Introducing the new AFL Commissioner
The way I am wired can be a bit annoying at times. I am always trying to figure out solutions to any problem that I see. I just can't help it. Some things are easy, like fixing potholes: JUST DO IT!!! Or fixing really bad roads: Sue the contractors for the repair... like having a ten year warranty on their work. Or getting stuck in a line at McDonald's behind someone that is ordering for 10 people back at the office: Adopt a single line like Burger King.
So, while watching the Sunday news shows today my affliction kicked in again when the subject of financial regulation inevitably came up. I have wasted more than a few brain cells on this issue over many years, but nothing like the past 20 months. I have blogged in the past about who I think was the real culprit in initializing our most recent crisis, as well as how the law of unintended consequences is the only law in Washington that will work as promised.
And then it hit me. We need a gaming commissioner. Seriously.
It has been my opinion for a very long time that the majority of Wall Street deals is nothing more than legal (or sanctioned) gambling. Very little of what happens in finance goes beyond educated guessing and most of the rarefied activity that REALLY gets us in trouble is nothing more than gaming the numbers.
I was in Las Vegas a few months ago for a conference. As I walked through the various casinos, I was amazed at the number of different games available. Back 25 years ago when I first started going out there on a regular basis (seems that almost all computer-related industries have held their conferences in Vegas) there were the traditional one-armed bandits with between one and five payout lines. Card games consisted of a few variations of poker, blackjack and baccarat. Now there are hundreds of 'slot' machines playing multi-lines, crazy characters instead of fruit, themes based on Elvis, Baywatch and Happy Days, and all kinds of electronic card games. Oddly, none of them require you to put real coins in a slot anymore. The card tables have a plethora of variations including Pai Gow Poker, Caribbean Stud, Texas Hold 'em, Seven Card Stud, Omaha HORSE and the list goes on. Like in the stock market, variety breeds unfamiliarity and unfamiliarity makes it easy to make stupid decisions which usually leads to loss.
In any casino, when you walk in the door you know one thing... IT IS GAMBLING AND YOU WILL PROBABLY LOSE SOME OR ALL OF YOUR MONEY. Anybody that goes into a casino, gambles, loses their money and then comes out and complains about it is a fool. You know going in what the odds are. To keep the casino operators honest (honest? is that the right word?) each state has a gaming commission that sets up limits and boundaries within which casinos must operate. The casinos in turn engage in very sophisticated processes including surveillance, background checks, audits, psychology and muscle to keep players and employees from cheating. How is that for an oxymoron? Cheating at gambling. Kind of funny if you think about it. That's like accusing someone of cheating in a knife fight, but I digress.
If you step back and take an objective look at what is loosely defined as Wall Street finance (buying and selling stocks, bonds, options, derivatives, futures, investment banking, IPO funding, etc.) you will realize that very little of the day-to-day activity is based on the necessary and essential process of buying and selling equities and agreeing upon prices for future purchases of commodities. It is not the object of this post to go into all of the ways that these relatively simple transactions have been gamed and new products and services layered on top of the foundational functions of the Stock Exchange.
My proposal would be as follows: Segregate the foundational processes and transactions of the Stock Exchanges, Boards of Trade, and investment banks away from the gaming functions such as puts, calls, options, leverage, derivatives, etc. Any layperson could identify which belongs in which column. Keep the regulation of the former under the auspices of the SEC which has done such a good job so far, and put the regulation of the latter under a newly formed Commission of the American Financial League (AFL). This quasi-government body would be modeled after the various sports leagues as well as the gaming commissions of the various states because it is a sport and it is gambling.
The primary, immediate benefit of this segregation is that everyone would immediately know when they are walking into a 'casino'. If one has the stomach for the gambling, go for it. If an investment company (casino) fails because of poor bets (options) then so be it. They would just be losing the money that is sloshing around on top of the foundational money of the base market. In other words, the players would just be hurting themselves and the basic investor would be insulated.
Of course, regulation would have to stipulate what the maximum percentage of a retirement fund could be invested (gambled) in this new market, and how would gains be taxed (and losses be carried forward.) No plan to reform or remake the incredibly large national and global financial system would be easy or could be completely thought out by a guy like me, so I am not even going to try. I am not naive enough to think that this would ever even happen as I suggest, but I am serious in my assertion that we need to at least stipulate up front that a large proportion of our financial system in the US and the world is nothing more than gambling. If we can start with that principle as a guideline, then the rest of the negotiations will be a lot easier, since we would not have to treat some of these crazy schemes as legitimate financial instruments.
Once the financial instruments (games) are established, the Commission would issue rules by which all firms (casinos) would have to agree. Then, like posting nutritional information in fast food restaurants, each instrument would have a disclaimer section written in plain English which would define the rules and list the potential risks and rewards. Then the investor (player) would at least know what they were getting into. Caveat Emptor.
C'mon people, let's call a spade a spade and get on with meaningful reform.
So, while watching the Sunday news shows today my affliction kicked in again when the subject of financial regulation inevitably came up. I have wasted more than a few brain cells on this issue over many years, but nothing like the past 20 months. I have blogged in the past about who I think was the real culprit in initializing our most recent crisis, as well as how the law of unintended consequences is the only law in Washington that will work as promised.
And then it hit me. We need a gaming commissioner. Seriously.
It has been my opinion for a very long time that the majority of Wall Street deals is nothing more than legal (or sanctioned) gambling. Very little of what happens in finance goes beyond educated guessing and most of the rarefied activity that REALLY gets us in trouble is nothing more than gaming the numbers.
I was in Las Vegas a few months ago for a conference. As I walked through the various casinos, I was amazed at the number of different games available. Back 25 years ago when I first started going out there on a regular basis (seems that almost all computer-related industries have held their conferences in Vegas) there were the traditional one-armed bandits with between one and five payout lines. Card games consisted of a few variations of poker, blackjack and baccarat. Now there are hundreds of 'slot' machines playing multi-lines, crazy characters instead of fruit, themes based on Elvis, Baywatch and Happy Days, and all kinds of electronic card games. Oddly, none of them require you to put real coins in a slot anymore. The card tables have a plethora of variations including Pai Gow Poker, Caribbean Stud, Texas Hold 'em, Seven Card Stud, Omaha HORSE and the list goes on. Like in the stock market, variety breeds unfamiliarity and unfamiliarity makes it easy to make stupid decisions which usually leads to loss.
In any casino, when you walk in the door you know one thing... IT IS GAMBLING AND YOU WILL PROBABLY LOSE SOME OR ALL OF YOUR MONEY. Anybody that goes into a casino, gambles, loses their money and then comes out and complains about it is a fool. You know going in what the odds are. To keep the casino operators honest (honest? is that the right word?) each state has a gaming commission that sets up limits and boundaries within which casinos must operate. The casinos in turn engage in very sophisticated processes including surveillance, background checks, audits, psychology and muscle to keep players and employees from cheating. How is that for an oxymoron? Cheating at gambling. Kind of funny if you think about it. That's like accusing someone of cheating in a knife fight, but I digress.
If you step back and take an objective look at what is loosely defined as Wall Street finance (buying and selling stocks, bonds, options, derivatives, futures, investment banking, IPO funding, etc.) you will realize that very little of the day-to-day activity is based on the necessary and essential process of buying and selling equities and agreeing upon prices for future purchases of commodities. It is not the object of this post to go into all of the ways that these relatively simple transactions have been gamed and new products and services layered on top of the foundational functions of the Stock Exchange.
My proposal would be as follows: Segregate the foundational processes and transactions of the Stock Exchanges, Boards of Trade, and investment banks away from the gaming functions such as puts, calls, options, leverage, derivatives, etc. Any layperson could identify which belongs in which column. Keep the regulation of the former under the auspices of the SEC which has done such a good job so far, and put the regulation of the latter under a newly formed Commission of the American Financial League (AFL). This quasi-government body would be modeled after the various sports leagues as well as the gaming commissions of the various states because it is a sport and it is gambling.
The primary, immediate benefit of this segregation is that everyone would immediately know when they are walking into a 'casino'. If one has the stomach for the gambling, go for it. If an investment company (casino) fails because of poor bets (options) then so be it. They would just be losing the money that is sloshing around on top of the foundational money of the base market. In other words, the players would just be hurting themselves and the basic investor would be insulated.
Of course, regulation would have to stipulate what the maximum percentage of a retirement fund could be invested (gambled) in this new market, and how would gains be taxed (and losses be carried forward.) No plan to reform or remake the incredibly large national and global financial system would be easy or could be completely thought out by a guy like me, so I am not even going to try. I am not naive enough to think that this would ever even happen as I suggest, but I am serious in my assertion that we need to at least stipulate up front that a large proportion of our financial system in the US and the world is nothing more than gambling. If we can start with that principle as a guideline, then the rest of the negotiations will be a lot easier, since we would not have to treat some of these crazy schemes as legitimate financial instruments.
Once the financial instruments (games) are established, the Commission would issue rules by which all firms (casinos) would have to agree. Then, like posting nutritional information in fast food restaurants, each instrument would have a disclaimer section written in plain English which would define the rules and list the potential risks and rewards. Then the investor (player) would at least know what they were getting into. Caveat Emptor.
C'mon people, let's call a spade a spade and get on with meaningful reform.
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