely to grow far more expensive than that. The cost of political advertising, to supplement earned media, is very substantial. While Trump could, in theory, reach out to big donors doing so would rupture his narrative of being uniquely his own man. He is likely to find himself in a squeeze play.

Deleveraging also changes Trump’s “win-win” calculus. Deferring risk — structuring win-win situations for himself — is Trump’s lifelong M.O.

As Max Ehrenfreund, writing at the Washington Post’s Wonkblog astutely notes:

[Trump] is a billionaire today despite this poor performance because when he started his career, his father had already built a colossal real-estate empire. And the wealth Donald Trump has accumulated since then has at times come at the expense of taxpayers or the banks and investors who have lent him money.

…
Yet perhaps the most telling comparison is between Trump and his golf buddy, Richard LeFrak. The LeFraks and the Trumps have been rivals in New York’s real estate business for generations. LeFrak’s father, Samuel LeFrak, took a no-nonsense approach to the business. He focused on minimizing risk and making money, according to a 1992 profile in Business Week , before the magazine became Bloomberg Businessweek.

“He might be strutting around like a peacock today, but he’s gonna be a feather duster tomorrow,” the elder LeFrak told Business Week when asked about Trump.

Donald Trump, notably, never has declared personal bankruptcy. He shrewdly has managed to insulate his personal fortune from the risks of his highly leveraged investments. This implies a certain personal risk aversion.

There is no comparable insulation in politics. There is a real chance he, and maybe soon, will have to begin digging very deeply into his, as reported by Politico, liquid assets of $300M (or maybe only $70M) to sustain his momentum. He blusters that he will do so.

Of course he could….
Yet how deep will Donald Trump desire to dig into his Money Bins once it’s an actual gamble for him? In gambling terms Trump’s always played the role of the house, never the bettor. It’s not impossible that Trump would spend all of his cash. Yet even $300M would not take him all the way to the White House.

It’s not impossible that he would take out loans against his net worth even further to up the ante. That said, doing either would be utterly contrary to his lifelong practice of gaming the system to lay off risk and keep the upside safe in his pocket.

It is highly likely that the Trump Campaign will begin to (and maybe has already begun to) deleverage. Earned media will fade as his novelty wears off. He may even, as Carson’s surge suggests, get knocked out of front runner status.

The cost of maintaining his status will rise. It likely will skyrocket. And it's on a long shot. Trump does not bet his own money on long shots.

Donald Trump’s lifelong reliance on leverage looks like the Achilles’ heel of his campaign. If the leverage weakens or even turns negative the Trump Campaign rather quickly could enter the political equivalent of bankruptcy. Leverage cuts two ways.

If a political bankruptcy occurs, though, shed no tears for Donald Trump. Trump, truly a peacock, no feather duster, simply will walk away richer than ever.

Originating at Forbes.com