The Bookies" Model Vs The Banker"s Model
Even those of us that do not use our neighborhood bookie kind of know how he operates.
We have seen how his operation works as portrayed in the movies and on television.
We want to bet $100 on the Bears, our home team, to beat the Packers.
But we know that the Packers are, at least for now, a better team.
The bookie knows that we know this and spots us eight points so that even if the Bears loose by seven points we win the bet.
He has to sweeten the bet or even though we want to bet our better judgment says no.
Our cousin in Wisconsin is a Packer's fan and wants to bet on his team but finds out that he must spot his bookie eight points.
That's okay with him because he knows that his team is better than the Bears so he goes along and places a $100 bet on the Packers.
Both of these bookies make their money not on whether we win or lose the bet but on what is called the vigorish or house cut.
In other words, the bookie rakes in a percentage off the top of the winner's payout.
The Chicago and Green Bay bookies make a deal to offset their bets so that neither bookie ends up losing no matter which team wins.
However, what happens if our Chicago friends bet excessively on the Bears and our Green Bay cousins, a much smaller fan base, doesn't match Chicago's enthusiasm to bet? Chicago's bookie makes deals with New York, Saint Louis, and other cities to lay off the excess bets on them.
They all work together to even the odds so there are no big winners or losers among the bookies but only vigorish takers.
Each bookie is responsible for collecting his client's bets.
See the bookies are not so greedy that they want to take chances on their bets.
They all want to stay in business for the following week's bets and so settle for their cut.
They know that the government will not offer them a bailout.
To keep this simple I have not addressed just how organized this bookie operation is or who is at the top.
It is the model of the bookie business that I wanted to outline.
Let's compare the bookie business to, what some would call, a more legitimate operation, our banking industry.
In the old days, retail banks made their money from the interest difference between depositors and borrowers, what we might call the vigorish or house cut.
Peer banks and sometimes central banks were available to provide loans to the retail banks if their loans versus deposits got out of whack.
They would also sometimes lay-off loans to other firms referred to as the secondary mortgage market.
See in the old days, before the current crop of geniuses took over; the banking industry used a model similar to the bookies' model.
Investors had no problem with the bookies' model since, like the bookies, they were happy to invest in a relatively safe enterprise at a reasonable profit.
The problem with the bookies model was that there just wasn't a way to spread enough money around to the CEOs and executives.
A lot of money was being exchanged and the CEOs and executives, in their minds, were not getting their proper cut.
The CEOs and other top executives could also envision various convoluted plots to reap even more money if they could just get rid of those pesky banking regulations.
It was a gold mine just waiting to tap.
So the Wall Street crowd and bankers lobbied Washington to impale the regulation of banking institutions so that something could be done about improving the CEO's and the other executives pay.
Washington politicians operating in their own haphazard way, and happy to get their cuts from the financial lobbyists, gutted the banking regulations in 1999 when Texas Republican Sen.
Phil Gramm pushed through legislation signed by Democratic President Bill Clinton repealing the Glass-Steagall Act.
The Glass-Steagall had been passed in 1933 to prohibited banks from getting into the investment business.
I guess the Washington politicians knew what they were doing back in 1933.
No longer were banks regulated out of the investment markets.
Out went the bookies' model and in came the regulatory hands off and the more leverage the better model.
Leverage is a fancy term for working on credit rather than cash.
At the same time, in order to keep the influx of mortgage sales streaming in, they accepted false and dubious credit applications that were generated by unscrupulous mortgage agents and irrationally exuberant homebuyers who drank the Kool-Aid that home prices would forever increase and they could therefore refinance sub-prime loans in future years.
In order to sustain the flow of all of the loans coming in, improve their cash flow and most importantly, improve the CEOs' and other top executives' take out compensation, the banks passed along commercial paper called derivatives to hedge funds.
Actually, the derivatives are not backed up by any real collateral at all but only a promise that if borrowers default the holder will pay the value of the derivatives.
Since the new banking method was unregulated, the banks were able to pass on many times the value of the actual mortgages with these derivatives.
Hence the high amounts of leverage.
The derivative holders did not quite trust the value of these derivatives so they went to the big insurance companies for protection.
Of course, insurance instruments are regulated so they had to issue "credit default swaps", another type of derivative that works about the same way as insurance policies do.
In case you haven't figured all this out yet, what it all boils down to is a lot of high risk gambling.
Many of the bets were lost when home values shank.
This left the banks under water and poor credit risks so the easy money train dried up.
Rather than let the banks fail, and risk another great depression, Washington has decided to pour seven hundred billion dollars into their coffers.
This amount could balloon into trillions if seven hundred billion dollars proves not to be enough.
Now our children, our grandchildren and great-grandchildren will be working to pay off these bad gambling debts for decades to come.
The important thing for the CEOs and other top executives is that they were finally able to skim the cream off the top of the banking business.
Now that the milk has tuned sour you can bet that they will keep the cream.
Wayne Nolen
We have seen how his operation works as portrayed in the movies and on television.
We want to bet $100 on the Bears, our home team, to beat the Packers.
But we know that the Packers are, at least for now, a better team.
The bookie knows that we know this and spots us eight points so that even if the Bears loose by seven points we win the bet.
He has to sweeten the bet or even though we want to bet our better judgment says no.
Our cousin in Wisconsin is a Packer's fan and wants to bet on his team but finds out that he must spot his bookie eight points.
That's okay with him because he knows that his team is better than the Bears so he goes along and places a $100 bet on the Packers.
Both of these bookies make their money not on whether we win or lose the bet but on what is called the vigorish or house cut.
In other words, the bookie rakes in a percentage off the top of the winner's payout.
The Chicago and Green Bay bookies make a deal to offset their bets so that neither bookie ends up losing no matter which team wins.
However, what happens if our Chicago friends bet excessively on the Bears and our Green Bay cousins, a much smaller fan base, doesn't match Chicago's enthusiasm to bet? Chicago's bookie makes deals with New York, Saint Louis, and other cities to lay off the excess bets on them.
They all work together to even the odds so there are no big winners or losers among the bookies but only vigorish takers.
Each bookie is responsible for collecting his client's bets.
See the bookies are not so greedy that they want to take chances on their bets.
They all want to stay in business for the following week's bets and so settle for their cut.
They know that the government will not offer them a bailout.
To keep this simple I have not addressed just how organized this bookie operation is or who is at the top.
It is the model of the bookie business that I wanted to outline.
Let's compare the bookie business to, what some would call, a more legitimate operation, our banking industry.
In the old days, retail banks made their money from the interest difference between depositors and borrowers, what we might call the vigorish or house cut.
Peer banks and sometimes central banks were available to provide loans to the retail banks if their loans versus deposits got out of whack.
They would also sometimes lay-off loans to other firms referred to as the secondary mortgage market.
See in the old days, before the current crop of geniuses took over; the banking industry used a model similar to the bookies' model.
Investors had no problem with the bookies' model since, like the bookies, they were happy to invest in a relatively safe enterprise at a reasonable profit.
The problem with the bookies model was that there just wasn't a way to spread enough money around to the CEOs and executives.
A lot of money was being exchanged and the CEOs and executives, in their minds, were not getting their proper cut.
The CEOs and other top executives could also envision various convoluted plots to reap even more money if they could just get rid of those pesky banking regulations.
It was a gold mine just waiting to tap.
So the Wall Street crowd and bankers lobbied Washington to impale the regulation of banking institutions so that something could be done about improving the CEO's and the other executives pay.
Washington politicians operating in their own haphazard way, and happy to get their cuts from the financial lobbyists, gutted the banking regulations in 1999 when Texas Republican Sen.
Phil Gramm pushed through legislation signed by Democratic President Bill Clinton repealing the Glass-Steagall Act.
The Glass-Steagall had been passed in 1933 to prohibited banks from getting into the investment business.
I guess the Washington politicians knew what they were doing back in 1933.
No longer were banks regulated out of the investment markets.
Out went the bookies' model and in came the regulatory hands off and the more leverage the better model.
Leverage is a fancy term for working on credit rather than cash.
At the same time, in order to keep the influx of mortgage sales streaming in, they accepted false and dubious credit applications that were generated by unscrupulous mortgage agents and irrationally exuberant homebuyers who drank the Kool-Aid that home prices would forever increase and they could therefore refinance sub-prime loans in future years.
In order to sustain the flow of all of the loans coming in, improve their cash flow and most importantly, improve the CEOs' and other top executives' take out compensation, the banks passed along commercial paper called derivatives to hedge funds.
Actually, the derivatives are not backed up by any real collateral at all but only a promise that if borrowers default the holder will pay the value of the derivatives.
Since the new banking method was unregulated, the banks were able to pass on many times the value of the actual mortgages with these derivatives.
Hence the high amounts of leverage.
The derivative holders did not quite trust the value of these derivatives so they went to the big insurance companies for protection.
Of course, insurance instruments are regulated so they had to issue "credit default swaps", another type of derivative that works about the same way as insurance policies do.
In case you haven't figured all this out yet, what it all boils down to is a lot of high risk gambling.
Many of the bets were lost when home values shank.
This left the banks under water and poor credit risks so the easy money train dried up.
Rather than let the banks fail, and risk another great depression, Washington has decided to pour seven hundred billion dollars into their coffers.
This amount could balloon into trillions if seven hundred billion dollars proves not to be enough.
Now our children, our grandchildren and great-grandchildren will be working to pay off these bad gambling debts for decades to come.
The important thing for the CEOs and other top executives is that they were finally able to skim the cream off the top of the banking business.
Now that the milk has tuned sour you can bet that they will keep the cream.
Wayne Nolen
