Senate hearing shows Wall Street can be bigger gamble than Las Vegas

During Tuesday’s Senate hearing into the causes of the financial crisis, Goldman Sachs’ notorious mortgage-backed financial investments were skewered by senators, who repeatedly referred to the firm’s actions in gambling terms. The word bet was used 54 times, bets 13, betting 83 and bettor three times. The word odds was uttered five times, some form of the word gamble was used 15 times, there were two references to casinos and seven mentions of Las Vegas.

Whew.

Among the most notable references:

Sen. Claire McCaskill, D-Mo., declared that Goldman Sachs “had less oversight than a pit boss in Las Vegas.”

Sen. John McCain, R-Ariz., wondered how the firm’s deals “differ from going out to Caesars Palace to the sports book and making a wager on the outcome of an athletic contest?”

Sen. Mark Pryor, D-Ark., said that “instead of Wall Street, it looks more like Las Vegas.” Sen. John Ensign, R-Nev., a member of the subcommittee holding the hearing, corrected Pryor, saying “most people in Las Vegas would object to having Wall Street compared to Las Vegas.”

Ensign’s right. In Las Vegas, people know the odds aren’t in their favor but, unlike on Wall Street, they are assured they’ll get a fair game.

In a news conference Tuesday, Senate Majority Leader Harry Reid said that if the financial market was regulated the way gaming is in Nevada, Wall Street firms “wouldn’t be able to do a lot of these games — in fact, they wouldn’t be able to do any of them.”

Reid noted that when he served as chairman of the Nevada Gaming Commission, “we did everything we could to make sure the rules for people to gamble were fair to the consumer.”

But that is not the way things work on Wall Street, as the Goldman Sachs case illustrates. The investment bank had no problem offering deals that employees described as “junk” or “a piece of crap” to their investors. The firm, after all, made money on the deals.

Goldman Sachs has been charged with fraud by the Securities and Exchange Commission for its handling of a mortgage-backed investment deal. The SEC says the firm let hedge-fund manager Paulson & Co. influence the investments Goldman Sachs offered without disclosing Paulson’s role to other investors. Paulson reportedly made $1 billion on the deal, and it’s no wonder why. In gambling circles, that’s politely called stacking the deck.

McCaskill summed it up well when she said, “any street gambler would never place a bet with a bookie or a house” like Goldman Sachs. Those are biting words that Wall Street should take to heart. Investors can’t trust Wall Street to play fair, and that’s the essence of why financial regulation needs to be reformed.

SUN EDITORIAL

I've had a similar argument with friends and family about general investments. Investing is really a sophisticated form of gambling.

Do your investments always go up? Do your investments never lose you money? Are your investments risk free?

Unless you're only ever buying government bonds or GICs then the answer to all three is no, and that's what makes investing a gamble.

That said I still invest for my retirement because, unlike gambling, it doesn't appear there is an unbeatable mathematical house edge that you can't overcome in the long run. You hope the volatility is less than a traditional casino too, but the last couple years have shown some pretty amazing volatility in the markets.

What makes you think that investing is sophisticated?

Quote: matilda

What makes you think that investing is sophisticated?

Well one thing is at the casino you know how much, up front, you'll get paid if you win or what you'll lose. Most investments you don't know up front how much you'll make or lose.

You can also predict all the outcomes of a casino game. Craps has 36 possibilities for the outcome of the dice. No more or less. That's what The Wizard of Odds site is predicated on. The same is not true of investments.

Casinos are also up front about the rules and what you're betting on. Cases like the recent Goldman Sachs fraud investigations show that investors aren't always given all the information of what they're investing in.

Check out Nassim Nicholas Taleb and his Black Swan theory for some interesting reading on economies, banking, and investments.

As I see it, the casino gambling would be more like Wall Street, if the casinos were actively jimmying with the mechanisms of the odds under really free for all conditions where anything they can get away with goes and they don't get caught.

All that leveraging, things not worth near what they're priced, it'd be like the casino says today you can increase your wealth by adding Monopoly money to real money.

And I sure hope the casinos aren't operating like that.