How the Mob Influenced My Asset Allocation

“Behind every great fortune there is a crime”.  – Honore de Balzac

I have recently been doing a good amount of research on Peer-to-Peer Lending (P2P) and have written about it in a recent blog post.  Yes, Peer-to-Peer Lending (P2P) is legal in most states, but is it ethical?   While I was researching more about Peer-to-Peer Lending (P2P), I felt a strange nostalgia.  This type of investing caused me to reflect on the town I grew up in and the people I once knew.

I grew up in a small town located in Northeastern, Pennsylvania.  Like myself, most of the population was made up of people who were Irish, Italian, Polish, and from other Western European heritages.  Many of my friends would say that their grandparents were “right off the boat” at Ellis Island.  These were hard working people, some might say salt-of-the-earth.  Many of those first-generation Americans performed back-breaking labor.  The men worked in coal mines and the women worked in dress factories.

Not everyone in this region shared the Protestant work ethic.  Like my parents, most of my friend’s parents also had square jobs.  Some, however, did not seem to work at all, yet lived very well.

This had me perplexed.  I remember asking my friend Sal what his dad did for a living since he always seemed to be home and never at work.  He told me that he worked as a billiards supply salesman and spent his evenings working at pool halls.

I asked my father if he knew about how lucrative being a billiards supply salesman was.  He frowned at me and explained that even though it was socially acceptable in our town, Sal’s dad was not a billiards supply salesman.  He explained that Sal’s dad was a loan shark, bookmaker, and organized illegal high-stakes card games.  It was even rumored that people lost the deed to their house at these card games.

My dad was not being judgmental.  Sal’s dad was a legitimate criminal.  He did time at the Allenwood Federal Prison Camp for racketeering.

My parents raised me with high morals.  Never the less, I was young and impressionable.  I just saw that Sal’s dad seemed to live a great life.  He had a big house with a kidney shaped swimming pool.  He drove a brand-new black Jaguar.  The whole family had the best of the best.  Plus, they were always nice to me and a very popular family in the community.

It was not until many years later that I realized why my dad was so critical about Sal’s father.  Sure, I understood that he was not paying taxes, but I was in denial about the scale of corruption that infected this region.  I thought that nobody was getting hurt.  Two books and a documentary changed my whole outlook about the area where I grew up and some the people who I grew up with.

The first book that blew my mind was I Heard You Paint Houses by Charles Brandt.  This book is about Frank “The Irishman” Sheeran.  Sheeran was a hitman from Philadelphia who worked for Jimmy Hoffa.  He also worked for the mob boss Russel Bufalino who was from Kingston, Pa.  What was truly shocking about this book was that it states that the plan to murder President Kennedy was hatched at Brutico’s Bar & Grill in Old Forge, Pa.  I have eaten dinner at that restaurant on countless occasions.  This book was adapted into the movie The Irishman that will be released in 2018.  The movie stars Robert De Niro, Al Pacino, Joe Pesci, and is directed by Martin Scorsese.

The second book that was shocking to me was The Quiet Don by Matt Birkbeck. The Quiet Don was about the history of organized crime in Pennsylvania and how powerful Russel Bufalino was with the New York crime families.  What floored me was that people who I knew as a teenager were mentioned in this book.  I used to casually talk to Frank Pavlico at Golds Gym in Scranton, Pa.  I did not know that he was the driver for mob boss William D’Elia.  He told me that he owned a car detailing business.  After William D’Elia was arrested, Frank was identified as an informant.  Shortly after that, Frank was found dead and his death was labeled as a mysterious suicide.

Thirdly, what truly was disturbing was the Kids for Cash Scandal in 2008 that was made into a documentary.  Kids for cash was a scandal involving a real estate developer who was also the owner of a for-profit juvenile correctional facility and two corrupt Luzerne County judges.  Basically, the owner of the for-profit jail was paying off Judge Marc Ciavarella and Judge Michael Conahan to send children to his jail for minor offenses such as not completely stopping at a stop sign or truancy.  The arrangement between the owner of the prison and the two judges was allegedly brokered by William D’Elia.

How does this tie into the ethics of Peer-to-Peer Lending (P2P)?  Maybe I am just not anti-establishment, but I see Peer-to-Peer Lending as being very much like an online loan shark.  It seems as shady as the payday loan stores or cash-for-gold outfits that you see in strip malls.

Some might say that Peer-to-Peer Lending (P2P) helps people who do not have the credit to get a traditional loan from a bank.  Some might even feel that they are sticking it to the man by taking business away from big banks.

In my opinion, it is not altruistic for an individual to loan money to other people and charge them a high interest rate.  I would not do that to a friend or relative, so why is it alright for me to do in on an anonymous level?  Also, the lending practices of P2P companies are equally as manipulative as big banks based on advertising one rate and offering a higher one.

While I am socially conscious, I do not generally take on a socially conscious approach to investing.  My largest holding is a S&P 500 index fund.  Some of the stocks in the S&P 500 have questionable business ethics.   There are energy companies that pollute the environment and clothing manufactures that pay slave wages to employees in third world countries.  Yes, all of that might be true, but I do not feel like the pawnbroker who Raskolnikov murdered in Crime and Punishment by Fyodor Dostoevsky when I contribute to my Roth IRA.

Don’t get me wrong, I am an investor.  Never the less, I believe that is important to be honest to yourself and have principles.  If a business transaction or investment opportunity does not seem ethical, it should be examined further.

Just because I can use a sterile online platform to issue loans to people with shaky credit, am I not just shylocking?  Sure, nobody is going to get their finger broken or have the vigorish increased for defaulting and failing to pay back their loan on time.  It is still feels like the same basic concept of taking advantage of people who are down on their luck.

For some time, I was considering opening an account and to participate as a lender. Upon further review, I have decided against opening a Peer-to-Peer Lending (P2P) account.  I am comfortable with my balanced-growth portfolio and do not see the need to add alternative investments to my holdings.  There is no need to go beyond a portfolio of a few index funds and to make my investment portfolio more complex.

What is your opinion on Peer-to-Peer Lending (P2P)?

Do you think that this type of investing is ethical?

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer page.

10 thoughts on “How the Mob Influenced My Asset Allocation

  1. Amy @ Life Zemplified

    Very interesting read and take on P2P. I’ve not invested in it myself and would need to do some research before I formed a real opinion. You do bring up some valid points to consider.

    Those books really did have to shock you. It’s amazing what happens that we just don’t have a clue about.

    I’ve eaten many times in the restaurant of Jimmy Hoffa’s ‘last meal’ and used to drive past it every day on my way to work at a previous employer. Some people here still think they’ll find him…

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  2. Mrs. Adventure Rich

    Fascinating story and tie in with P2P lending. I have not seriously considered P2P lending in the past, but I agree with your points that, while it may not be a shady enterprise, it also may not be in the best interest of the recipients and could lead them into dangerous financial waters.

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  3. catfishwizard

    This is an interesting take on P2P lending, and I really appreciate the article.

    I’m not convinced that it needs to be a major allocation in one’s portfolio, but I do find it a pretty interesting experiment and a decent investment. I certainly don’t have any moral qualms about it.

    Granted you have some loans that are at 20%+ rates, but those are to the folks with very shaky credit history. The interest rates are high because those are risky, unsecured loans. You have to charge a high rate to offset the higher probability of default. That’s how debt works.

    And if they do default, their credit score gets whacked even more than it already was, but nobody’s legs are getting broken. The P2P lending market is a tightly regulated financial ecosystem and a far cry from a street corner in Scranton.

    I’ve been invested in Lending Club for a little over a year now, and my net returns are around 6-7%. For me, that’s pretty clear evidence that the interest rates are priced pretty appropriately to the risk profile. It certainly isn’t usurious.

    Honestly it’s probably a little low considering that I’m giving unsecured loans to strangers on the internet.

    But I’m okay with that, because of (get this), a moral justification.

    Hear me out:

    I only invest in loans that are for “debt consolidation” or “credit card payoff”.

    This rule ostensibly limits my investments to “helping people” get out from under the burden of higher interest debt vehicles (credit cards, payday loans, etc.) I guess I have no way of knowing for sure that the P2P rate is lower than the debts they’re consolidating, but it probably is, otherwise they wouldn’t do it right?

    Rather than “taking advantage of someone who’s down on their luck”, I feel like I’m helping them out by offering a steep but fair interest rate that’s lower than what they’re currently paying. That’s actually a pretty noble cause when you think about it.

    If I can help a firefighter in Minnesota get out of credit card debt and get on the path to a better financial life AND earn a 7% net return in the process, I’d say that’s a pretty darn good investment and probably a net benefit to society.

    While there are some pretty stupid loan categories (“dream vacation”, “wedding”, “major purchase”) that probably do represent “taking advantage” of financially illiterate borrowers, you don’t have to invest in those loans.

    By being selective about the loans you buy, you can avoid a lot of the moral issues brought up in this post.

    Just my $0.02 FWIW

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  4. Darren @ Learn to Be Great

    What an interesting story! I think many people would be surprised to find that many criminals live what most people consider normal lives. Essentially, we all want what’s best for our family. I understand wanting to be ethical in your investing but we can easily take it too far in almost everything we buy.

    I started investing in P2P lending several years ago after reading several blog posts about it. Unless you’re using a Roth IRA, calculating exactly what I owe in taxes is a real pain in the @$$ets. I’m not a fan and am slowly cashing out as each loan is paid in full (or defaults).

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  5. Actuaryonfire

    I’ve never really thought of the ethical angle to P2P lending. That’s either a lack of moral compass on my part, or you’ve hit on an interesting perspective (I think the latter) .

    I’ve been investing in it a couple of years and now winding it down because the defaults are too high. Like Catfish above I’ve only been investing in debt consolidation borrowers. I would love to say that’s altruistic on my part but my investment thesis was that this would be better than lending to someone to pay for an expensive frivolity. But that didn’t really work out for me…

    However I’ve seen how dysfunctional the aid/charity sector is and I am a believer in capitalism with a conscience. In other words a well functioning market for cheap credit that earns lenders a fair return and allows borrowers to access fair rates is a good thing. Just not sure that P2P has succeeded there.

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  6. Lyn

    I also had a looanshark school mate, he did great in school and the logical next step was ivy league university since cash is never an issue and the assets for the next generation will be all clean. I don’t believe money can buy moral. Just saying this to state the fact that, yes, unfortunately, life can still be great being a mob.

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