Wall Street Casinos

Posted on October 10th, 2008

As Wall Street and The City lurch from crisis to crisis, there have been the inevitable headlines in the papers acusing the bankers of gambling with people´s money, and comparisons with casinos- somewhat unfairly, we think (for casinos and people who enjoy a spell at the tables that is).

As the Federal Reserve starts to pump in more than $800 billion into the financial system, and the UK government anounces its latest monster Get Out of Jail Free Card, we compare the two activities below: casino gambling and the world of “high” finance to see if there really is any justification in making such a stark comparison between the 2 activites.

Let´s look at the facts one by one.

1. When a player loses his or her money at the casino, he loses his or her money at the casino. He doesn´t then walk off into the sunset with a big fat bonus and a final salary compensation when he calls the wrong colour at the roulette table or goes bust at the blackjack table.

2. It´s not that easy to get credit at a casino. Generally, players come with a budget to enjoy a session and either leave after they have hit their profit target or head off once they have run through their budget. It´s dificult to borrow money to bet without having water tight security backing up your borrowings. On Wall Street and in The City, however, it seems easy to borrow as long as you are a part share owner of a piece of paper that part owns a selection of run down offices and delapidated apartment blocks next to the freeway and underneath the flightpath of the nearest airport.

3. When you are playing casino games, you can generally bet in 2 directions- ie whether or not an event will  or will not take place. The game of craps comes to mind (Pass Bet and the Don´t Pass bet), or betting on red and black in roulette. This is much like you can go long and short in the stock market. But the difference is, is that there is no real incentive to do this at the same time (ie by hedging your bets) and you certainly can´t take “positions” in complicated derivative instruments that allow you to borrow big amounts on the back of a relatively small cash investment.

4. The house edge at a casino is very well understood. There have been hundred of books written on the subject, not to mention online casino sites whose whole purpose is to monitor the payout at various online casinos. And the edge varies by game and by bet within the game. On Wall Street, however, no-one understands what the total value of the black hole on the banks balance sheets are because the games all got too complicated years ago. Not even the PHD boffin with the scraggly beard, suffering from body odour and  wearing the dark green fleece in the basement of HSBC in Canary Wharf understands what´s going on, exept that there´s a stampede going on and no-one has pressed the big green flashing button that says “DON¨T PANIC!”

5. The only thing that spins in a casino is the roulette wheel and the reels on the slot machines. On Wall Street, and in The City, however, everyone´s head is spinning.

In the US so far we have Lehman Brothers bankrupt and Merrill Lynch sold to Bank of America. We have the insurers and Man United sponsors AIG effectively nationalised, along with Fannie Mae and Freddie Mac. The sharks are sniffing around Morgan Stanley- shares recently nosedived 26% as its business model is still one of big debts on risky securities. They are still waiting for their white samurai warrior to ride to the rescue. Now it look like Wells Fargo is on course to snap up Wachovia for a tidy $11.7 billion after Citigroup ran for the hills having seen their detailed balance sheet.

Are the financial markets similar to a casino? You´re joking, aren´t you? Las Vegas is a calm and serene place compared to the madness that is going on on Wall Street and in The City. At least the drinks are free if you are betting on The Strip.

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