Debt, Taxes and How Much to Pay Out
In 1916 a Neapolitan named Pellegrino Morano asked Nick Morello for an underground lottery in East Harlem. Morello agreed, on the same terms he’d had with the previous owner: twenty-five dollars a week. Fixed. Every week, however much the lottery took in.
Morano ran the game for several months, and it never brought in enough to pay. Morello’s man, Eugene Ubriaco, demanded the money anyway. Critchley gives his words almost verbatim; the gist was that it made no difference to him—if Morano had won ten thousand dollars, he’d have put it in his own pocket all the same. Flawless logic. You win, it’s yours. So if you lose, that’s yours too.
Morano reckoned Morello had cost him fifteen hundred dollars. And, Critchley writes, it was he who first proposed killing the Morello brothers. That autumn Nick Morello and Ubriaco were killed. By the contract, the creditor was in the right. By the consequences, he wasn’t.
Debt or Equity
When any business needs money, it has to make the main choice: borrow, or sell a stake?
Borrow, and you’ve promised to pay a fixed sum whatever happens. As long as you pay, the creditor doesn’t care how business is going. If it’s going brilliantly, everything above the debt stays with you. If it’s going badly, the debt presses down just as hard as in a good year. And in the end it breaks you.
Sell a stake, and you’ve promised to share whatever comes out. Things go well, and your partner gets a lot. Badly, and he gets little or nothing. The risk is shared.
Remember the Harlem lottery owners from the last chapter? They refused to pay Brooklyn a fixed tribute and agreed to hand over sixty per cent of the takings. They chose a stake. Morano agreed to a debt. Same lottery, same neighbourhood, same year. The only difference: who carries the risk of a bad month. In Morano’s case, Morano carried it himself. And at some point he decided to shift it onto the creditor. In the crudest way possible.
The Pie Stays the Same
In 1958 two American economists, Franco Modigliani and Merton Miller, proved something that seems odd at first. If there are no taxes and bankruptcy costs nothing, a company is worth the same however it’s financed—with debt or with shares. The pie is the same. All that’s decided is who gets which slice and who carries the risk.
Morano would have learned that the hard way. The lottery brought in what it brought in. Twenty-five dollars a week didn’t add a cent to its takings. It just loaded all the risk of the bad weeks onto him.
Later Modigliani and Miller added a correction. And it matters more than the theorem itself. Once there are taxes, borrowing pays better: in many countries interest on debt reduces a company’s tax, while payouts to shareholders don’t. It’s as if the state pays you a bonus for borrowing. But the more you owe, the closer bankruptcy gets, and bankruptcy is expensive: lawyers, fire sales, customers walking away. A sensible company looks for the middle. It borrows enough to win on taxes, but not so much that it collapses in the first bad year.
The Creditor You Can’t Scare
While we’re on the subject of taxes.
There’s one creditor every mafioso is defenceless against. The tax authorities. In 1927 the US Supreme Court ruled that illegal income is taxable too: made money smuggling—kindly pay up. Four years later they put Al Capone away on the strength of that ruling. Everyone knows that.
Fewer people know who the taxman practised on before and after. Tommaso Gagliano, a contractor from the Bronx, was by then already head of one of the New York families. In 1932 he was found guilty of tax evasion: according to the charge, he hadn’t declared more than two hundred and forty-five thousand dollars he’d made from the plasterers’ cartel. He got fifteen months.
And Ciro Terranova, Morello’s half-brother, who had once got rich on the artichoke racket, came to an even sadder end. In 1935, Dash writes, the government went after him for unpaid taxes—the same trick it had used on Capone. Two years later Terranova declared himself bankrupt: by all appearances he couldn’t pay a bill of five hundred and forty-three dollars. The bank took his mortgaged house. The list of his assets showed two hundred dollars he was owed, two shares in a real-estate company and a possible claim for wrongful arrest. Not long before, a police captain had needled him: people took him for a big racketeer, and he was just a cheap pedlar.
The taxman doesn’t shoot, doesn’t threaten and doesn’t hurry. He just turns up with the bill. And nothing Terranova’s people were used to works against him.
When Debt Becomes a Stake
There is one more road. Almost everyone who borrows too much ends up on it.
Saviano describes how the Camorra in Naples rebuilt the old loan-sharking. A shopkeeper does better paying his supplier in cash: that way the goods come out noticeably cheaper than on promissory notes. The clan lends him the cash, at ten per cent on average. Straight away, Saviano writes, an almost corporate relationship takes shape: profits are split fifty-fifty. But if the shopkeeper can’t keep up with the payments, the clan’s rate goes up, more and more money goes upstairs, and in the end he’s sitting in his own shop as a front man on a monthly wage. The clans, Saviano remarks, aren’t banks that take every last thing. They take the property. And they leave the people working.
That’s how debt turns into a stake. Legitimate companies go down the same road when they go bankrupt. The creditors who didn’t get paid become the owners. The old owners are left with nothing. Sometimes still sitting in the director’s chair.
How Much the Don Borrowed
In forty years Don Vincenzo borrowed once. We were buying the second press, there wasn’t enough money in the till, and he took a two-year loan from the bank. He paid it off in fourteen months. I asked him what the hurry was, when the contract let him take his time and the interest was low. The Don said: “As long as I owe the bank, there are two owners in my laundry. I put up with the second one only because I invited him myself.”
I don’t advise you to be quite that stubborn. Modigliani and Miller are right: borrow with your head, and the business gets stronger. But the Don was right too. A fixed payment doesn’t ask what kind of month you’ve had. Borrow as much as you can stand in your worst year, not your average one. Or one day, like Saviano’s shopkeeper, you’ll wake up as the manager of your own shop.