Wednesday, November 30, 2016

Why Won't Trump Forgo the "Corruption Premium"?

by Michael Dorf

In my latest Verdict column, I distinguish three risks that arise out of President-elect Trump's extensive business holdings: (1) That Trump will pursue his private interest at the expense of the public interest by, say, altering foreign policy or regulatory policy in exchange for favorable business deals from foreign governments or private actors, respectively; (2) that Trump and his family members will unjustly enrich themselves; and (3) that even the extensive appearance of corruption will spread corruption, which is a corrosive force. I argue that (1) and (3) are the bigger problems, not because I don't think Trump will use the power of the presidency to enrich himself and his family, but because I think the scale of damage from (2) is relatively small--at most a few tens of billions of dollars unjustly flowing into the Trump pockets. (I know, a billion here and a billion there and pretty soon we're talking about real money. I'm making a relative point.)

Trump has faced considerable criticism for failing to follow the practice of other wealthy elected officials who put their assets into a blind trust, thereby ensuring that they would make policy decisions based on the public interest. During the campaign and since the election, Trump and his spokespeople have said that he would turn over the running of his businesses to his adult children and that lawyers would look out to avoid conflicts of interest.

But this is far from an adequate solution. Even assuming that Trump himself plays no role in the running of his businesses--a heroic assumption given reports that he has continued to pursue his business interests since the election--Trump will know what sorts of policy decisions favor his businesses. Turning over day-to-day control over the businesses means that Trump might not know the impact of government policy on all of the details of his business empire, but he will surely know how, say, a change in the tax code on the depreciation schedule for golf courses will affect his businesses. Likewise, a foreign government that publicly announces that its diplomats will stay in Trump-branded hotels can thereby attempt to curry favor with Trump without his having to be involved in the running of those hotels.

Accordingly, turning over the day-to-day operation of the family businesses to other family members is nothing like creating a blind trust. It's not even like creating a vision-impaired trust.

Why doesn't Trump simply create a blind trust? The facile answer is that the nature of his business appears to preclude his doing so. A billionaire-turned-politician who made her fortune by founding a tech company can simply sell all of her ownership interest in the company and then give the assets over to a trustee to invest and manage. Neither the billionaire nor the public knows what investments are in her portfolio, and therefore there is no opportunity for those investments to distort her policy judgment. One might think that, by contrast, Trump is far too closely tied to his businesses to be able to divest ownership. Much of the value of the Trump empire is the Trump name, which itself is an association with the Trump lifestyle, as personified by Donald Trump. According to this objection, Trump can't put his assets in a blind trust because he is his assets.

But that answer is too facile. For one thing, it's often true that a wealthy person must sacrifice some of the value of her assets in order to govern without a conflict of interest. In the tech billionaire scenario, even after a company has gone public, part of its market capitalization may reflect the leadership of the founder. Think Apple during the Steve Jobs eras. When the founder divests, she somewhat undercuts the value of the company, including her erstwhile shares in it. Taking a haircut can be part of the price of providing honest public service.

Now, it can be objected, there's a very big difference between Apple and the Trump businesses. Even after Jobs gave up running the company and then died, Apple has been a very successful company. By contrast, the objection goes, the Trump businesses don't exist without Trump.

Yet this objection is dubious. For many years, a major element of Trump's business has been the licensing of the Trump name to properties that are owned and managed by completely separate parties. People nonetheless pay a premium for Trump-branded properties because they associate the name with luxury, even absent any direct connection to Donald Trump. Divesting Trump of the income stream from these licensing deals does not fundamentally change what is being paid for. Thus, the portion of the Trump business that consists in licensing the Trump name can readily be sold to a third party for the discounted present value of its future earning stream.

Meanwhile, those pieces of the Trump empire that consist in tangible goods and real property have a cash value. To the extent that part of their value comes from the Trump name, they also can be sold along with a license to use the name, much in the way that the pure licensing arrangements can be sold.

Is it possible that the Trump properties along with the license to use the Trump name would fetch a
price somewhat lower than the full value of the Trump empire under Trump's supervision? Sure, but it's important to distinguish two different sorts of premium that would be forgone by Trump selling off his assets and the right to use his name.

One premium has to do with management. Despite Trump's spotty business record, there are undoubtedly people who believe that a "real" Trump property is worth more than one that is merely Trump branded. However, forgoing the premium associated with active management is very much in line with what other wealthy people forgo when they sell their identifiable assets and put the proceeds into a blind trust. So while the loss of the management premium could be real, asking Trump to forgo it as the price of public service does not treat him any differently from anyone else. His business is not unique in this regard.

However, there is a second premium that Trump would forgo by selling off his properties and the right to license his name: what I'll call the "corruption premium." By continuing to own properties that are clearly identified with him, Trump effectively invites foreign governments and private parties seeking favorable regulatory treatment to do business with Trump enterprises on more favorable terms than otherwise justified. If Trump were to sell his businesses, the buyer could not capture that additional income stream, because future business counter-parties would know that doing business with the Trump brand would no longer create a financial benefit for the president. Thus, the sale price would not include the discounted present value of that additional income stream. Selling would require Trump to forgo the corruption premium.

Yet that is exactly the point. Surely even Trump and his supporters do not think that he is entitled to receive the corruption premium. Why, then, is Trump unwilling to forgo it by selling his assets and the right to license his name for at most the same sort of discount that any wealthy person who has been closely associated with a particular company would have to absorb as the price of avoiding the fact or appearance of corruption?

Here's a useful thought experiment. Suppose that, after the election of 2008, Barack Obama had decided to cash in immediately. Despite having no prior involvement or experience running hotels or golf courses, Obama sold the rights to his name to a chain of reasonably well-managed hotels and golf courses under a deal in which he earned 20% of net operating profits. Would anybody think that this was anything but corrupt? And yet the money Obama would have earned from Hotel Obama and the Obama National Golf Course would be no different from the money that Trump will earn due to the corruption premium.

Trump has shown no interest in substantially distancing himself from his business interests, much less in divesting his current assets in favor of a blind trust. Given Republican control of Congress and his own impending control over the executive branch, he can probably get away with pocketing the corruption premium. That still doesn't make it remotely acceptable.

15 comments:

David Ricardo said...

Anyone else see the tremendous, sickening irony here?

Mr. Dorf invents a great term, the 'corruption premium'. The irony is that it appears that this is what the Clinton's did, but largely (not totally) using the corruption premium to fund the Clinton Foundation and do a tremendous amount of good. Of course the Trump campaign and Republicans with collusion from the media made this sound like the scandal of all ages. Leveraging one's influence to raise money to promote world wide health, what a terrible thing the Clinton's did, they both should be in jail.

Now we have Trump using the same corruption premium to enrich himself and his family and maybe a few friends that heap slavish praise on him. Condemnation from the Republicans and the colluding media will be nowhere to be found, and a foreign policy based on furthering Trump interests fueled by pseudo bribes of foreigners utilizing Trump properties will almost certainly damage not just American interests but world wide freedom.

Irony and hypocrisy, anyone have a cure?

Shag from Brookline said...

In the course of my law practice that began in 1954, I dealt on occasion with franchising. Franchisees would be required to maintain certain standards set by the franchisor (which standards varied, depending upon the bargaining power of a franchisor). I'm curious about the Trump licensing arrangements as to standards required of licensees and remedies for violations of any such standards, other than removal of the Trump name from an edifice or product (which might impact a continuing stream of licensing fees). Of course it's possible that how Trump deals with his businesses during his presidency may impact upon the value of the Trump license. What might the licensee do in the event the impact of the Trump presidency served as a negative to the licensee's business?

I haven't read the Verdict column as yet but plan to do so shortly, following which I may have some direct comments.

Shag from Brookline said...

Mike's Verdict column's discussion of the Constitution's Emoluments Clause includes this:

"Congress could hold hearings that might embarrass President Trump, but it could not bring a prosecution. The only remedy for an Emoluments Clause violation would appear to be impeachment, which would likely carry unwanted political consequences for Republicans in the form of primary challenges."

Is impeachment the only remedy for a violation of this clause? If so, a cost/benefit analysis by President Trump might suggest full steam ahead for the "corruption premium." [I'm imagining President Trump wearing Commander-in-Chief military regalia in the manner of some presidents of third world countries.]

Joe said...

Clinton's power as senator and secretary of state is a different level than that of Trump as President, and she made a serious effort to separate herself from the foundation once she became SOS. I'm sure, like in all cases, those in high places will influence those who donate in some fashion. No reason to be naive or have the vapors about the real world there though also can't make Clinton out as special. But, need more evidence she "largely" used such "corruption" to fund the foundation.

I'm not going to blithely connect them like that and say, well she did it for good at least. And, what hypocrites Republicans are! No. There is a difference.

Anyway, the NYT yesterday had an interesting column in the business section about suggesting he use some sort of overseer (the guy involved in the 9/11 fund was cited) to keep conflicts to a minimum. An imperfect solution but better than the "shady glasses" trust of using his family.

Finally, some have noted there is an explicit constitutional concern here:

"no Person holding any Office of Profit or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State"

This was covered, but it was suggested only impeachment was a solution if he violated it. I wonder about that. It would seem there is various things Congress can do there ("without the Consent of the Congress" seems helpful) such as requiring "any person" in this situation release tax returns or other types of disclosure. Or, if someone has a financial claim arising from a person violating the clause, and they can spell out details, they can have standing and obtain financial relief or some other type of relief. This can be limited in certain cases to actions involving the business in question alone. That is, Trump himself personally need not be liable.

David Ricardo said...

Update:

Trump has announced that he will hold a news conference on Dec. 15 with his family to announce his total withdrawal from his businesses. For all of those who believe this will happen I am pleased to announce that I am heading up a real estate syndication of a bridge that connects Manhattan and Brooklyn and I can get you in on the ground floor. Cash only please.

One simple solution to the problem would be for Trump to donate all of his holdings to the Trump foundation, which on paper would remove his ability to benefit from the corruption premium, but even this solution is corrupt because of Trump's willingness to use even his foundation for his personal benefit. Is there anything this man touches that does not turn to crap?

Even worse as Mr. Dorf pointed out yesterday corruption at a billion dollar level in a Trump administration is just number five in a listing of risks to democracy and the continuation of the United States as we know it.

Shag from Brookline said...

David's question:

"Is there anything this man touches that does not turn to crap?"

may suggest a variation on the Midas touch.

Consider Trump's wooing of Mitt Romney as Trump's interest in locating "The Lost Mormon Treasure." (Alternatively Trump is co-opting Romney whether or not Trump nominates Romney to be Secretary of State.)

Shag from Brookline said...

Perhaps Trump may propose a "Three Blind Mice Trust" consisting of his adult children. Perhaps someone may take a crack at adapting the nursery rhyme lyrics to reflect this. Will we "See how they run" Daddy's businesses? Will Daddy?














"See how they" run

Michael Gould said...

Is there really no scenario under which a plaintiff would have standing to take the Trump administration to federal court over the emoluments clause? After all, if billions of dollars are changing hands, there must be losers somewhere. A DC hotelier who's foreign diplomatic customers suddenly start patronizing a Trump-owned hotel? An American businessman involved with overseas markets, who's business suffers because of an executive action which arbitrarily benefits a Trump business?

Joe said...

I think Mr. Gould's comment has some bite. For instance, following a link from the column, eventually saw an article which included this comment:

"If Congress wants to enforce the Emoluments Clause against Trump, they could pass some specific legislation enabling judicial enforcement of its terms"

http://www.vox.com/policy-and-politics/2016/11/23/13715150/donald-trump-emoluments-clause-constitution

Not that they probably would. The clause itself says "without the consent of Congress," so that would suggest (at least by the Necessary and Proper Clause) it could allow it with strings (only allowing minor enrichment here, standing provided to challenge for large amounts, disclosure etc.).

I would argue, though the courts might not, the clause itself should grant standing. As Mr. Gould notes, it need not be a citizen suit, but someone who specifically was harmed by an alleged violation. I assume an attempt will be made eventually.

Shag from Brookline said...

Over at the Originalism Blog there is a post on Josh Blackman's views. I haven't checked out Blackman's full blog post as yet but what is excerpted points to the Emolument Clause's inapplicability to the President per Tillman who, according to Larry Tribe is "no kook." We don't know if Larry extends this compliment to Blackman.

Shag from Brookline said...

Here's the closing line of Blackman's Blog post:

"So here’s another thing John Roberts and Donald Trump have in common: Congress can’t regulate their private dealings, short of impeachment."

So presidents and justices can game the system unless the House takes action and the Senate agrees via impeachment? That's just peachy.

Joe said...

A person replied at Concurring Opinions Blog to the "not applicable" argument in a post before Professor GM signed off for the month. Felt the argument lame. Ditto.

I don't believe impeachment only is the remedy and it amounts to saying 'not happening' since it is a nuclear option. It's a b.s. argument, surely vs. Trump.

Shag from Brookline said...

Richard W. Painter has another OpEd on potential conflicts of Trump as President in connection with his businesses. The OpEd includes this:

"But it also presents a global security risk. A building branded with the name of an American president — any president, but perhaps especially Mr. Trump — would be a tempting target for terrorists and other enemies of the United States. Who is going to protect the buildings? Will the Trump organization hire a security firm to do the job, or will the American taxpayer be on the line for the bill? Will foreign governments offer to pay to secure the properties — a subsidy of the Trump organization that would probably violate the Emoluments Clause? If a terrorist attack, a botched security operation or some other tragedy happens on a Trump property, the United States could easily get drawn into a conflict abroad. And our adversaries know this. This is one of the most dangerous aspects of Mr. Trump’s conflict-of-interest problem."

I raised this issue in comments at this Blog (on another thread) and at Balkinization. No one picked up on them. But this real problem. It may raise issues beyond the Emoluments Clause that are key to the C-in-C role of the President as well as his foreign policy role.

By the way, Painter seems to think the only remedy for violation of the Emoluments Clause is impeachment. But he says there may be other lawyers that might deal with certain conflicts.

There are many companies based in America that have operations in foreign countries. Could the Trump Administration be expected to treat their foreign operations any less than foreign operations of Trump's businesses?

Joe in his recent comment mentions "a nuclear option." But I think he means that in the same sense as used regarding changing certain Senate rules. But the President has the nuclear football, which is more devastating in the event of a potential incident described by Painter and the reaction to it.

I share Joe's concern with limited remedies.

Shag from Brookline said...

Sorry. The Painter OpEd is at the NYTimes website.

Shag from Brookline said...

One of the duties of a President is to state, from time to time, America's National Security Strategy. Here is a link to President Obama's dated February 2015:

https://www.whitehouse.gov/sites/default/files/docs/2015_national_security_strategy.pdf

I first became aware of this duty while auditing, as a senior citizen in semi-retirement from my law practice, a political science course in the Spring of 2003. I became aware of George W's Strategy published in September or October of 2002, which included a right o pre-emptive action.

At some point in time, President Trump will submit his Strategy, although Trump during his campaign stated that he doesn't like to let enemies know what he might do. I wonder if Trump's Strategy will reference his foreign businesses or other US-based businesses' interests in foreign countries. Will the Senate in considering consent to Trump's Cabinet nominees, especially Defense and State, inquire into reactions by nominees if events described in Painter's quote in my earlier comment occur, or with respect to foreign emoluments?