Yes, this is inspired by Trump and I will use him as an example but this is meant to ask for factual answers.
Former president Trump needed to come up with a ~$500 million bond to appeal his court case won by the New York attorney general. Or, rather, he needed to post that money, wherever it came from. Write a check, get a bond or something.
What I do not understand is the insurance companies that would post a bond wanted so much collateral that, if Trump cold provide it, it does not seem he would need a bond (and the cost that goes with it).
To protect themselves, insurers often demand collateral totalling 100 per cent of the judgment, or more, in cash or highly liquid securities — not real estate.
In Trump’s case, his attorneys have estimated that he would actually need to come up with $570mn in collateral, or 120 per cent of the judgment. There is also an upfront fee of 1 per cent to 3 per cent charged by the underwriter. Trump’s team pegged that at $18.5mn. Even if Trump were to win his appeal, he would not get that money back. - SOURCE
If Trump could meet the demands of the insurers why on earth would he need the insurers?
You save on the tax hit when liquidating and keep the gains from the assets during appeal vs. the overhead costs of the bond. It makes even more sense if you expect the appeal to lower the judgement – then some of the assets would never need to be liquidated.
For Trump to come up with all of that cash without a bond he would have to quickly sell off his real estate holdings at a fire sale. He doesn’t want to do that. Getting a bond only requires him to put up his assets as collateral without requiring that they be sold.
If he wins the appeal, he is then only out the money due to the bonding company. If he loses, he has successfully delayed the day of reckoning. And if even he does lose the appeal, there is always the chance that the fine will be reduced.
But the article (if it is to be believed and I believe it) says for Trump to get the bond he needs to provide 120% of the judgement in liquid assets and that does not include real estate. That seems it has to be cash or darn near. Trump still has to do a fire sale. And if he did that sufficient to meet the insurers’ demands it seems he doesn’t need them anymore. I am not sure what I am missing. Seems a silly deal.
Would it be different for you or me if the bond was $5,000?
I think that means liquid assets not necessarily liquidated. The 20% headroom accounts for fluctuations in value. You could back the bond with your brokerage account without selling it. It’s possible there are terms to handle the case where the value drops suddenly or maybe that is the cost of doing business.
This is all IMHO – this isn’t my area of expertise.
I think the caveat is the part where it says that “insurers often demand [emphasis added] collateral totalling 100 per cent of the judgment, or more, in cash or highly liquid securities — not real estate.”
Maybe Trump is trying to get them to accept less liquid assets as collateral. Which may also be the reason he is having trouble getting a bond.
That’s my understanding. A “highly liquid” asset can be easily converted to cash, but that doesn’t mean it can be easily converted back. The bond companies let him use those assets without having to sell his stuff, and they make money either way.
This is how a lot of transactions go for the wealthy elite. They have the assets, but they’re not liquid. So instead of liquidating they get loans backed by those assets when they need cash. Oftentimes the interest on those loans is significantly less than the interest they get from their assets so there’s not even any point to paying off the principle. Maybe at some point they’ll get some funds to pay off the loans. Maybe not. That’s for the accountants to worry about.
Something obvious that never seems to get pointed out in the press, but bond writers certainly understand.
Trump always talks about his assets (probably exagerrated like Mar A Lago being worth at least a billion), and never about the associated liabilities. This is standard operating procedure for a majority of property developers/investors. Property people are always leveraged to the hilt. And they look like geniuses in a rising market with low interest rates, and drop like flies in a commercial bear market with higher rates like we have now.
Trump’s properties are all encumbered with partners, liens, pledged collateral, covenants against selling, etc. He probably doesn’t actually have even 5% equity even if these illiquid buildings, hotels and golf courses could be sold off. This means even if one accepts his claims to be “worth” $5 billion, the actual equity is around $250 million. News flash: he ain’t a billionaire.
That’s the way I understood it too- he’s got to come up with the $175 million bond amount in cash, or he’s got to withdraw his appeal.
And like you say, it’s similar to if some legal entity demanded $10000 from you or me in cash in a short time frame. We’d have to get some sort of weird loan or sell easily sold things quickly, because the vast majority of people don’t have that sitting around in cash.
He’s in the same position, only on a larger scale. The question to me is how doable is that for him, and where did the appellate judges come up with that number? I’m still not sure why he’s not on the hook for the whole thing.
The appellate court didn’t explain its ruling, afaik, but they seem to have bought Trump’s lawyer’s arguments that he didn’t have $500 million in cash sitting around, so they are allowing him to post the smaller amount, The alternative would be for the NY AG to seize one of his buildings and sell it, a complex and difficult that process that would certainly take months or years. By allowing him to post the lower amount, the state of New York at least gets a fairly substantial chunk of change now while the appeals process continues.
Court says (in effect) “IF you want to appeal, you must put up something - cash or credit, to show that you can pay your judgment if your appeal fails.”
Trump has the option of paying cash or getting a bond (credit) to show that he’s able to pay his judgment if he wants to continue his appeal.
If he doesn’t put that cash or bond up, he basically is withdrawing his appeal and is on the hook for the whole 464 million.. If he does put it up, he’s got another shot in appellate court.
Now what I don’t know is what happens if he loses his appeal- is he on the hook for 175 million, or 464 million? I do know that if he can’t scare up a 175 million bond, he’s on the hook for the whole enchilada.
If he loses his appeal, he will have to pay the original judgment, plus interest, plus probably costs and maybe attorney fees on appeal. That’s another reason why it’s usually the judgment plus some amount. The judgment on appeal can be higher still.
Court (actually the court rule) says AG can start executing on the judgment if you don’t protect the state’s interest with a bond. The appeal goes forward regardless.
Oof… that’s worse. I thought the judgment was suspended until the conclusion of the appeal, assuming he could get the bond to prove he can pay it. And I believe the proof of ability to pay is more along the lines of preventing him from appealing constantly to forego the judgment indefinitely.
Talking heads discussing the bond problem on TV basically said - bond guarantors dislike real estate. First, it takes a long time to sell real estate, and generally the market can fluctuate a lot depending on economic issues - plus, the complexity of who is owed what in preceding mortages and loans. A pile of stocks and bonds traded on the major exchanges - you can easily dispose of in a month, at pretty much market prices. Presumably his broker accounts they check carefully, but most NYSE-listed stocks don’t drop a huge fraction in a month. Most of the buildings and real estate, Trump or Trump Org is a minority shareholder, there may be all sorts of issues with selling, and getting out of his management contracts and naming rights, need for agreement with co-owners, etc. (Trump’ magically expanding condo in Trump Tower for example - is there a coop-type restriction on who may buy into the residential tower?) A golf course may have all sorts of obligations to members, zoning restrictions on other development, etc. Valuation may simply be a number pulled out of a body orifice. Meanwhile, there’s maintenace costs and property taxes.
The $90M for E Jean Carroll was allegedly guaranteed to Chubb using one of Trump’s brokerage accounts. So presumably he is required to keep a certain balance in it, and check with them before making any significant changes to the holdings that might impact the value. But note, he does not have to sell anything, just make sure the balance stays where it is. (Until the appeal is over) Either he sells when the appeal is done, or he only sells some if the appeal reduces her award. Meanwhile, the stocks could keep appreciating… probably faster than the interest rate on court deposits.
I presume the logic for the appeals court was basically “Okay, $500M may be a stretch, but you have to put up sufficient money that it shows you are serious.” Perhaps who knows - it’s an indicator of what the appeals court thinks is a bottom number for what an appeal would produce.
Ah so the court determined that the appeal may just be a delay in order to cost the plaintiff a fair bit of money and time, eg harrassment , or to allow more time for ongoing financial transactions to shift value out. IE, trickling funds through so as to launder them elsewhere, because the proof required to reverse a transaction has to be good, the proof to reverse large numbers of transactions starts becoming impossible.
And so too, the insurers, the people who would provide the bond, did not want to supply more bond than assets provided to secure the bond…they actually want it the other way, that if the face value of the security is $500M, they can provide $100M. Effectively Trump has told the court that everyone considers that his assets are worth 20 cents in the dollar.
Also note the court created a monitor position to oversee Trump Org, to ensure that the owners don’t start selling assets and transferring the proceeds out. The monitor must approve all transactions. This prevents Trump from pulling his money out and disposing of assets to get his money out of reach of the NY courts. While the appeals court reduced the bond requirement, they left this monitor in place.