How to Get Rid of Risk

In 1909 the chief of the Secret Service, William Flynn, was unravelling the biggest counterfeit-distribution network his service had come up against in half a century. The network, Dash writes, was built as a pyramid. Antonio Cecala, Morello’s man, travelled from city to city opening “agencies for the circulation of notes”. There were six of them in all. Each was headed by a man from Corleone, loyal to the family. These deputies each hired half a dozen helpers, and it was they who actually passed the fakes, with the deputy vouching for every one of them before he was given any money. A note went through at least three pairs of hands before it reached a buyer.

But Morello valued something else in this system. It walled off the bosses in New York from the street. The ones at the bottom took the most risk: they were the ones caught with fake notes in their pockets. And their arrest brought the police no closer to Lupo or to Morello. Convenient.

Risk Doesn’t Vanish, It Changes Hands

Hence the first lesson about risk, and it’s not a pleasant one. You can almost never destroy risk. You can pass it on, share it or step around it. To whom, at what price and on what terms—that’s what’s worth thinking about.

Morello passed the risk of arrest to the lower floors and paid them a share for it. An insurer takes your fire risk off you and collects a premium. A bank throws its loans into one pot and issues paper of different classes against it: the pot’s first losses fall on the junior paper, losses reach the senior paper last, and the holders of the junior paper get a higher rate for that. A bank sells a loan—and the risk goes to the buyer. In every case there’s a contract: who pays whom if disaster strikes.

But if you simply bought safe paper instead of risky paper, you haven’t passed your risk to anyone. You’ve stepped around it. Someone else bought the risky paper, and there’s no contract between you and him: if his borrower goes bust, he suffers, not you, and nobody’s going to thank you for it. Somebody always holds the risk. Don’t know who? Then it’s you.

That’s also where Morello’s limit lay. Cecala’s pyramid lowered the risk for the bosses but didn’t bring it to zero. At the end of 1909 Flynn got to the top after all, and Morello got twenty-five years. Any protection works until someone finds a way round it. Don’t confuse “my risk is smaller” with “I have no risk”.

Ways to Shed Risk

Financiers know a few honest ways to reduce risk. Each of them costs something.

You can spread your eggs across baskets. We’ve discussed that already: it saves you from individual disasters, not from general ones, but it’s almost free.

You can take out insurance. You pay a premium, and somebody else’s company takes on your trouble. It costs money. And the insurer mustn’t burn down himself.

You can hedge—agree on a price in advance. We’ll talk about that in detail in the chapter on contracts for the harvest.

And you can simply leave the game and hold your money in cash. Nothing could be simpler, and this method is wrongly underrated. It’s also the one that fools you if you cling to it too long.

Getting Out in Time

In 1980 Tommaso Buscetta, “the boss of two worlds”, came to Palermo. Dickie writes that he sensed at once which way the wind was blowing. He stayed with the bosses Stefano Bontate and Salvatore Inzerillo and saw that they had thrown themselves headlong into the heroin business, which was just then at its peak. Every day between fifty and a hundred lorries pulled up at the gate of Inzerillo’s villa. Bontate and Inzerillo, by Buscetta’s account, talked about seaside villas, millions, yachts and banks as if they were discussing what to bring for breakfast. They urged him to stay on and make some money.

Buscetta refused. As a parting gift, as he claims, he was handed three hundred thousand dollars. In January 1981 he flew to Brazil with no intention of coming back. On 23 April the second Mafia war began. Bontate was the first to be killed.

Cash in your pocket and a plane to Brazil—that’s what financiers call “cash as a position”. Getting out of the market at the peak, when everyone around you is counting money and sure it’ll always be like this. It’s hard: you’re leaving while others are still making money. From the outside it looks like cowardice. Sometimes it’s the only thing that saves you.

This story has a limit too, and a terrible one. Buscetta survived himself, but many of his relatives died in that war. Cash saves whoever holds the cash. It won’t save everything you hold dear.

Cash Is a Poor Place to Live

Now the other side. In October 2008, at the height of the panic, Warren Buffett published a column in the New York Times headlined “Buy American. I Am.” He repeated his old rule: be fearful when others are greedy, and greedy when others are fearful. And he wrote that those sitting in cash right now felt comfortable, but that the comfort was misplaced. Cash, in his view, is a terrible long-term asset: inflation is almost certain to eat it.

Buffett and Buscetta don’t contradict each other. Cash is a good place to wait out a storm and keep your powder dry until the sale. It’s a bad place to live permanently. Whoever went to cash at the top and came back at the bottom won twice. But whoever went out at the top and never came back will find, twenty years on, that inflation has eaten a third of his caution.

Saviano notes that at some point the Neapolitan clans stopped trusting banks with their money and began keeping it themselves, in goods and in cash. A bank can’t seize a hiding place, and the tax office won’t find it. But the police can find it, one of your own can steal it, and while the money sits there it earns nothing. However you keep money, you take a risk. There’s no keeping it without risk.

The Don’s Deal

Don Vincenzo had his own way of getting rid of risk. He made a five-year agreement with the mill owner: the Don promised to take a set volume of oil every year, in bad years too, and the mill owner promised to sell it to him at a price agreed in advance, with a small adjustment. Every year somebody lost out. In a good year the Don could have bought cheaper elsewhere; in a bad one the mill could have sold for more. But both of them slept soundly.

“I pay so I don’t have to guess,” the Don used to say. “Guessing costs more.” He didn’t destroy the risk. He shared it with someone who agreed to carry the other half.

The Bottom Line

Stepping around risk and passing it on are different things. Step around it, and nobody pays you for it. Pass it on, and you’re the one paying—and from then on everything depends on whether its new owner can bear it.