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The Wall Street Black Sox

January 4, 2011

There is also the risk that Joe Pesci will bury you in a hole in the desert.

Gambling pretty often gets a bad rap, invoking images of pinky-ringed fingers, pin-striped gangsters, and grimy loan sharks. Those who don’t frequent casinos and other gambling establishments tend to regard them with scorn, and their patrons as derelicts and risk junkies.

That perception is not entirely off-base. I’ve played at several casinos and frequented several underground poker parlors. I’ve known a lot of people who’ve made and lost their livelihoods at the tables. Gambling can be an exciting social activity, but it can also bring out the worst in people, not to mention bring out the worst people.

One of the most famous gambling events in the world right now is the World Series of Poker, particularly the $10,000 No-Limit Hold’em Main Event. Celebrities, professional gamblers, businesspeople, and ordinary Joes from all over the world migrate to Las Vegas every year to play in the dozens of tournaments in the WSOP, and the Main Event alone has drawn thousands of entries for the past several years, with total prize pools in the tens of millions of dollars.

For some players, the multi-million-dollar prize pool of the Main Event isn’t enough. Some players find other things to bet on during the tournament, including the fates of fellow players in the tournament. Some bets relate to random events, like the turn of a particular card, and have no bearing on the play of the game itself. But it’s also common practice for high-level players to place “last longer” bets and to “stake” each other in major tournaments.

For those not entrenched in poker lingo, a “last longer” bet of, say, $100 between Player A and Player B means that if A is eliminated from the tournament before B, then A owes B $100—and vice versa. A “stake” arrangement usually means one of two things: (1) an outside person pays, say, 25% of Player A’s buy-in and is entitled to 25% of his winnings if he wins, or (2) Players A and B are both in the tournament and agree to split some percent of their winnings if either or both of them win.

Since the release of this photo, bulldogs have been prohibited from playing in the WSOP.

The problem with last-longer bets and staking agreements is that the outcomes relate to the play of a game in which all players are supposed to be opponents. Those familiar with poker should immediately realize the problem with this; it can turn into collusion—a form of cheating in which players effectively “gang up” on other players who are competing individually.

This phenomenon is not isolated to poker. Having a material stake on an event skews the bettor’s interests. It can turn a coin flip or the drawing of a playing card—which otherwise has little to no effect on anything—into a make-or-break action and a point of major contention. It can inspire clever, unscrupulous bettors to sneakily affect the outcome of the event, i.e., to cheat.

This is why casino gambling is conducted in a very controlled environment with strict limits on the parameters of the events and the betting. Without those controls and limits, people would bet on everything and anything, and cheating would be rampant. No one would be able to trust the integrity of the games. The whole thing would fall apart at the seams.

Speaking of seams, one of the most notable instances of cheating is known as the “Black Sox Scandal” of 1919, in which players on the Chicago White Sox were caught deliberately losing World Series games against the Cincinnati Reds in order to win bets they had placed against their own team. The scandal caused an uproar and resulted in several players being permanently banned from the game of baseball. The involved players were vilified for undermining the integrity of our national pastime—an event that, however popular, really has little effect on anything. It’s just a game, after all.

The Black Sox Scandal involved scamming bookies based on the outcome of an athletic competition. Aside from the bookies, the White Sox and Reds were certainly affected, as well as several other people in that circle, but that’s it. It caused damage in a controlled environment, but it was a very good example of just how much damage unbridled gambling can cause.

Nearly a century later, we’re facing a similar but much more widespread and damaging problem. Over the past several years, investment banking has expanded from buying an interest in stocks, bonds, and other simple securities to gambling on nearly anything. An investor can now bet on a homeowner’s ability to pay his mortgage, the outcome of a life-insurance policy, the solvency of a national economy, and a large and growing number of other things. The same investor can also bet against any of these things—that a homeowner will go broke and face foreclosure, that an insured person will die, or that a country’s economy will crash and leave its citizens destitute.

Betting on success has been widely regarded since its inception as a good thing; it’s the premise behind stock markets. It encourages people to want good things to happen so that they may share in the benefit. But betting on bad outcomes…well, that’s another story. It’s harmless to be able to bet that the next die roll will not be a 6, but foreclosures, deaths, and crashing economies affect a lot more people than the turn of a card.

Someone other than the dealer must call out Mr. Eyepatch's string bet.

This Wall Street practice of being able to bet for or against nearly anything has turned into a major problem for us, the ordinary citizens caught in the crossfire. The underlying probabilities are obfuscated by a complicated series of events, but what has happened is that investment banking has changed from a mechanism for facilitating commerce into a reckless, amoral gambling venture.

The whole institution has been so skewed that rich investors can now purchase a major material interest in terrible things happening to people. We saw some of the effects of this when the housing market crashed, while the investment banks made fortunes from both the solvent mortgages and the foreclosures. Then we found out that multiple lenders and investment firms were involved in setting up the whole scheme by deliberately giving out made-to-fail mortgages, selling them to uninformed investors, and then betting against them.

Some might say they were just being diligent businesspeople, making shrewd investments while hedging their risks. Then again, some might say the same about the Black Sox in 1919; they stood to gain from playing fairly, but it turned out that they stood to gain even more by throwing the game, so they did. But you’d be hard-pressed to find someone who will defend what the Black Sox did the way that so many people defend the actions of Wall Street over the past several years.

The Black Sox Scandal was an isolated incident, a breach in the usually controlled environment of professional baseball. The unscrupulous investment-banking practice of betting for ill fates, on the other hand, is not an isolated event or a breach in a controlled environment. It is the controlled environment. It is business as usual.


No one can reasonably expect the whole world to be fair. Even absent criminality, a wholly innocent person can find himself swallowed up by an earthquake or mauled by a bear with no warning. But when we set up and support institutions, their purpose ought to be the protection and well-being of our fellow people, not the creation of material interest in loss and catastrophe. If anything, they should create material interest in success, fairness, and the common good.

Sure, cheaters can be clever, and we can acknowledge that about them, just as we can acknowledge that the Wall Street cheaters must have been quite talented to have orchestrated so many lucrative scams. We could acknowledge the same thing about a serial killer who evades capture by the police for decades, but his cleverness doesn’t change what he did, just as the cleverness of operators of Goldman Sachs, JP Morgan Chase, AIG, and so many other firms doesn’t change what they did or make it honorable.

We cannot tolerate this kind of gambling on our lives and well-being, and the disastrous cheating that it instigates. If the Black Sox had not been removed from baseball and the commissioners had not been more watchful of sports gambling, professional baseball could easily have been reduced to a ruse, just as investment and lending have become a ruse now.

The cheaters whose actions have left the world on its knees must be punished, and the mechanisms that allowed them to do so must be stopped immediately. If we do not punish them, and we allow the institutions to continue acting as they have been, it will be the end of any fairness in finance and in our lives. At least for the moment, you can bet on that.

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