HaRav Yehuda Silman, a rav in Bnei Brak who is very active in many business-related areas, had some choice comments and halachic insights for the readers of the Hebrew Yated Ne'eman about risky investments. The article was written in the wake of the collapse of an investor in Bnei Brak who caused losses to the religious community in the tens of millions of shekels.
This investor had been offering more than 2 percent a month for loans. He was a chareidi person and virtually all of his customers were also chareidi.
Rabbi Yaakov A. is a very serious avreich who is fully dedicated to Torah. The main responsibility for the parnossoh of the home is shouldered by his wife, who struggles to make ends meet for their family of six, kein yirbu. One day a good friend offered him to invest NIS 150,000 for a monthly interest of 1.5%. He was convinced and took the chance. Things went so well that after a year he took a larger loan against his home, since the difference between the low mortgage interest and the investment seemed too good to pass up. Now he is stuck with a mortgage that he has to pay and nothing to show for it.
HaRav Silman says that the morning of our interview a rosh kollel told him his story of woe. He had invested NIS 350,000 and the interest covered most of his monthly budget, until it stopped.
"The facts are clear," says HaRav Silman. "Our community is easy prey. And it is not because it is a community that is less sophisticated than others in financial matters — though that is also true sometimes — but rather because we have people living under financial strain who are mainly involved in Torah learning, and the yearn for a situation in which they will have a monthly income that will make life easier. Therefore when they come to him suddenly and say that with a relatively small investment he can get NIS 3,000 a month, how can he refuse?
"I will tell you a story that happened 25 years ago. There was a big bankruptcy in Bnei Brak, and two months previously two men came to me for advice. They were yirei Hashem. One was an avreich who works part time in diamonds, and the other a melamed in cheder. They asked me whether to invest with that Yid, who was known as reliable and a learned man. They said that he is a yorei Shomaim and more reliable than a bank.
"I told them unequivocally: the man in question is a very good friend of mine. He understands finance very well and is reliable. But I would not invest even a penny with him. Because if he pays, as you say 3 percent a month, and the banks pay only 6 percent a year, I have a simple question: Whey don't the banks, who are very eager to make money and spare no effort to do so, just go and invest with him and earn much higher profits than they are used to. But you want to tell me that the banks do not learn in Kollel Chazon Ish like you do, and therefore they do not understand the real opportunities for profit? I do not believe this.
"Two months later that Yid went bankrupt. I was asked to go in and try to save what could be saved, and after a lot of work that included countless actions, we managed to collect for distribution about 40 cents on the dollar of the big debts. We made a special bankruptcy arrangement.
"When those two men came to collect their share of the settlement, I was amazed. "You!? You came to me and I told you not to invest even a cent in something like this. How could this be?"
This is what they replied. "When we came to ask the Rav's advice, we were already invested. But we began to see that the business was getting shaky and the payments were not as regular as in the past. We began to worry. Therefore we came to ask the Rov. After his categorically negative answer, as we were going down the steps to the street, we made up our minds to get out immediately and to ask for our money back. However when we looked into it we found that if we get out right away we would lose a lot of the interest, so we thought that it was better to wait for only three months when we could get out with all our money and the accumulated profits.
"But, as the Rov knows, the bankruptcy was two months later. One month before our planned exit."
"From here I learned," said HaRav Silman, "and from hundreds of other cases, that it is simply an addiction. One who sees the profit straight ahead, cannot forego it. The most he will do are small postponements or momentary changes, but nothing fundamental in his perception will ever change.
"I can give you a concrete example in that just yesterday a well-known talmid chochom came to me and asked if he should invest a significant sum in a deal very similar to the one that collapsed last week. I was so amazed. But when I looked at him, I understood everything: the momentary pressures against the dream of steady profits blinds the eyes of even the wise among us and if they will not realize that there is a real danger to their money from investing in any scheme that pays interest that is much higher than the going rate, this awful thing will not go away."
Problems with the Heter Iska
HaRav Silman said, "I always say that I have at home a letter written 25 years ago by the major poskim that, while everyone relies on the heter iska in such investments, if someone pays 18 percent a year on a loan it is prohibited as interest even with a heter iska. The reason is that the heter iska states that the lender is entitled to receive half of the profits of the business venture, and if we are talking about 1.5% a month, this implies that if the borrower gives the lender a percent and a half per month, the lender is prepared to forego his share of the profits. In order for this to be meaningful the profits must be at least greater than this amount. Therefore we said then that 3% per month [for the overall profit of the business venture] is too much to be realistic, and there is serious doubt if the heter iska helps in such a situation. And that was a relatively good time, better than now, and the interest rate in the US was as high as 12 percent.
"Therefore today, where the economy is much worse, we usually say in the beis din that we cannot approve more than 15-18 percent — meaning that the heter iska is for half that amount. The upshot is that a heter iska is valid up to a ceiling of between 3/4 to a percent a month.
"The words of Tosafos in Bovo Metzia are well known, that one who lends with interest will not rise for techiyas hameisim. How are people so easily willing to put themselves into such danger? I once said as a joke, that HaKodosh Boruch Hu does so much chesed for us since, at the time of techiyas hameisim, there would be choliloh an awful chillul Hashem if we look and we see that many of the great tzadikim buried in the local cemetery would not rise at techiyas hameisim because of this problem. So what does the Borei do for us? He does a great chesed in that people do not even get their original investment back, so that they will rise for techiyas hameisim and there will be no chillul Hashem!"
"So what advice can you give to wannabe investors?
"A simple idea: before every investment find someone that you rely on who knows the area, like a veteran businessman or rabbonim who have expertise in the area, and have a sense of responsibility, and then, besides their knowledge and experience, they are also evaluating the subject objectively, without all the subjective feelings of the investor that can corrupt his judgment.
"To my dismay I see so many cases that I cannot be silent. This is the reason that I have never directed or agreed to these types of investments and I have never even told someone to use his judgment.
"If someone comes to me with clear and solid bank guarantees, I would rely on that, but even with the various guarantees there is a lot of fraud. One cannot mortgage a single property to dozens of people at the same time, and also farming lands whose value is very uncertain are not suitable guarantees.
"The best advice for someone who has a significant sum to invest [in Israel] is to buy only real estate even in peripheral areas. But it must all be done with a lawyer and everything should be vetted by experienced and knowledgeable professionals."