Other People’s Money
On the last day of 1902 a construction company with a fine-sounding name was registered in New York: the Ignatz Florio Co-operative. Ignazio Florio was one of the richest men in Sicily, and in all likelihood he never found out that someone across the ocean was trading on his good name. Giuseppe Morello was put down as the company’s treasurer. The idea belonged to his brother-in-law, Ignazio Lupo: to make money out of building in a city that took in a million immigrants every year.
They started modestly: share capital of one thousand two hundred dollars, shares at two and at five dollars. A few hundred small investors, mostly poor fellow villagers from Corleone, bought one or two shares each. Nobody had to be forced, Dash writes: Morello’s business sense was respected. They built houses on the outskirts, where land was cheaper, and sold them as soon as they were finished. In February 1907 the sale of three houses on 138th Street brought fifteen thousand in profit, and another three on 140th Street nine thousand. Dividends were paid after every house, and most shareholders preferred to put them into the next project.
Business went so well that they decided to expand. The capital was increased almost two hundredfold, to two hundred thousand dollars; shares now cost a hundred each, and they had to be sold far beyond Little Italy, all over the country, largely to the family’s criminal partners. In 1905–1906 alone, Morello and Lupo took out three hundred and thirty-six thousand dollars in mortgages against a dozen building sites. They ran three or four sites at once. There was practically no cash reserve, Dash writes. On top of that, according to the Secret Service, Morello had got into the habit of spending whatever was left of the association’s money.
Then came 1907. A financial panic, a recession; in Little Italy alone twenty-five banks went under, and twelve thousand of their customers lost all their savings. Land and house prices collapsed. By the summer of 1908 the cooperative’s money had run out, and the suppliers went to court. Morello had to go to the shareholders, announce that there would be no dividends, and ask for money to save the company. The poor folk from Corleone, as far as we know, lost their five dollars in silence. But the new shareholders, the ones who had paid a hundred apiece, turned out, as Dash writes, to be much less patient. Less patient and more dangerous. They threatened to kill the treasurer.
Leverage Lifts Both Ways
I’m telling you this story in full because it has everything about other people’s money in it.
Other people’s money is leverage. When you build a house with twenty-five thousand of your own and sell it at a profit of five, you’ve made twenty per cent. When you build it with five thousand of your own and a twenty-thousand mortgage, the same five thousand in profit gives you a hundred per cent on your money. That’s why leverage is so tempting. On the way up, it multiplies profit.
But it multiplies losses too. If the house falls in value by five thousand, the man using his own money has lost twenty per cent and carries on. The man with the mortgage has lost everything he had and still owes the bank interest. Morello’s cooperative was a splendid business in the good years and a deadly one in the bad, because it stood on credit with no reserve. Leverage doesn’t make a business better or worse. It makes it louder. A good one louder in the good way, a bad one louder in the bad.
Hence the rule Don Vincenzo repeated so often that I can still hear it. Borrow only against something that will pay the money back even if everything goes wrong. Not against something that will pay it back if everything goes right.
Two Thousand for Ten Days
There’s a second danger too: other people’s money costs money, and sometimes it eats the whole profit.
Pistone describes yet another deal of the eternally broke Lefty. He was offered a load of video recorders for fifteen thousand dollars, and they could be sold for eighteen. As usual, Lefty had no money of his own. An acquaintance lent him five thousand for ten days and wanted two thousand in interest for it. The other ten Lefty meant to get from Tony Conte, the agent from Milwaukee. The agent wasn’t allowed to give money to a mafioso, and to buy time he decided to fake a heart attack. He checked into hospital, lay there on a drip for a while, and when he was discharged announced that the tests had cost him six thousand, so there could be no question of a loan. Lefty was beside himself: an ordinary heart attack, three days in bed, and six thousand?
Do the sums on Lefty’s deal. Three thousand in gross profit, two thousand of it interest for ten days—and that was on only a third of the money he needed. The remaining third of the profit, presumably, was to be eaten by the investor with the bad heart. The borrowed money was so expensive that the deal made no sense before it even began. Before you borrow, work out how much you’ll have left after paying for the money. Sometimes all that’s left is the trouble.
Who Lends Money, and Against What
Money comes into a business from different sources, and each has its own price.
The cheapest and most reliable is your own: the business’s own profit and your savings. It costs you nothing except whatever else you could have done with it. Next comes money from people close to you: relatives, friends, people who know you. Then a bank loan, where the bank wants its money back with interest and on time, whatever state your affairs are in. And the most expensive is money from co-owners, who will get a share of everything you create, for ever.
In our world this order could be seen very clearly. Gambetta writes that the main obstacle to cigarette smuggling is capital: you have to buy a whole ship’s cargo, one to three thousand cases, and in 1971 that took between eighty and two hundred and forty million lire, and no smuggling outfit had that kind of money of its own. Banks don’t lend for that sort of thing. The money was raised by mafiosi: from their own families, from other mafiosi, from clients and from fellow villagers who knew only that they were dealing with respected men. When Don Mariano Marsala, whom you’ve already met, complained that there was little money to be made in his little town, he was invited into the tobacco business at forty per cent every three months. He put in five million lire.
Forty per cent a quarter—that’s the price of money where there are no banks and no trust. The mafiosi sold investors not only the hope of profit but their own guarantee, and charged accordingly. At the office it’s all gentler, but it works the same way: the less people trust you, the more other people’s money costs you. A good reputation is also cheap credit.
And Tommaso Buscetta, the most famous of the mafiosi who later talked, opened his first pizzeria in America in 1966, as Dickie writes, on credit from the Gambino clan of New York. Money from “our own”: cheaper than a bank, but with conditions that aren’t written into the contract. What that later meant for American pizzerias, the historians of the Pizza Connection case will tell you. All you need to remember is that cheap money from “our own” has a price too; it’s just announced later.
Grow on Your Own Money
There’s one more road, the one almost every good business started on: growing on your own money, without anyone else’s. Slower, but nobody comes to you with threats in a bad year.
Remember how Don Vincenzo started the trade in Sicilian oil? Deposits from the restaurants, the first deliveries through an importer, the olive mill only once the business had proved itself. Not a single loan. The clients themselves financed the business they needed. Each next step was paid for out of the profit from the last. It’s not as impressive as mortgages on a dozen houses, but twenty years later the Don was alive, rich and sleeping soundly, while Morello’s cooperative, though it limped on until 1913, never made good its losses.
To sum up. Other people’s money is a tool, not a gift. Take it for a business that will pay it back even in a bad year. Work out how much you’ll have left after the interest. Remember the order of the sources and the price of each. And if you can grow on your own money, grow on your own money. The only more patient people are fellow villagers with five-dollar shares, and as you can see, there aren’t enough of them to go round.