The Fake Loans Edition

Summary

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.

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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.

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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)

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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)

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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)

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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 |

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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.

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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.

Transcript

[Anna Shymansky]

The following podcast contains explicit language.

[Felix Salmon]

Hello, and welcome to the Fake Loans edition of Slate Money, your guide to the business and finance news of the week. There's been a bunch of news this week. I'm Felix Hammond of Fusion. I'm here to talk about this news with Anna Shymansky.

[Jordan Wiseman]

Hello.

[Felix Salmon]

And Jordan Wiseman of Slate.

[Anna Shymansky]

Hello, everyone.

[Felix Salmon]

And the minute I said fake loans, I'm like, oh, my God, we're going to talk about Paul Manafort, aren't we? And all of these weird loans that the New York Times dug up $17 million of debt he nominally he apparently had to various Russian or Ukrainian entities. We're not going to talk about that because we try and keep this a politics free zone. We are not. I apologize to all of my Twitter followers. We are not going to talk about Anthony Scaramucci.

[Anna Shymansky]

I thought about Trump. So I literally was going to do my number for the numbers round was going to be five. At one point I was like, that's how many letters are in the fucking Mooch. But then I realized that Felix Crown.

[Felix Salmon]

Of me and she looks like he might be the new White House communications director. And famously once said of me that everybody hates him, even his wife.

[Anna Shymansky]

He's really good at communicating clearly. He's really good at that.

[Felix Salmon]

Everybody hates Felix Salmon, even his wife. That was one of the legendary Mooch quotes, which for obvious reasons I haven't really forgotten. We're not going to talk about him. We are not even going to talk about AlphaBay, which is the new Silk Road and which did, like a billion dollars worth of illegal trade in.

[Jordan Wiseman]

Almost talked about it.

[Anna Shymansky]

Almost talked about it.

[Felix Salmon]

We almost talked about. And we just decided that, no, what we really want to do is talk about charitable deed annuity funds instead.

[Anna Shymansky]

We do.

[Felix Salmon]

It's going to be awesome.

[Jordan Wiseman]

It really will.

[Anna Shymansky]

It's like how last week we were like, hey, we really want to talk about Warren Buffett's utility deal, because it's really fascinating. And Anna lit up like we've never seen before.

[Felix Salmon]

So I do have a new blog that says, I have a little announcement to make. It's called Cause and Effect. You can find it at CauseAndEffect FM, which is maybe a hint to its final form, but right now it lives on the web. And I am going to be writing about charitable lead annuity trusts, and I write about various philanthro stuff on there. So I feel like this is my wheelhouse. Now I get to the philanthropy out for a segment.

[Anna Shymansky]

Excellent.

[Felix Salmon]

It's going to be. It's going to be fun. It's going to be all about how hedge fund managers try and evade taxes. But we have other things to talk about and most urgently, Jordan.

[Anna Shymansky]

Yes.

[Felix Salmon]

We want to talk about the student loan market or what is going on. There was a crazy New York Times story about student loans.

[Anna Shymansky]

Yeah. So you remember how right after the financial crisis and we had all those foreclosures where the banks actually didn't have any paperwork and they were just foreclosing on people anyway and suing them, trying to take away their.

[Felix Salmon]

And do you remember? I don't know. I mean very long term listeners to Slate Money might rem that very early on in the show we had Jake Halpern on.

[Anna Shymansky]

Yes.

[Felix Salmon]

And he was talking about like what do you do if you're being chased by debt collectors? And the answer is make them take you to court and then ask them to prove that they have title to the loan because they never do.

[Anna Shymansky]

Absolutely. So those two stories are sort of combined now with student loans. The New York Times had this piece about how this company called National Collegiate Student Loans Trusts was essentially which has billions of dollars in student loans. We're not talking about government backed debt here, we're talking about private student loans that would have been issued by banks, Sallie Mae back in the day. You still see some sort of a private student loan market even though it's not that huge in the scheme of things. And so those loans were securitized as all debt eventually gets securitized. And it ended up in the hands of this group and a lot of that.

[Felix Salmon]

And the name of the group is.

[Anna Shymansky]

National Collegiate Student Loan Trusts. Yes, we all remember that name. And so they ended up with laws debt and because it's private student loans and a lot of them were made to people who never should have taken them out in the first place. A lot of it ended up in default. And so now they have been suing people to try and get back or to try and collect that debt.

[Felix Salmon]

Or more to the point, they have passed it on to various debt collectors and then the debt collectors take the people to court. And guess what? Some of these people listen to Slate Money.

[Anna Shymansky]

Yeah. Or also, you know, or have good lawyers. Yes, have good lawyers or you know, get some non nonprofit lawyer to show up and help take the case to court. And what are they discovering? Oh, there are billions of dollars of these loans with no chain of title that no one has. They cannot prove that they actually own these things. It's a complete just replay of what we saw with securitized Mortgages.

[Felix Salmon]

And someone took a sort of random sample of 400 of these loans and said, I'm just going to look at 400 of these loans and see how many of them we actually have title to. And the number of those, that group of 400. Now, we don't know that it's completely representative, but it's indicative.

[Jordan Wiseman]

Yes.

[Felix Salmon]

How many of those loans did they actually have title to, Anna? 0.

[Jordan Wiseman]

How is that even possible, man?

[Anna Shymansky]

This is where they need blockchain for. This is actually, actually, you know what? This is an example.

[Jordan Wiseman]

This actually is an instance.

[Anna Shymansky]

This is one where it's like that would. Because apparently they can't keep track of the goddamn paperwork.

[Felix Salmon]

They should have just put these loans on the blockchain, had the blockchain existed. But the. But, yeah. So it's called. I believe the name of the entity which you probably see if you're the borrower is American Education Services. And the fact is that if you're writing monthly checks to American Education Services and we can get into this a little bit, but, like, not that this is financial advice or anything, but if you just stopped writing those checks and waited for them to take you to court, you could probably just say, show me the title. And they probably couldn't.

[Anna Shymansky]

I mean, yeah, it's. It's. This is just so fascinating because I feel like part of the sloppiness that. Or part of the sloppiness here is actually student lenders or people who took or who bought these securitized loans just assuming that government regulation was going to make it really easy to collect all this, because back in the early 2000s, as part of the bankruptcy bill that President Bush signed, it made it impossible, essentially, or nearly impossible to discharge student loans. And so very rarely do people try to get them discharged. Very rarely do people take this stuff to court. For the most part, if they end up defaulted and in trouble, they just kind of let it lie. They don't challenge it. It's just, you know, they just sort of saying, well, I'm screwed. And so I'm assuming there was some degree of overconfidence here where they were just like, we'll be able to collect this debt no matter what. Who cares what's in the filing cabinet? Yeah. And instead it's, you know, they seem to have screwed the pooch.

[Jordan Wiseman]

Definitely. And part of the reason that you, when you often had other assets that were backed by these type of payments, they tended to be pretty SAF assets, because the laws related to discharging student loan debt are so onerous that it's going to make the ultimate default rates lower.

[Felix Salmon]

Yeah. So the interesting twist to this case is that the equity owner of the loans, like, if the loans all get paid back and the people who bought the securitized debt get their interest payments and there's a bit of money left over, then that money goes to this guy who's a venture capital private equity guy who gets what's left over at the end of it all. And this guy, if you are a slate money nerd and you understand capital stacks, which you probably do at this point, the intuition is that this guy, because he's the equity holder, he's like the most junior person owns it, basically, he's like the owner of it, and he gets to control it and he gets to say what happens. He doesn't want these cases being brought to court. Court. And he's trying. He's basically saying, this is insane. I own this debt and I can't. And I. He's in his own court fight, trying to stop them from bringing these cases to court, and then somehow they're still bringing these cases to court.

[Jordan Wiseman]

Yeah, I think he's actually fighting with other equity owners, and then the. This particular trust is not speaking with him. So, yeah, it's a mess. But, you know, when the good guy in this case is the private equity guy, that the other people are pretty darn bad.

[Felix Salmon]

And. Yeah, and this is another literal sort of running theme of slate money is that trustees and fiscal agents and all of those things where people, you know, give themselves jobs to act on behalf of bondholders and whatnot. They are, I believe the technical term is otos. They just. They do as little as possible, and they are as unhelpful as possible as they can be because, like, they. It's just a horrible thing. Never become one of those. But, Anna, I have a question for you.

[Jordan Wiseman]

Okay.

[Felix Salmon]

If you had a bunch of student loan debt payable to American Education Services, let's say you had, I don't know, $20,000 in AES debt, which you owed them and you were paying back at however many hundreds of dollars a month, would you just default on that right now?

[Jordan Wiseman]

Probably not.

[Anna Shymansky]

But you can ask them to prove that they own the title. Right?

[Felix Salmon]

Like, and they'll just ignore you.

[Anna Shymansky]

Interesting.

[Jordan Wiseman]

Right. But I would say in this specific instance, again, this is not advice to anyone. In this specific instance, you could argue that it might make sense to either just stop paying or to actually get a lawyer to figure out what your rights are, which I think probably is the better option. But this is a very specific example of student loan debt that is not really applicable, I would say, beyond this specific example.

[Felix Salmon]

So I, so I got into this on, on Twitter a little bit. I'm like, if I had AES debt specifically given that it's pretty obvious they can't prove title to any of it, you know, it wouldn't make it. Now, I would probably suffer a hit to my credit rating. But that hits my credit rating is probably worth, you know, cost me less than like $10,000 or $20,000, however much I'd save. And so ultimately I'll take that if I get to keep my $20,000. And some people were just coming back and making the standard argument of, but you have like a moral, ethical responsibility to make this debt repayment. To which I just said, well, what would Donald Trump do?

[Anna Shymansky]

Yeah, I mean, although, should that be our moral. I think, you know, longtime listener show may remember me haranguing Ellie Mistel a while back about his law school debt. But there was a weird, that was a weird discussion. But in general, I'm not, I don't have many compunctions about a strategic default on private debts. That's, you know, they're, they're underwriting the loan. They're supposed to be assessing you as a risk. And if you're more of a risk than they thought, whoops, they did a bad job underwriting. I will say that I think that again, the idea of just, just defaulting because you think they probably don't have title, that is, that is a risk. You know, just because that sample 400 had no title, like, there is a chance that that was a, you know, a skewed sample. It's put that way, there's an off chance.

[Jordan Wiseman]

And also, like society is based on contracts, upholding contracts is kind of important. And if lots and lots of people default on debts, it does make rates higher for everyone.

[Anna Shymansky]

Yeah, but private student debt is just.

[Jordan Wiseman]

Yeah, look, private. Look, I will totally give you that. Yes. Private student debt is a specifically awful part of the market.

[Anna Shymansky]

Yes. And the fact that, I mean, I think part of the reason I'm relishing this is because the government went to such lengths to make it impossible for people to get rid of these private loans, which they never should have passed that law. It was such a reprehensible piece of legislation that just, there was no public policy justification for it. They said, okay, lenders, you've got free reign here. You've got all the same rights as the federal government. Which offers all these discounted loans to people, to poor people who would never get private loans for the most part. And then these lenders, or I guess this trust just managed to totally mess it up. It's like you just. It's like you were playing T ball and you whiffed like it's what they've done here. And so I think that's part of why I'm just like, yeah, if you think I have.

[Felix Salmon]

I have sympathy with this because I have whiffed things. I have very bad hand eye coordination. What can I say? But, yeah, I would say, like, yeah, not a lot of tears are being shed for. What's the name of this entity again?

[Jordan Wiseman]

You're just being mean at this point.

[Anna Shymansky]

National College Loans, something. Whatever the fuck it is, like the Keystone Cops of debt here. That is pretty much what we're dealing with.

[Felix Salmon]

Okay, so when I ask my Twitter followers who I'm getting into fights with on Twitter, what would Donald Trump do? Anna, what would Donald Trump do? If entirely hypothetically, he went along to Deutsche Bank's commercial real estate arm and said, hey, lend me hundreds of millions of dollars so that I can build a big tower in Chicago. And Deutsche bank turned around to him and said, fuck off. What would he do?

[Jordan Wiseman]

He would probably sue them, which is so. Incidentally, he did actually originally take out a loan, Donald Trump, from Deutsche Bank's commercial real estate arm. And then when he couldn't pay it back in 2008, he couldn't make one of the payments. He then said that he couldn't make the payment because of the financial crisis. Deutsche bank was partially responsible for the financial crisis, and he sued them for.

[Anna Shymansky]

$3 billion, which is the greatest lawsuit I had known that this lawsuit happened. I did not know that was the actual complaint. I did not know, literally, he sued them for the financial crisis that only affected him. That is such. Just like. I mean, this is why people actually had affection for Donald Trump before he became into. Became a racist demagogue who is just like the ridiculous brass.

[Jordan Wiseman]

But anyway, yeah, so ultimately, obviously, he did not win this case, but the loan is extended and he was able to pay off that debt by then going to Deutsche Bank's private wealth management division, getting a loan from them, and using that to pay off Deutsche Bank's commercial real estate.

[Felix Salmon]

So this is, this is. This is memorably described in the article as basically, you owe money to your dad and so you pay it off by borrowing money from your mom.

[Jordan Wiseman]

Yes, exactly.

[Felix Salmon]

And it all comes from.

[Jordan Wiseman]

Or your dad wearing A different hat.

[Felix Salmon]

And it's, it's basically, yeah, it's one big Deutsche bank balance sheet. And. But the people in the commercial real estate arm are happy because they got their loan repaid and the people in the private wealth management arm, because that's where he's getting the money from, are happy presumably because this is part of a broader relationship that he has with them and they get to look after his billions.

[Jordan Wiseman]

Exactly. So part of the reason you would think, okay, why is the wealth management arm more likely to deal with them? Because this is normally not what you think of when you think of private banking and wealth management like financing like hundreds of billions of dollars in a hotel. That's not normally what you think of. And this is uncommon. But not. It does happen. And in this instance, part of the reason it happens is because often in private wealth management you have securities based lending, so you have to keep a certain amount of assets at the bank that then you are lent against. I don't know if that's the case with Donald Trump, but that is, I.

[Felix Salmon]

Don'T think he has that much in securities.

[Jordan Wiseman]

I have no idea.

[Anna Shymansky]

But he has some.

[Felix Salmon]

I remember the whole point was.

[Jordan Wiseman]

But in terms of assets, in terms of the assets that he would have to have with Deutsche bank that then potentially they would lend against. But the, the argument is that by going to the wealth management arm, he's now going to do much more of his banking, hold more of his, of his assets at Deutsche Bank. He has other rich friends that he will then get to come to Deutsche Bank. There are all of these kind of contingent benefits that they would get that the commercial real estate arm wouldn't.

[Felix Salmon]

And, and yeah, not just rich friends, but even rich son in laws. Yes, I was, I have this theory about Donald Trump that he admires people entirely based on their net worth. And the reason he loves Jared Kushner so much is just because Jared Kushner has more money than he does.

[Anna Shymansky]

Does he at this point? Does Jared Kushner actually have a higher net worth than Trump?

[Felix Salmon]

I probably does.

[Jordan Wiseman]

Depends on how you define Trump's net worth. Which.

[Anna Shymansky]

Yeah.

[Felix Salmon]

And Jared Kushner.

[Anna Shymansky]

Yeah. And who knows? This may all become a very Putin esque exercise in trying to figure out net worth soon. But we should probably say what the news hook for the New York Times article was, which is there now. Regulators are looking at Deutsche bank, at.

[Jordan Wiseman]

His relationship with Deutsche bank, partly to figure out if in order his relationship with Russian lenders.

[Anna Shymansky]

Well, partly. But also the Fed is looking at it because they're just saying, are these loans like good, Are you going to be able to get this money back?

[Felix Salmon]

Yeah, yeah. It's a really salient question because if Donald Trump has a personal private banking relationship with Deutsche bank and he personally owes hundreds of millions of dollars to Deutsche bank and he then defaults on any of that debt, which is an entirely possible thing because he defaults on debt all the time, then what does Deutsche bank do? They have two choices. They can either sue the President of the United States or they can not sue him because he's the President of the United States. Either of which is problematic.

[Jordan Wiseman]

Right. Because Donald Trump likes to say he has no personal debt. But that's not really true because even though a lot of the debt is actually through his companies and they're non recourse loans, so you would think in theory they can't come after him, they can only go after the collateral. But he has personal guarantees on a lot of these loans, so ultimately they can. That's actually why he had the original issue with Deutsche bank, because he had a personal guarantee on that.

[Anna Shymansky]

Yeah. And that's not totally unusual in real estate. Actually, I'm pretty sure that's how my grandfather lost all of his money on a bad real estate deal back in the day. I can get into a long story about that. But I mean, these things, I mean the personal guarantee part, that's one of those quirks of real estate is like sometimes that's just how you do it, but in this case now it's the personal guarantee of the President who also wields the entire Justice Department.

[Jordan Wiseman]

Right. And then it raises larger questions about the American government's relationship with Deutsche Bank. And if we have had penalties against Deutsche bank in the past. So if now you have a President of the United States who has this tremendous liability with this institution that raises large in.

[Felix Salmon]

Ultimately, you know, it's the government that's in charge of regulating Deutsche Bank. And so the bank regulators kind of answer to the President. It's all very difficult to disentangle.

[Anna Shymansky]

In this case, the Fed, not so much. The Fed thankfully has its own lines of authority that don't really come directly from the President.

[Felix Salmon]

So that although he did just appoint or say he was going to appoint Randy Qualls to be the guy who oversees, even the Fed is ultimately appointed by the President.

[Anna Shymansky]

Yeah, I guess you're right. There it is. It's hairy. It's like it seems like, I don't know. To me this does seem like an example of you owning the bank like, to me, like, you know, he, you know, this is yet yet another example of Donald Trump in his long, illustrious career of, you know, taking out loans that suddenly had the bankers beholden to him. He's.

[Felix Salmon]

There's a good reason why, when you look at the list of sanctions that the Americans have imposed on various Russian nationals for being, you know, bad people, that that list has a lot of bankers on it, a lot of the Putin cronies and whatnot. He has a bunch of banks which are kind of indistinguishable from the government.

[Jordan Wiseman]

Right. And that's frankly, I mean, when you start to look at Russian corporates and Russian banks, anything of size is either going to be state owned or it's going to be very closely aligned with the state. That is just Russian business.

[Anna Shymansky]

So I guess that's the other element here that the Times article was kind of weird about the Russian angle going on, because they're saying Deutsche bank involved in a lot of Russian money laundering. They've been fined for money laundering. A lot of Russians do business with it still, but they don't think any of this private lending business had anything to do with the Russians.

[Jordan Wiseman]

Although I'm gonna argue, like, look, all German banks do a lot of business with Russians.

[Felix Salmon]

But Deutsche bank is the.

[Jordan Wiseman]

Biggest German bank, so they're gonna do more business with Russians.

[Felix Salmon]

And they also. And they were doing some of the most blatant business with Russia. They were doing this scheme which basically, if you're a Russian with assets in Russia and you want to get those Russia assets outside Russia, you're not allowed to just transfer them out of Russia. So what you do is you go along to Deutsche bank and say, can I sell you the assets in Russia? And then at the same time, you're shorting the assets outside Russia, and there's this weird sort of mirror trade thing going on where magically you wind up with assets outside Russia. And yeah, Deutsche bank gets fined quite a lot of money for doing these, because they were clearly not economic transactions. They were just ways to get around rules that this is what Deutsche bank is good at. And this is also what Deutsche Bank's private wealth management arm is particularly good at, because these people are individuals who are wanting to move money around the world. And wealth management operations, when you're dealing at that level of individual, that's your job is to try and find ways to move money around the world.

[Jordan Wiseman]

Right.

[Felix Salmon]

When you're not meant to.

[Jordan Wiseman]

Exactly. Also be. And wealth management is becoming a bigger and bigger profit center for a lot of banks as they can't make as much money through trading as they can't make as much money through all of these other means that they used to because of stricter regulations. This is a very competitive business.

[Felix Salmon]

We have talked about Credit Suisse many times on this show.

[Jordan Wiseman]

The only place a company that can lose money in wealth management.

[Felix Salmon]

But that's true. It's like they are betting the farm on wealth management and specifically on wealth management in Asia on the grounds that they can't work out how to make money anywhere else.

[Anna Shymansky]

Does betting the farm on wealth management or getting really further into or kind of diving deeper into it pretty much guarantee that these banks are just going to be dealing with more unsavory characters that like you're just going to deal with more, more of your business is going to be like serving oligarchs essentially and helping them move their money around.

[Felix Salmon]

Like if you're international, I think the answer is necessarily yes.

[Anna Shymansky]

Yeah.

[Felix Salmon]

You know, there's a case to be made that there's a handful of like Silicon Valley billionaires who are relatively clean. But yeah, if you're trying to do wealth management in you know, Africa, say, you know, or just about anywhere in the world, certainly in, you know, Eastern Europe and Russia and places like that, you can't avoid dealing with people who in an ideal world you might not necessarily want to be dealing with.

[Jordan Wiseman]

Right. Although I would say the vast majority of wealth management people who are dealing with are not those high, high, high net worth individuals. That's going to be a smaller sliver of your business.

[Anna Shymansky]

How? What percentage of your business though comes from those super high net worth individuals? I mean they are so disproportionately wealthy it seems like they're going to be.

[Felix Salmon]

And this inequality increases. Your total like wealth management assets could easily be dominated by those individuals. I even one or two of them.

[Jordan Wiseman]

I agree. But I'm also wondering how many of the wealthiest people are actually going to work with these big banks wealth management divisions? I don't know because, because they actually don't. The client isn't necessarily going to get all the benefits. The, the bank is going to be able to assess a lot of fees. And this is really all about fees. Any wealth management store is fundamentally a story about fees. Now if you're very, very wealthy and you can put your money in all these different smaller private funds which also you're paying fees, but I don't know, I would think the, the biggest players might not be as involved in this. Donald Trump is because nobody else will lend to him.

[Felix Salmon]

Well, so that and, well, I mean, I think wealth, every single major wealth management arm of a big bank, whether it's Deutsche bank or Credit Suisse or anyone else, will tell you that they're more than happy to put your money into small private funds like they will. You just need what you want. And what you need is a highly professional operation which you can trust not to run away with your money and to keep tabs on everything. And just like a one stop shop which will look after everything for you because otherwise it's just too much for you yourself to keep up with. And then if you want to invest in small private funds or whatever, they'll be happy to do that for you. But if I'm a billionaire, I don't want to use, I mean, I, you know, I might set up my own family office, but if I don't want to set up my own family office, I want to find a large Swiss bank or Deutsche bank or someone who I can just say, like, deal with everything.

[Anna Shymansky]

I think this. So just coming back to Trump, this does kind of explain or I think we're starting to understand his relationship with Deutsche bank better, which is just like, why was this the bank that decided to work with him? Simple. It was the bank that was used to dealing with extremely unsavory characters.

[Jordan Wiseman]

It also has to do with. So in the 90s, when they really started to build their business with Trump, it was because they were trying to build a New York commercial real estate business and trying to expand. And so they would deal with him. And then when you move further on, the reason that they would continue with the wealth management was same reason they were really trying to build out their wealth management. So they were more apt to deal with him.

[Felix Salmon]

This is one of the standard stories about German banks, and it's not just Deutsche bank, but it's mainly Deutsche bank is that they look jealously at various banks in the US and the UK and Switzerland and say they're making so much money in bond trading, they're making so much money in equity trading, they're making so much money in M and A, they're making so much money in wealth management, we should be in that business. And then they spend gazillions of dollars trying to get into that business and then it never really works out for them. Right, okay, so we have a news hook now, which is a good news hook. It's a fun news hook. Basically there was this loophole which was closed in 2008. A bunch of hedge fund managers were managing their money offshore. And a little bit like Apple and Microsoft and all of these other companies which managed to keep money, keep profits offshore and not pay taxes on it. They were basically doing the same thing. They were managing offshore money in the Cayman Islands and keeping that money in the Cayman Islands. And so long as they weren't repatriating it, they weren't paying any income tax on it. This was a loophole which was closed in 2008, and the government gave them 10 years to just pay that income tax already. So this is all income tax which was owed before 2008, but they could just defer paying it indefinitely until now. Finally, something's coming home to roost. I'm not quite sure.

[Anna Shymansky]

Well, now it's the 10 years or.

[Felix Salmon]

The 10 years up in 2018. And so now they're like, oh, yeah, they don't have to pay this tax bill.

[Anna Shymansky]

They interpreted that as, oh, we have 10 years to figure out how not to pay tax.

[Jordan Wiseman]

Exactly.

[Anna Shymansky]

It wasn't. We got 10 years to pay. It's like, okay, we got a decade to figure out a new loophole. And so, you know, the Wall Street Journal had a report on this, and it seems like a lot of what they're think, they don't have a really good loophole. They don't have, like, a great loophole. I just got to keep it totally intact. But there's a lot of shenanigans involving charities. And I was.

[Felix Salmon]

So this is. Yeah, so this is this wonderful. There were two wonderful charity shenanigans which they're using. And honestly, like, you know, the ultimate effect of this is that a bunch of charities are going to get a bunch of money. So that's good. But. So the idea is basically they're going to think to themselves, I have billions of dollars, and I'm going to inevitably wind up giving some large chunk of that money to charity eventually anyway. So why don't I give a bunch of that money to charity now in this 2018 year where I have a massive tax bill in such a way as to minimize my massive tax bill? Because even though they might like giving money to charity, they really hate paying taxes.

[Anna Shymansky]

Yes, yes.

[Felix Salmon]

So one of the ways they do this is called the Dungeon Tribes Fund. We'll talk about that. Interesting thing. The other way that they're doing it is a crazy, crazy thing called the Charitable Lead Annuity Trust. And that's what I really want to geek out.

[Anna Shymansky]

So I was reading the description of it in the Wall Street Journal. I was just like, this can't be renewed. This has to be. This is a scam.

[Jordan Wiseman]

And then we heard that it was a scam that Jackie Onassis was involved in.

[Anna Shymansky]

What?

[Felix Salmon]

Yeah. Felix, explain this thing. I'm going to explain this thing, but before I explain this thing, I just want to just very quickly touch on the donor advised funds.

[Anna Shymansky]

Yes.

[Felix Salmon]

Because the one, because the one thing they want to do beyond just not paying taxes is keep the money.

[Anna Shymansky]

Yes.

[Felix Salmon]

So one of the things they can do is set up this thing called a donor advised fund. And what they do is they create a charity or there's some sort of paper charity which they give their hedge fund holdings to. And then what does the charity do with these holdings?

[Anna Shymansky]

Invests them in their fund.

[Felix Salmon]

It doesn't give them away. It just keeps that money invested in that fund. So if I'm Stevie Cohen, say, and I give a billion dollars to a donor advised fund, then that donor advised fund can just keep that billion dollars in Stevie Cohen's hedge funds. And he still has that money under management.

[Anna Shymansky]

And does he still collect his 2 and 20 on that?

[Felix Salmon]

He still collects his 2 and 20 on that. And he has zero obligation to give any of that money actually in cash to actual charities. If you set up a foundation now, like this is the other thing that people do is they set up a charitable foundation and then the charitable foundation will have an endowment and the endowment can invest its endowment in your funds. And that's. People do that. And that is another way of getting around, you know, these, these tax bills. But foundations need to spend 5% of their assets every year on actually giving money to charity, whereas donor advised funds do not.

[Anna Shymansky]

So is there anything, I mean, do. What's the downside of a donor advised, like a donor advised fund? Like, there has to be some reason why people do foundations instead of that. Or is it just like some people have moral compunctions and some people don't.

[Felix Salmon]

The foundations are very expensive.

[Anna Shymansky]

Okay.

[Felix Salmon]

I have a donor advised fund. Really, there's. Donor advised funds are very easy and effective ways to give money to charity. Especially if you like have a windfall or you get some kind of an inheritance or something like that, or a capital gain. And you're like, I want to give this money to charity, but I don't know exactly which charities and I don't know exactly when. But why don't I just put it all in this donor advised fund and then once it's there, it's not yours anymore, so it's kind of easier to give it away and you don't need to worry, worry about like, oh, am I going to do this, which tax year am I going to do it in? Or anything like that. It's all been given away already. And so on a personal level, I find donor advisor funds kind of fun and awesome things. On a public policy level, they're really bad.

[Anna Shymansky]

Has anyone tried to undo this loophole where they just get to keep the damn money in their own fund?

[Felix Salmon]

Yeah, it's like the question of whether you can direct the money to be invested in your own funds is a slightly complex one. And I don't want to make it sound that it's very, very easy for you to direct, to keep, put it in your own funds, but it definitely does happen.

[Anna Shymansky]

Okay.

[Jordan Wiseman]

And you still have to pay some taxes on it. Right. When you are first setting all this up or no. Really?

[Felix Salmon]

Well, you're giving it away to charity. And that's like the American way is that if you're giving money to charity, you get to always give pre tax money to charity. Now, you know, again, up to a certain limit, Warren Buffett is giving billions of dollars to charity every year and he gets no tax deduction for that. But a lot of these things are really done within the sort of limits of the amount that you can deduct. And as long as it's within those limits, then people go ahead and do it. On the, as I say, on the public policy level, I really don't love this idea that there's billions and billions of dollars in these huge unadvised funds which are just sitting there. It turns out weirdly that if you don't put a minimum.

[Anna Shymansky]

Yeah.

[Felix Salmon]

On it. If you don't have that 5% minimum, then people actually in practice tend to give more than 5%. They tend to give like between 10 and 20% each year. Whereas if you have a minimum of 5% for foundations, that then has this weird anchoring effect. And all foundations just end up just giving 5%. Yeah. So, but, but the other difference is that foundations are often set up with the explicit intent of existing in perpetuity, whereas donor advised funds. I think people mentally are saying, I want to spend this within the next five or ten years.

[Anna Shymansky]

Yeah, right.

[Jordan Wiseman]

Because also the amount of money you pay out is going to affect the amount of returns you need to make.

[Felix Salmon]

Which brings me on to the charitable lead annuity trusts, which are this crazy scam and that Jackie probably didn't seem so scammy back in the day when interest rates were quite high. But now. Okay. So the number is. Yeah, 1.8%.

[Anna Shymansky]

Okay.

[Felix Salmon]

The official discount rate that the IRS uses in terms of. If you promise to give an income stream to charity.

[Anna Shymansky]

Yeah.

[Felix Salmon]

The way they value that income stream is by discounting it at 1.8%, which is a very low.

[Anna Shymansky]

Yes.

[Felix Salmon]

Interest rate. So basically what that means is if I use this thing called the Charitable Lead Annuity Trust, I can promise to give $75,000 a year to charity from. For. For 15 years, right?

[Anna Shymansky]

Yeah.

[Felix Salmon]

And then I can get a $1 million tax deduction right now.

[Anna Shymansky]

Okay.

[Jordan Wiseman]

It's the net present value.

[Felix Salmon]

Yeah. So basically the present value of $75,000 a year, discounted at 1.8% for 15 years is $1 million.

[Anna Shymansky]

Yes.

[Felix Salmon]

So this is how it works, is that you give a million dollars to charity, you then immediately borrow that million dollars back from the charity. The charity's like, wait, yeah, you know, they thought they had a million dollars, but they don't. Now they've got a note from you, basically. Instead you say, okay, I will pay this money back to you at a rate of $75,000 a year for 15 years. But in the meantime, I get to put that million dollars in my hedge fund. And if that million dollars at the end of 15 years is worth $10 million, then all of the extra $9 million that I don't pay to the charity is mine. Tax free.

[Jordan Wiseman]

Yes. And if I'm not making more than 1.8% in my hedge fund, I am a really lousy fund manager.

[Felix Salmon]

Yeah.

[Anna Shymansky]

And I see why this wouldn't have been as big a deal when interest rates were higher because they would have been higher than the discount rate. And so that would have been. Made it less valuable without getting too deep into it. That would have made it a less valuable move for the person trying to run this scam. But now that interest rates are perpetually, you know, hugging zero.

[Felix Salmon]

And then, and then the other part of the scam is that these things are non recourse.

[Anna Shymansky]

Yeah.

[Felix Salmon]

So if I give the charity $1 million, borrow back that million dollars and say, now I'm going to repay at $75,000 a year, and I'm just going to invest that million dollars in my ultra, ultra high risk hedge fund, and then my ultra, ultra high risk hedge fund goes to zero. The charity is just shit out of luck. I don't owe that charity any money anymore.

[Anna Shymansky]

So when you're giving the money to a charity and then borrowing it back, is it typically a charity that they themselves have set up? And so that they.

[Felix Salmon]

No, no, it's this thing called a charitable annuity trust.

[Anna Shymansky]

Right, okay. Yeah. So it is the trust you're giving to and then borrowing it back from. And so that is. And you can kind of then direct all of that and make sure you're going to get your money back.

[Felix Salmon]

As far as the charity is concerned, it's all downside and no upside because they are getting effectively, they're lending out money to a billionaire at 1.8% and they have a default risk because he could just invest it all in high risk securities which go to zero. And so they could wind up getting nothing, but they never get more than that 1.8%.

[Anna Shymansky]

So is this something that's gotten more popular in recent years for tax avoidance schemes?

[Jordan Wiseman]

Because I'm thinking like, why wouldn't every very, very wealthy person do this?

[Anna Shymansky]

Yeah, it seems like the kind of thing where would have noticed it for a while because it was this fusty old thing that the Kennedys were into and then they realized, oh, now it works differently. Or is. Am I reading that situation?

[Felix Salmon]

Basically these, these things become increasingly popular as the official IRS discount rate comes down.

[Anna Shymansky]

Yeah.

[Felix Salmon]

So you know, last year it was like for 2016, it was below 2% all year and at some points it was below even 1.5%. And the lower that discount rate goes, the more the hedge fund managers and even just normal investors start getting dollar signs in their eyes and going, this is an amazing opportunity for me to make millions and millions of dollars of untaxed income. Because everything they get from that investment over and above that 1.8% is tax free income. It's obscene. So that was me geeking out about Jared the Bully, the annuity trust. I hope that wasn't too geeky for your.

[Anna Shymansky]

It's fascinating and horrifying.

[Felix Salmon]

But yeah, I think it is time for the numbers round.

[Anna Shymansky]

All right, you want me to go first?

[Felix Salmon]

Sure.

[Anna Shymansky]

So my number is 50 or thereabouts, which is apparently the number of companies that have been using the enterprise version of Google Glass. You probably remember Google glass.

[Felix Salmon]

Google Glass 2.0.

[Anna Shymansky]

Yeah. So the greatest consumer, the most spectacular consumer tech failure of the last several few years, which.

[Felix Salmon]

Well, there was the fire phone.

[Jordan Wiseman]

I was just gonna say. Oh, that's true.

[Anna Shymansky]

Just speaking to it, maybe the fire phone. Okay. Or I guess there was the Juicero also. Okay. But like the Google. Google Glass was like a high. Like just the scale of it and just the degree to which it was mocked. The fact that it was Google, I mean they really kind of Just blew it on the rollout the first time around. Then they kind of retrenched and they're like, what can we actually do with this? And what they discovered was that a lot of industrial companies liked the product because they said, that's great. Our workers can do their jobs and they don't have to, like, hold papers in their hands. They can have their hands free to weld or do whatever or take control of machines. And they can just get info input through this glass, and no one gives a damn what they look like on a factory floor. They're already wearing goofy goggles. And so this seems to be what glass's future is, is that, you know, they've got, you know, again, factory workers, doctors are wearing it. So they can just call up, you know, medical files while they're sitting there talking to a patient. They don't have to keep turning around back and for. So it seems like this great failure may actually be having a second life as an enterprise solution. Yes.

[Felix Salmon]

Oh, God, I can't believe we had the term enterprise solution.

[Anna Shymansky]

I said it in my most. You did. I said it in an ironic voice.

[Felix Salmon]

Even ironically. It's like fingernails down a blackboard.

[Anna Shymansky]

Enterprise solution.

[Jordan Wiseman]

Did you say Great Financial Times article about corporate speak?

[Anna Shymansky]

No.

[Felix Salmon]

Lucy Kelloway's final. Lucy Calloway is the queen of making fun of. Of corporate speak. She is one of the great financial journalists of our age. And she has officially now left the Financial Times to become a schoolteacher, which is not an obvious career move, but it is one that she is doing. And so her last column for the FD was a kind of greatest hits of corporate speak. And yeah, you should read that column. And also the response to it by the guy from Starbucks, Anna.

[Jordan Wiseman]

So My number is 17, and those are the number of words in the quarterly earnings presentation that the founder of Sports Direct. Yes.

[Felix Salmon]

Oh, my God, I love this guy.

[Jordan Wiseman]

He basically came in and was like, this was his entire presentation. It's clear we've smashed it out of the park with our Selfridges of Sport concept mic drop.

[Anna Shymansky]

What?

[Felix Salmon]

So this is an English company, which is. It's kind of like the models of England.

[Anna Shymansky]

Okay.

[Felix Salmon]

And. And what you do is it's just like a high street sportswear chain, which has always been a bit shabby. And what they've decided in the midst of this crazy real estate boom in England is they're going to reinvent themselves as something much more upmarket and real estate heavy, and they're going to start buying a bunch of, like, extremely prime Real estate from his, like. And he put his, like, daughter's boyfriend in charge of it. And. And that they're gonna go high end and. Yeah, what could possibly go wrong? And this was his. In his entire presentation to investors. Although there was a Q.

[Jordan Wiseman]

Of course. There's a Q and A. Yeah. But I. I just very much appreciate. And also, like, if you've ever had to listen to corporate earnings presentations, they go on so long. So there's a part of me that was like, I kind of respect that.

[Anna Shymansky]

Can you read it one more time? I just want.

[Jordan Wiseman]

I can. It's clear we've smashed it out of the park with our Selfridges of Sport concept.

[Anna Shymansky]

So. Good.

[Felix Salmon]

Yeah. Which is kind of. I want to say that's a baseball metaphor. And they don't play baseball in the uk.

[Jordan Wiseman]

Cricket.

[Felix Salmon]

Yeah. I mean, I was thinking, do people smash it out of the park and cricket, is that a thing? Maybe. Perhaps. Anyway, My number is 43438.455. You know, because a lot of decimal places. That's eight significant figures right there.

[Anna Shymansky]

That's a very specific number.

[Felix Salmon]

That is a number of ether. It is not a number of dollars. The value of that ether in dollars is about $7 million. And that is the amount of ether that was stolen in one of the most. Probably the simplest sort of bitcoin hack story I've ever come across in my life is awesome. There was this company called CoinDash, which, like every other company out there right now is doing an ICO. We've talked about these ICOs in the past. It was like, please give us a whole bunch of ether and we'll give you a bunch of worthless tokens in exchange. But maybe those tokens you can speculate on and might go up in value. And everyone in their mother said, oh, great, I'm going to go in and I'm going to get in on this CoinDash. ICO. So what they did is they went along the CoinDash website and the CoinDash website said, if you want to buy our tokens, you need to send your ether to this particular address. And then once we get the ether, we'll give you our. We'll give you the tokens. So this is the simplest hack in the world. A bunch of hackers just hacked the CoinDash website and they changed the address so that. Instead of. So that they just changed a couple of digits in the address so that instead of people sending their money to CoinDash, they were sending their money to the hackers. And they wound up, and they wound up sending 43438.455 ether to these hackers and got nothing in return.

[Anna Shymansky]

Friends don't let friends invest in ICOs. Just don't.

[Jordan Wiseman]

We have one piece of investment advice for you.

[Anna Shymansky]

I know we're going to get so many angry tweets from people like every time we talk about ICOs, like we've.

[Jordan Wiseman]

Libertarians hate us.

[Anna Shymansky]

And yet you guys are still listening, apparently. And please do. We love you. We love you.

[Felix Salmon]

Thank you. Yes, thank you, listeners, even, even you bitcoin faithful out there for listening to this. And I. And if you're screaming in the middle of the street right now saying no, ICOs are the best, then stop screaming because people can hear you. And tune in next week where we promise not to talk about bitcoin. I mean, unless we, unless we find.

[Anna Shymansky]

Unless we do. Yes, that's what we do. And then what are you going to do?

[Felix Salmon]

We had the opportunity to talk about, you know, the dark web and bitcoin and stuff this week, and we didn't. You see, that's how much we respect you people. You people, you people, you people. Anyway, many thanks to you all for listening. Do subscribe. Also subscribe to trumpcast, because obviously that's, you know, if you don't get enough Trump on Slate Money, then you can get all Trump, all the time on Trump Cast, which is Jacob Weisberg and Virginia Heffernan and Jamelle Bouie. Just talking about Trump on Mondays, Wednesdays and Fridays. There's a lot of Trump to go around. That's also brought to you by the good people at Panoply. Keep on writing to us. The email is slatemoneyatslate.com Many thanks to Dan Schrader for producing and we will talk to you next week on Slate Money.

[Anna Shymansky]

I want to be Jackie Onassis. I want to wear a pair of dark sunglasses. How won't you be Jackie Onassis?

[Felix Salmon]

Oh, yeah.

[Anna Shymansky]

Oh, yeah.