Slate Money: "The Fake Loans Edition" — July 22, 2017

Host: Felix Salmon
Co-hosts: Anna Szymanski, Jordan Weissmann
Theme: A weekly roundup diving into the most intriguing and sometimes outrageous stories in business and finance, featuring in-depth discussion on student loan chaos, hedge fund tax shenanigans, wealth management’s underbelly, and more.

Episode Overview

This episode explores the world of "fake loans," with a primary focus on the chaos in the private student loan market where poor tracking of loan ownership prevents effective debt collection, and the elaborate tax avoidance strategies of hedge fund managers using donor-advised funds and charitable trusts. The discussion weaves in memorable stories from the finance world, such as Donald Trump's infamous Deutsche Bank loan saga, and ends with a round of quirky financial numbers.

Main Topics & Key Insights

1. The Student Loan Title Mess (03:00 – 13:08)

• Background: Recent New York Times reports revealed that the National Collegiate Student Loan Trusts owns billions in private student loans but often can't prove ownership due to lost paperwork—a striking echo of the foreclosure crisis.

• Application to Borrowers: Many people who default are sued for repayment, yet when challenged in court, the Trust cannot produce proof of ownership ("title") for the loans.

• Key Example: A sample audit showed zero out of 400 loans had verifiable titles.

  “The number of those [loans with verified titles]... 0.”
  —Felix Salmon (05:25)

• Implications: This means debt collectors and the Trust may not have legal standing to collect, impacting both borrowers and investors.

• Broader Take: Sloppiness in paperwork, faith in harsh bankruptcy laws, and overconfidence by lenders are fault lines in the private student debt market.

2. Ethical and Practical Questions for Borrowers (09:22 – 12:58)

• Hypothetical: Would you strategically default on these loans?

• Host Views:

  • Felix leans toward defaulting if collection is unenforceable, citing potential cost-benefit versus credit impacts.
  • Anna supports “strategic default” as a rational choice if lenders have failed risk assessment.
  • Jordan highlights the principle of upholding contracts and effects on broader credit markets.

• Notable Quote:

  “Society is based on contracts, upholding contracts is kind of important...”
  —Jordan Weissmann (11:41)

• Takeaway: Strategic defaults may be morally ambiguous but stem from lenders’ own mismanagement.

3. Case Study: Donald Trump’s Loans & Deutsche Bank (13:08 – 22:29)

• Storyline: Trump defaulted on a $640 million Deutsche Bank loan, sued the bank for the 2008 crisis, and eventually repaid by borrowing from a different Deutsche Bank division.

• Mechanism: This intra-bank loan shuffle exposes complexities when major clients are also political leaders.

• Why Deutsche Bank? The bank was trying to build its US real estate and wealth management presence, making them more willing to extend risky loans.

• Concerns: Trump’s personal guarantees create potential regulatory and diplomatic issues if future loan problems arise.

  “If Donald Trump has a private banking relationship [and] he then defaults, what does Deutsche Bank do? Either sue the President or don’t sue him... Both are problematic.”
  —Felix Salmon (17:22)

4. Wealth Management, Tax Avoidance & Charity Loopholes (27:26 – 38:10)

• Hedge Fund Tax Deferral Loopholes:

  • Managers delayed taxes on seeded offshore money; post-2008 loophole closure, many sought new avoidance methods before a coming deadline.

• Donor-Advised Funds (DAFs):

  • These allow for charitable donations and immediate tax benefits while retaining investment control, and unlike foundations, face little obligation to disburse funds quickly.

• Host’s Take: Donor-advised funds are personally handy but problematic from a policy perspective as they can hoard resources.

  “On a personal level, I find donor adviser funds kind of fun and awesome things. On a public policy level, they're really bad.”
  —Felix Salmon (31:46)

• Charitable Lead Annuity Trusts (CLATs):

  • Exploit low IRS discount rates to generate large, immediate tax deductions, while the donor retains nearly all investment gains ("scammy").
  • High returns beyond a paltry interest rate go untaxed ("obscene").
  • Charities bear risk with little upside; more popular as rates stay low.

  “Everything they get from that investment over and above that 1.8% is tax-free income. It's obscene.”
  —Felix Salmon (37:02)

Notable Quotes

• “This is just so fascinating because... the sloppiness here is actually student lenders... just assuming that government regulation was going to make it really easy to collect all this...”
  —Anna Shymansky (06:21)

• “If I'm not making more than 1.8% in my hedge fund, I am a really lousy fund manager.”
  —Jordan Weissmann (35:39)

• “Friends don't let friends invest in ICOs. Just don't.”
  —Anna Shymansky (43:54)

Memorable Moments & Side Notes

• Running Joke: Near-reluctant mentions of “The Mooch” (Anthony Scaramucci) and Trump politics, underscoring their effort to stay business-focused.
• Anna’s Reaction to Charity Trusts: “This can't be renewed. This has to be. This is a scam.” (28:51)
• Discussion on Google Glass 2.0 (39:41): Former flop now finds a second life as an "enterprise solution" for industrial and medical use.
• UK Sports Direct Earnings Presentation (40:39): Only 17 words—“It's clear we've smashed it out of the park with our Selfridges of Sport concept.”
• ICO Hack Highlight (42:26): A simple website hack rerouted $7 million in ether from hopeful investors to scammers: “Friends don't let friends invest in ICOs. Just don't.” (43:54)

Timestamps for Key Segments

| Topic | Start | End | |-------------------------------------- |----------:|-----------:| | Student Loan Papers/Title Mess | 03:00 | 13:08 | | Default Strategies & Ethics | 09:22 | 12:58 | | Trump/Deutsche Bank Loan Saga | 13:08 | 22:29 | | Wealth Management & Russian Oligarchs | 22:29 | 27:26 | | Hedge Fund Tax/Charity Loopholes | 27:26 | 38:10 | | Numbers Round (Google Glass, etc.) | 38:13 | 44:39 |

Takeaway

This episode unpacks how the student loan servicing debacle exposes regulatory gaps and misplaced lender confidence, while also demystifying sophisticated tax avoidance strategies used by the wealthy. The hosts' frank discussions bridge finance theory and the very real ways in which individuals and companies play—and sometimes game—the system.

For Listeners Who Want More

If you’re fascinated by financial loopholes, regulatory quagmires, and stories where the systems designed to protect the powerful sometimes backfire, this is an episode worth referencing—both for the surprising insights and the hosts’ candid, often humorous tone.