Editorial: A Modest Proposal for Securities and Other Forms of Gambling

1 February 2008

“The gambling called business looks with austere disfavor on the business called gambling.”

Ambrose Bierce

For years the I-gaming industry has endured the slander that it was a hell-sent lure, set to bankrupt and ruin the poor unwary player: "With the click of a mouse you can lose your house.” Well, people all over the United States are losing their houses in record numbers now, and attendant financial losses have driven the whole country, perhaps the world, to the screaming edge of recession (if we’re not there already). But none of this was caused by online poker, roulette or even sports betting.

"A gambling joint that operated with this kind of serial recklessness and bad faith would be blackballed out of business online, raided by a SWAT team on land."
-Martin Owens

It’s because of a crap shoot -- not the kind found in casinos, online or off, but the one called the securities market. The one that asks for blind bets and encourages cheating. The Wall Street crash-and-burn du jour traces to the collapse of a type of financial instrument based on securitized mortgages. This type of arrangement is known as an exotic derivative. Exotics have become so exotic that today even the man who invents one can hardly explain how it’s to be valued. Nevertheless, billions upon billions poured into this one, with few questions asked.

But now we find they were backed up not by tangible assets, but the fluctuating market prices of home mortgages. Worse, all too many of those prices were based on deliberate fraud at every level. Buyers who list their income as two or three times what they’re really making hardly qualify as innocent bystanders; nor do appraisers, who overpriced the real estate or realtors, intent on commission only; nor does the lender, who knew he ran no risk once the whole thing was securitized packaged and sold to somebody else, who wouldn’t look at it either. Next to no oversight, nothing serious in the way of checks or balances, only the innocuous term “subprime” to denote these were extra risky from the get-go.

A gambling joint that operated with this kind of serial recklessness and bad faith would be blackballed out of business online, raided by a SWAT team on land.

But here we are, after yet another bubble has burst. Governments are slashing interest rates with the fervor of castaways lightening ship on a lee shore, and sponsoring “stimulus plans” as hastily and sloppily conceived as the original mess. Literally from here to China, banks and businesses are writing off rafts of billion-dollar blarney and licking their wounds. Where is the casino, online or off, that has caused one-tenth the harm? In fact, a gambling establishment is a model of prudence and sanity by comparison. And I go so far as to recommend that control of the stock markets be placed under the supervision of online gaming operations until public confidence can be restored. The advantages are obvious, but I’ll list them anyway.

To begin with, a stock market run like an I-gaming site would introduce the account system. No one would be allowed to make a bet they couldn’t cover. Better yet, betting style accounts are held separately and do not influence each other. Just because somebody next door lost HIS money would not mean that you lost yours, which is certainly not the case today. What mountains of pain and loss, what black sieges of fear and shaken confidence nationwide, would be prevented by that alone!

Also important, the same protection and concern afforded problem gamblers would finally be extended to the careless and compulsive members of the investing public. After all, many of the promises made for the stock market -- that if you keep at it long-term, you’ll win; a big score will make it all worthwhile; it’s OK to borrow for wise investment -- match exactly the warning signs listed for a gambling problem. The evils caused by a misstep -- loss of jobs, financial harm, loss of standing and even health problems -- are also eerily similar. The difference seems to be this: In the gambling context, such red flags bring a swift reaction. But in the world of “respectable business,” it would seem, things are allowed to pile and compound until government intervention on a massive scale is the only hope.

"For it is becoming clear at last: If the aim is to prevent harm to the American public, the Justice Department has been arresting the wrong executives in the airports."
-Martin Owens

With wicked I-gambling in charge, the unlucky or unskillful could have their names placed on a self-exclusion list. Dedicated software would track the market activity to be sure that no bids were placed by unauthorized people, or from unauthorized locations. The French bank of Sécurité Générale, for one, would still have its reputation. And if the financial world prefers the term “exposure” to the good old Anglo-Saxon “bet,” what matter? There would still be limits on the amount of “exposure” any one party could undertake, and a monitoring system to send out a warning when “exposure” became too persistent or too frenzied, as is the case with many I-gaming sites already.

It would be even better if the appropriate state authorities became involved -- gambling authorities, I mean. If the Nevada Gaming Control Board, for instance, had been given the oversight, there would hardly have been a sub-prime swindle. No mere prospectus will suffice here; new games have to be vetted in depth for fairness and playability, their makers, too; and excessive or bizarre bets can be investigated. Since it is now apparent that few if any players or onlookers knew the whole story with securitized mortgages, it is doubtful whether the product would ever have been set loose if it were a gambling game.

And it is precisely the bad rap gambling has been getting all these years that makes it a more reliable model. No one gives benefit of the doubt in this neck of the woods. The watchwords are: show me. Who goes into a sports book and bets on a game he doesn’t understand? If we gave the stocks and securities one twentieth of the hardball, take-no-prisoners inspection routinely given to online gaming, we would probably not be sweating each Dow opening today.

In summary, it is beyond dispute that major reform is needed in the way we gamble on our future. High time we had help from pros, from people who have proved themselves to be reliable and durable gambling operators in a hostile, skeptical environment -- the people who made online gaming into a billion-dollar industry in the teeth of everything the powers-that-be could throw at it.

For it is becoming clear at last: If the aim is to prevent harm to the American public, the Justice Department has been arresting the wrong executives in the airports.

Mr. Owens is a lawyer in Sacramento, Calif., specializing in Internet gambling law. Released in 2005, he coauthored "Internet Gaming Law" with Professor I. Nelson Rose, America's senior authority on gambling.