Risk Markets And Politics

Wednesday, September 27, 2006

The State of Louisiana vs. X: Put my money on X

Or behind X, where internet gambling is concerned, at least. A few months ago I wrote that, "it may take an attempted crackdown to galvanize support for online gambling in the US."

Well, we may be getting there.

Adding to its singular accomplishments, the great State of Louisiana is now lending a hand to the assault on the future competitiveness of United States financial markets. The recent arrest of SportingBet Chairman Peter Dicks apparently signaled a wider crackdown on unregulated internet-based speculative markets, but it's unclear to what extent federal agencies were actually involved in this case. Considering the history of gambling prohibition, it isn't at all surprising that Louisiana may have been acting at the behest of local casinos who feared online competition. Fortunately, there is reason to suspect that Louisiana's legal efforts will prove to be feeble, and may be rebuffed in New York with a suitable level of disgrace. Companies accepting or brokering online wagers might also be able to escape Louisiana's wrath by simply blocking IP addresses originating in the State. (In any case, I hope that other writers, especially in the UK, Europe and Australia, will continue to take every opportunity to chide the United States and its paralyzing rat's nest of archaic federal and borderline corrupt State laws.)

Still, many enthusiasts, not to mention entrepreneurs, of unregulated markets are frustrated and wondering how to proceed. Actually, the securities and investment industry lobby - already the 5th largest - could be a natural ally to these dispersed interests. It's worth noting that a few large and well-respected investment banks at one time held positions in both SportingBet (SBT.L) and BetOnSports (BSS.L). Most of these positions have probably been exited by now and these banks (or their clients) are among the many shareholders hurt by the burgeoning crackdown, which currently has destroyed around 2.4 billion pounds in market capitalization. Also, consider that commercial bankers were the most weighty opponents of the "Internet Gambling Prohibition and Enforcement Act".

More generally, new markets mean profits for banks, both in terms of brokering and trading capacity. Of course, the vast majority of these new markets will be too small to attract interest from investment banks, but the risk-sharing markets (e.g. tax futures), at least, have the potential to be large enough. Risk-sharing markets presently fall under the jurisdiction of the CFTC, which is reluctant to approve any contract that would raise the eyebrows of Congress.

Now, the SEC, alongside the banking lobbies, would be in a more politically secure position to oversee exchange-traded contracts like policy event derivatives. The jurisdictional dust-ups between the SEC and CFTC are well-known, and the Senate Banking Committee, which oversees the SEC, seems to be taking an increasing interest in the activity of the CFTC. So, both in terms of legalization and robust, flexible regulation, banking interests are perhaps the best hope - however indirect - for proponents of new online markets.

9/29/06 Update: As hoped, Dicks is free to return to the UK. After consulting with Eliot Spitzer, New York Governor George Pataki has refused to sign the extradition order to fourth-rate power Louisiana.

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