It’s funny how ethics and regulation vary from industry to industry. If Goldman Sachs CEO Lloyd Blankfein were the boss of a Las Vegas casino instead of a New York investment bank, his firm’s front-running and derivative trading against customers would have been a class B felony. Instead of $9 million in Goldman shares, his bonus this year would have been 1-6 years in prison and a minimum $10,000 fine on each count, of which there were presumably thousands.
Who would have thought Vegas was more ethical than Wall Street?
Testifying last month before Congress, Blankfein explained this behavior as just giving the customers what they want. “These are the professional investors who want this exposure, ” he said.
And Blankfein is correct, after a fashion. The Securities Act of 1934 specifically defines a class of “qualified” investors who are supposed to have enough assets and enough savvy to make their own mistakes, God bless ‘em. Yet in Vegas, where there is a sucker born every minute and capitalism is at least as popular as it is in New York, section 465.070 of the Nevada Gaming Law makes it a felony “to place, increase or decrease a bet or to determine the course of play after acquiring knowledge, not available to all players, of the outcome of the game or any event that affects the outcome of the game or which is the subject of the bet or to aid anyone in acquiring such knowledge for the purpose of placing, increasing or decreasing a bet or determining the course of play contingent upon that event or outcome. ”
That pretty much covers both front-running and trading against customers for the firm’s account.
In Vegas the house has an advantage, which is the only way they can call gambling a business. On Wall Street, too, investment banks and brokers traditionally lived on fees and commissions, respectively, whether the trade goes good or bad for the customer. But for Goldman and its competitors that wasn’t enough profit. So now they make most of their profits from trading securities, not by issuing or making markets in them.
I struggled to understand the difference here between Vegas and Wall Street. Why shouldn't what's legal (or illegal) for one also be legal (or illegal) for the other? In the end I think it comes down simply to ambition. Gambling, Las Vegas-style, is a retail business. Customers actually have to come through the door, while Wall Street serves a variety of global customer bases, almost none of which come through the door anymore. That's why Las Vegas has showgirls and volcanos and Wall Street does not. Las Vegas also has lots of competition and a more-or-less level playing field, which Wall Street is supposed to have, too, but actually doesn't or Goldman's success wouldn't be so different from its competitors. Gambling in Vegas is a commodity requiring standardization and stricter rules to keep customers walking through the door. Wall Street doesn't seem to worry about institutional customers -- they're "qualified," remember?
For Goldman customers it’s like having the pit boss sit next to you and start playing blackjack, only the pit boss knows precisely what a bad player you are and it isn’t even clear that his losses would even be losses, since it is the casino playing against itself. That spoils the game, alienates the rubes and so it is illegal.
Just not in New York.
Robert X. Cringely is Adam Smith’s sidekick. The 12th employee of Apple Computer,
Cringely has been making or writing about high-tech history since 1977. He was field editor at InfoWorld, a computer industry trade
paper, from 1987-95. His
best-selling book Accidental Empires: How
the Boys of Silicon Valley Make their Millions, Battle Foreign Competition and
Still Can’t Get a Date was published in 18 languages. His PBS documentaries, including Triumph of the Nerds and Nerds 2.01: A Brief History of the Internet,
have been shown in more than 60 countries. A blogger since 1997, he has 300,000
weekly Internet readers and more than a million words in print. A former
columnist for Worth and Inc magazines, Cringely has written for Forbes, NewsWeek, MIT Technology
Review, the New York Times and
many other publications. The
companies he has helped to start have a market cap in excess of $500 billion.