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Why gambling at banks is legal [ClearOnMoney]
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Commentary

Why gambling at banks is legal

1 Dec 2009 by Jim Fickett.

What is the difference between betting on a sporting event and buying a credit default swap (CDS) on a bond you don't own? Not much, I've always thought, and it has always seemed strange that, for example, the US has made such a big deal of stamping out on-line gambling, while viewing the purchase of stock options and CDS's as a perfectly normal and valid activity.

I'm not endorsing or condemning gambling, either in casinos or banks; just pointing out a rather strange inconsistency.

So here is an interesting bit of background, from the Charlotte Observer on 29 Nov, in an article entitled, ”Senator seeks to use gambling laws to rein in Wall Street”. Turns out the parallel has been recognized in the law before, and the banks managed to loosen their restrictions in 2000:

There is precedent for state gambling laws being applied to financial transactions.

In the early 1900s, gaming establishments known as “bucket shops” allowed people to place wagers on whether a stock would go up or down without actually buying the stock. States banned such betting after the economic crash and the panic of 1907.

In 2000, Congress attached the Commodity Futures Modernization Act to a must-pass, 11,000-page omnibus spending package that provided funding for a handful of Cabinet departments and other federal agencies. The bill essentially deregulated the commodities markets and pre-empted the states from applying their “bucket shop” or other gambling laws.

Among those supporting the deregulation of the commodities markets were Alan Greenspan, who was then chairman of the Federal Reserve Board; Larry Summers, who was a treasury secretary in the Clinton administration and is now a top economic adviser to President Barack Obama; and Robert Rubin, another Clinton-era treasury secretary.

Greenberger [Michael Greenberger, a University of Maryland law professor], who was among those fighting the 2000 deregulation, said lobbyists for Wall Street and large banks essentially wrote the Commodity Futures Modernization Act and clearly recognized the need to pre-empt state gambling laws as the derivatives market took off.

“Las Vegas casinos were regulated but betting on Wall Street wasn't,” Greenberger said.