Tuesday, April 9, 2024

Something to Know- 9 April

Jimmy Kimmel, in his standup monologue a  few days ago, and Rachel Maddow, in her program last night, brought up the stability of the bond that Trump posted to satisfy the court of New York.   Now, the cat is emerging from the inevitable bag of shady dealing.   It is apparent that Trump and a whole lot of other characters are going to have a rough time.  This article from Status Kuo puts in it writing for most of us to get the details, with more to come.   For your HCR fix today (since trying to crowd 2 articles into 1 reading is difficult to read) here is the link to today's contribution.   If you run into a paywall, let me know.   https://heathercoxrichardson.substack.com/p/april-8-2024

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Through education and informed analysis, our brains become capable of processing all the chaos of our politics and even seeing a way through. That turns destructive distress into healthy eustress! That's a big part of why I write The Status Kuo each day.

Hankey-Panky Financing

The billionaire owner of the company behind Trump's questionable $175 million bond has some other shady connections.

Image courtesy of MSNBC

Trump surprised the world on April 1 by posting a $175 million bond to cover his appeal of the civil fraud judgment in New York. But no one was surprised when it turned out, just days later, that the lender and the deal itself were pretty sketchy. 

There are some foundational issues around Knight Specialty Insurance Company (KSIC), including its financial stability and its license to operate in New York as a bond issuer. A quick check of its financial statements raised further questions, and Attorney General Letitia James has now challenged the sufficiency of the bond. A hearing is set for April 22.

Some further digging also revealed that the very arrangement between KSIC and Trump is highly unusual. It appears from the legal documents filed with the court that KSIC isn't really acting as a guarantor at all. More on that below.

Finally, the identity of the heretofore unknown billionaire benefactor behind this lifeline, Don Hankey, Jr., has caused legal observers and follow-the-money-trail types to sit up and take notice. Hankey, it turns out, is deeply connected to another company that has thrown Trump a major financial lifeline.

Today, I'll start with the $175 million bond and explore why many remain skeptical over KSIC as a surety and whether the bond itself is even any kind of guarantee. Then I'll zoom out and connect some dots between Hankey and a bank you'll probably hear more of in the near future: Axos.

His word is not his bond

It didn't take long for the state to raise questions about the legitimacy and good standing of KSIC. After all, with so much money on the line, New York state is entitled to have all the Ts crossed properly on the appellate bond.

Attorney General James filed papers demanding that Trump or KSIC "justify" the bond within 10 days to show that the company could in fact make good on it. That was because the bond was missing information most such filings would typically include, including a financial statement from the company and a certificate of qualification from the Department of Financial Services.

As she indicated in a filing last Thursday, James objected to the fact that KCIS was not a legally admitted carrier in the state and lacked the certification required under New York law, specifically NY Insurance Law Section 1111. 

But are these big problems for the issuer? Trump's lawyers say no, it's just James trying to dig up more problems and harass Trump. But CBS News interviewed Bruce H. Lederman, an attorney who has filed many bonds in New York, including judgment challenges by a real estate developer. Lederman said he was struck by "glaring errors" in the bond.

"In all the years I've been doing this, you always have to have a certificate from the Department of Financial Services saying that you're licensed to issue a surety bond," Lederman said. 

Wait, wait! We can explain!

Amit Shah, the CEO of KSIC, claimed the company nevertheless had authority to issue the bond through a nonprofit association, the Excess Line Association of New York (ELANY). That association serves as a facilitator between brokers and regulators.

Whether that claim will stand up in court remains to be seen. To understand why it's pretty dubious, a bit of explanation first. 

"Excess line" insurance on a secondary exchange like ELANY is usually reserved for companies that can't find insurance in the primary market because of their history of losses or because they are high risk ventures. They often have to go out of state to find such insurers.

And that's what KSIC did, apparently. Its recent finances were registered with the Surplus Lines Stamping Office of Texas. Because of course, Texas.

To do this kind of bond in New York, however, KSIC would still have to have registered its financial statements with ELANY, which could then review those same finances to see if they qualify.

But that never happened. As The Daily Beast reported, KSIC is not on the ELANY voluntary list. 

ELANY recorded around $75 million in each of 2022 and 2023 in surety and fidelity type transactions. That's in total. So a bond of $175 million would have dwarfed this and certainly caught everyone's attention. But there's no record of it in ELANY's files.

KSIC's rejoinder? Don't worry, the company has over $1 billion in equity! But that appears to refer to a different, larger company, Knight Insurance LTD, which is not on the bond agreement.

What's really going on?

Shaky finances and a bogus "guarantee"

KSIC wasn't just unlicensed in New York. It hasn't even been verified to meet minimum eligibility standards to demonstrate its financial stability, and its stated "surplus" on its financial statements isn't enough to meet the capital requirements for posting the bond.

The Daily Beast explained the issue this way:

Just like federal regulators require financial institutions to have sufficient reserves in case of a run on the banks, New York law limits how much money state-regulated surety companies can post on a single bond to 10 percent of a firm's total "capital and surplus." However, a court filing by the company on Thursday showed that Knight Specialty only has $138 million in "surplus," vastly exceeding the government-set cap because the Trump bond alone makes up 127 percent of the company's reserves.

"Based on the financial statement provided, Knight Specialty is providing a bond that is one-third of its total assets and greater than its surplus, which is incomprehensible for a carrier to underwrite," said [Maria] Vullo, who was previously the superintendent of New York's DFS.

But wait! It gets weirder. The company apparently hasn't even promised to pay the $175 million if Trump and his co-defendants lose on appeal. Instead, the legal documents say that the defendants will pay that amount, which seems to suggest this isn't a guarantee at all.

I dug a bit deeper and found the operative clause (extraneous verbiage removed for clarity):

Knight Specialty Insurance Company… does hereby … undertake that if the judgment so appealed from, or any part of it, is affirmed, or the appeal is dismissed … Donald J. Trump … shall pay … the sum directed."

And as one bond industry source—who declined for understandable reasons to be identified—noted, "Getting into the weeds, the company undertakes that Trump will pay."

Hey, nice work if you can get it, right?

But why would Trump agree to a bond that isn't a bond at all, and let the bond company so off the hook? Perhaps it's because they already have already grabbed him by his debts.

Following the money: a bank called Axos

You might remember reading at some point that Trump was pretty deep in debt and had a number of big payments coming due on his loans. So who bailed Trump out of all those loans and helped him offload his flailing D.C. hotel property?

After all, once January 6th happened, Trump's lenders at Deutsche Bank came under intense scrutiny during the civil fraud case, and most banks wouldn't come near someone so radioactive. Trump and his extended family started courting and doing business with the Saudis, and we were left wondering what domestic financial institution might risk coming to Trump's aid. 

Now there appears to be an answer. Don Hankey, Jr. isn't just the shady owner of the bond issuer KSIC. He's also the largest individual shareholder in Axos, an "online" bank. Together with Hankey's KSIC, Axos has provided some half a billion in financing to Trump and his company. $225 million of that came in 2022 just as Trump's loans were coming due.

That's quite a lifeline. And it raises a big conflict of interest and influence peddling question. For that much money and with that kind of leverage, what kind of favors and access would the financiers expect?

"If the guy gets back in the White House, they've got him over a barrel," said Richard Painter, a former ethics lawyer for President George W. Bush, to the Associated Press.

Then there's this further connection. As Rolling Stone reported back in 2022, right after a massive debt on the Trump Tower was unexpectedly refinanced by Axos for a cool $100 million, the Kushner family is also deep in bed with that bank.

The bank has financed at least three real-estate transactions with Jared Kushner's family enterprise Kushner Companies. In 2018, according to Bloomberg, the Kushners got a $57 [million] bridge loan for a risky New Jersey real estate development that was largely backed by Axos (then BOFI). The Kushner family dealt with Axos again that same year, when the bank stepped in to take over the mortgage on a Brooklyn real estate deal that the Kushner Company's credit arm had first financed to the tune of $30 million. Last year, the Kushner Companies reportedly received $80 million in financing from Axos and the investment group Fortress to break ground on a development in South Florida.

So what do Axos and Hankey get out of all this big risk financing? Per the AP's reporting, Axos itself already has quite the history of legal troubles. It was investigated under the Obama Administration after a whistleblower filed a lawsuit accusing the bank of violating rules against money laundering. After Trump took office in 2017, that investigation went away. Shocker.

Hankey himself was investigated and forked over $48 million in penalties and compensation after Obama's Consumer Financial Protection Bureau found that his company had used illegal debt collection practices. Hankey made his money selling auto loans at very high interest rates to people with bad credit. 

Having a friendly administration willing to cut him and his company slack would be a huge benefit to Hankey and Axos. It already was in 2017. And having a president so leveraged and so dependent on outside financing would prove a tempting target for those seeking to influence policy, including our foreign dealings.

The threads of this story—with Axos and the massive debt relief now linked to Hankey and the New York bond—are intertwining in real time. I have confidence that reporters will now dig ever more thoroughly into these companies and into Hankey. 

The reporting so far has already placed the $175 million bond filed by Trump into serious question. And it would not surprise me if other financial irregularities already exist between the Trumps, the Kushners, Axos and Hankey.

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