SEC charges Goldman with Fraud

[toastywombel]

I am really surprised this story hasn't picked up a lot of steam.

 

http://www.msnbc.msn.com/id/36597290/ns/business-us_business/

 

NEW YORK - Goldman Sachs Group was charged with fraud by the U.S. Securities and Exchange Commission over its marketing of a subprime mortgage product, igniting a battle between Wall Street's most powerful bank and the nation's top securities regulator.

 

The civil lawsuit is the biggest crisis in years for a company that faced criticism over its pay and business practices after emerging from the global financial meltdown as Wall Street's most influential bank.

 

It may also make it more difficult for the industry to beat back calls for reform as lawmakers in Washington debate an overhaul of financial regulations.

 

http://www.foxbusiness.com/story/markets/industries/finance/sec-charges-goldman-sachs-fraud/?test=latestnews

 

In its complaint, the SEC alleges that Goldman failed to tell investors in a collateralized debt obligation that a major hedge fund that helped choose the portfolio had also placed bets against it.

 

FOX Business Network has learned that Goldman was completely surprised by the timing of the charges.

 

People close to Goldman say despite months of dealings with SEC investigators, the company was not aware the charges were imminent. A person close to Goldman described it as a"politically inspired hit" to propel the administration's financial reform bill through Congress.

 

http://money.cnn.com/2010/04/16/news/companies/sec.goldman.fortune/index.htm?hpt=T2

The SEC's civil fraud complaint alleges that Goldman allowed hedge fund Paulson & Co. -- run by John Paulson, who made billions of dollars betting on the subprime collapse -- to help select securities in the CDO.

 

I am sure the timing of this is political, as implied by the above articles. This could turn out to be a big deal though. Goldman says they are going to fight the charges. This move by the SEC could turn years of de-regulation on it's head, if done correctly of course. Here are some other links from different sites to the same story.

 

http://www.huffingtonpost.com/2010/04/16/goldman-sachs-fraud-expla_n_540938.html

 

http://news.yahoo.com/s/ap/20100416/ap_on_bi_ge/us_sec_goldman_sachs_charged

 

http://www.timescolonist.com/Goldman+Sachs+accused+subprime+mortgage+fraud/2919560/story.html

Top Wall Street bank Goldman Sachs has been charged with financial fraud in a move that raises the prospect of a wider crackdown on firms that bet on the collapse of the U.S. housing market.

 

Coming upon this story was quite nice. I devoted tonight to watching Capitalism: A Love Story. I have heard a lot about it, but I am not much of a watcher of anything, I prefer to read my news, so I had not seen yet.

 

And you know me, after watching it I got into an anti-capitalist, socialist, liberalized frenzy of anger. I wanted to take Jackson33 and Jryans pie and give it to my comrade down the street Joe Stalin or my other buddy Bum Unwelfarr (he's from Iceland).

 

The movie finished and I took a gander at the news and saw the above. It made me a little happier.

 

I know I am probably hoping for too much, but what do you guys think about this story?

Edited April 17, 2010 by toastywombel

[iNow]

I think much of it will largely be symbolic, but personally appreciate the symbol. It will help Washington to move forward with more support on the present work being done on regulation (IMO). Also, on this news Goldman Sachs stock closed down yesterday almost 13% a share, or a loss $23.50 for each.

[bascule]

All I can say is: about time

[D H]

I think much of it will largely be symbolic, but personally appreciate the symbol.

If the charges stick this will be much more than symbolic. Continuing with your post:

Also, on this news Goldman Sachs stock closed down yesterday almost 13% a share, or a loss $23.50 for each.

Look for Goldman Sachs to drop a lot more than that. A financial institution that makes money at the expense of the huddled masses: priceless. A financial institution that makes money at the expense of the investors and share holders: Also priceless. However, in the latter case it is the institution's stock that becomes priceless. Goldman Sachs broke the law; so what? They'll get a (relatively) puny fine. That they broke the trust of investors and stockholders is what will cost them a lot of money.

[Mr Skeptic]

Even if the timing is politically convenient, fraudsters need to be called on their fraud, especially where it affects the global economy.

[Dudde]

I think it was probably largely suspected, so not a lot to build steam up on =\

[toastywombel]

I think it was probably largely suspected, so not a lot to build steam up on =\

 

If you read the articles, Goldman executives and lawyers had been in negotiation with the SEC months before this happened, and they didn't expect it the whole time.

[Dudde]

If you read the articles, Goldman executives and lawyers had been in negotiation with the SEC months before this happened, and they didn't expect it the whole time.

 

Oh I agree that they probably didn't expect it, I wasn't clear, I meant the public at large mostly expected it I have no numbers or theories to backup my pot shot at Goldman, but it's a rather accepted notion in the political environment around where I debate people - between both conservatives and liberals

[jackson33]

Goldman Sachs Group (GS NYSE) actually rose .85 in after hours trading, but the expected flood of law suits, hardly make the Company a good investment.

 

FEC, is part of the Executive and can be controlled to some extent, which leads to believe somebody has flipped out of reality, probably in hopes of gaining more control/regulation over the financial. Paulson, the mastermind behind TARP, and one who personally has made billions for "GS" including Derivatives" while CEO, is not charged. He also played an instrumental role in Tim Guithner's nomination and CONFIRMATION, to replace himself as Treasury Secretary.

 

Equity Derivatives

 

The team specializes in strategic transactions that focus on equity derivative instruments. Pricing derivative instruments, interacting with traders and working with the Investment Banking division and the firm’s trading desks assist the group in its day-to-day functioning.

 

Leveraged Finance

 

Leveraged Finance is a specialized advisory group that uses debt financing to structure the acquisition or recapitalization of companies or business units. To generate an appropriate capital structure, the group uses leveraged loans, high-yield bonds or a combination of both to enable companies to meet their balance sheet objectives. [/Quote]

 

http://www2.goldmansachs.com/careers/our-firm/divisions/ibd/how-were-organized/financing-group.html

 

 

I believe these two items of the long list of the Groups activity, are the issues being attacked or the basis for and suit. Creating a derivative IMO, having been asked to do exactly that, and the distribution (sale) of them. As I understand the charge, they created these derivatives presumable thinking they would fail (not possibly, which everyone knew was possible) and encouraged the investors (many worldwide banks) to invest in what they knew would fail. Frankly that makes no sense, both simple operation with reasonable reason to believe a gain or loss were possible, no less than any 'at risk' investment.

 

I'm not sure how far these charges/suit will be taken, I certainly don't see court action where media would play a role and may be intended to serve as a warning (for what I don't know), but would expect an 'out of court' agreement/settlement, possibly already worked out. GS, has to many people, involved in Washington in high standing for anything else, to say nothing of Government backing in all those derivatives, still tied to Fannie/Freddy.

 

Personally, I would like to see a legal battle come of this as it would bring Dodd/Franks and several others, who have been promoting 'Low Interest/Qualification Free' home loans going well back into the 1990s, into the picture. Some thought should be given to what it means, if regulation already in place by Government, then with additional mandates, could mean to the Banking Industry, just another 10-15% of the US economy. Is just maybe, their is a unmentioned objective, to control both Health Care and the Financial's, thats half way to exactly what....

 

 

Not the charge, but a summary of the basis;

 

Despite the 2007 subprime mortgage crisis, Goldman was able to profit from the collapse in subprime mortgage bonds in the summer of 2007 by selling subprime mortgage-backed securities short. Two Goldman traders, Michael Swenson and Josh Birnbaum, are credited with bearing responsibility for the firm's large profits during America's sub-prime mortgage crisis.[16] The pair, who are part of Goldman's structured products group in New York, made a profit of $4 billion by "betting" on a collapse in the sub-prime market, and shorting mortgage-related securities.[/Quote]

 

http://en.wikipedia.org/wiki/Goldman_Sachs

 

To emphasize the idea, two things to remember; During the Tech Bubble crash, Hedge Funds (Soros/Cramer the most notable) and/or individuals made billions (possibly a trillion or two) selling short (betting they would go down) every Tech Stock. With any given investment, while that investment is going down, short term or long, somebody is assuming the loss as it retreats, all the way down, even into default, somebody owns the stock, IT'S PART OF THE GAME no different than buying GS in after hours trading last night...

[padren]

To emphasize the idea, two things to remember; During the Tech Bubble crash, Hedge Funds (Soros/Cramer the most notable) and/or individuals made billions (possibly a trillion or two) selling short (betting they would go down) every Tech Stock. With any given investment, while that investment is going down, short term or long, somebody is assuming the loss as it retreats, all the way down, even into default, somebody owns the stock, IT'S PART OF THE GAME no different than buying GS in after hours trading last night...

 

Selling while a bubble is building and then shorting what you can when you feel it's about to burst is one thing... secretly short selling while you are telling investors they should buy in on something you consider to be a "very bad buy" with such certainty, that you are already investing money against it is a whole other deal.

 

They were telling people these investments were good, obscuring the risk, and outright lying to them. If they represented the risk, by saying "well we can take your money, but you should be aware we are short selling that stock because we are very certain it will take a nose dive soon" in an honest manner I would totally agree with you as far as Caveat Emptor applies.

Otherwise, it's like a surgeon recommending a mechanical heart valve as the greatest thing ever because he expects it to fail and make a killing by shorting the stock when the lawsuits hit.

But you know "heart surgery has risks" and the free market will sort those things out.

[bascule]

I believe these two items of the long list of the Groups activity, are the issues being attacked or the basis for and suit. Creating a derivative IMO, having been asked to do exactly that, and the distribution (sale) of them. As I understand the charge, they created these derivatives presumable thinking they would fail (not possibly, which everyone knew was possible) and encouraged the investors (many worldwide banks) to invest in what they knew would fail. Frankly that makes no sense, both simple operation with reasonable reason to believe a gain or loss were possible, no less than any 'at risk' investment.

 

You hit the nail on the head here, although you seem to disagree with how you understand things went down (perhaps you don't know the details). Goldman Sachs deliberately created "toxic assets", particularly in the form of collateralized debt obligations. They sold these to investors who were ignorant of what Goldman Sachs was capable of: embedding toxic assets into a CDO in a way which was undetectable by the purchaser. This is financial fraud of the worst sort, and what's more, it's scientifically provable.

 

This revelation was made after the source code to Goldman Sachs' models was stolen and analyzed. A subsequent analysis of this code by Princeton Computer Scientists showed that such manipulation of financial derivatives is impossible for the purchaser to detect from a purely information science perspective.

 

But you claim unloading toxic assets on unsuspecting partners in a way that's undetectable doesn't "make sense"? It makes perfect sense to me. Goldman Sachs was looking for a way to unload their toxic assets. They found out a good way to hide toxic assets in CDOs in a way no one else could detect, and in doing so unloaded their toxic assets. It's unfortunate someone had to actually steal their source code to reveal this, but attempts at regulating the derivatives market were shot down in the late '90s by Greenspan and others.

 

I think the take away from all of this is that the derivatives market needs to be regulated. Unfortunately while Obama seems committed to this, little has been done in Congress. I was hoping after the passage of the healthcare bill this would get addressed, but sadly not much has happened.

 

From an information science perspective, Goldman Sachs fraud is effectively proven. They created the financial equivalent of cryptography and were able to disguise toxic assets hidden in CDOs.

Edited April 17, 2010 by bascule

[Pangloss]

Just reflecting briefly on the OP, I was a bit surprised to hear that the charge included actual fraud. If they can make that case stick it would seem to be a significant step forward in protecting investors. I'm afraid I don't know enough about this to draw any further conclusions, but it will be interesting to follow.

[jackson33]

You hit the nail on the head here, although you seem to disagree with how you understand things went down (perhaps you don't know the details). Goldman Sachs deliberately created "toxic assets", particularly in the form of collateralized debt obligations. They sold these to investors who were ignorant of what Goldman Sachs was capable of: embedding toxic assets into a CDO in a way which was undetectable by the purchaser. This is financial fraud of the worst sort, and what's more, it's scientifically provable.[/Quote]

 

First and foremost, any note once made by a bank or institution, is in it's entirety part of any derivative it's joined with. That everything known other than possibly a bank employee at the local level is privy to the entire transaction and the actual copy of the each contract. Second, any branch bank, central bank or any entity where that contract moves through the pipeline can be picked out to supply their own required share of equity asset holding. What made it to GS or where they made the contracts to begin with, are then part of the derivative itself, read and evaluated by presumed financial experts and no one was forced to buy or participate in the investment. What is being suggested is that these contracts, credit rating to locations were somehow hid from potential clients or in some manner information was with held. If toxic to GS, it should have been detected by any prospective buyers of those derivatives well. That would be a crime, very serious to the person who actually was perpetrating fraud on the financial markets and extremely easy to prove. Every body involved, to comply with law must maintain records of sales for a period of time and can be traced back to the original lender. I don't see any of this being remotely logical in that they all know the procedures involved, probably a whole lot better than myself. I'll say it this way, any person BETTING the Housing Bubble was over and prices would BEGIN TO RISE, bought these CDO's, (derivatives) and simply made BAD BETS....

 

One question investors need to ask is whether this incident will have any impact on Goldman's second-quarter earnings. The alleged wrongdoing by Aleynikov took place at the beginning of June--although it's not clear if it had any material impact on automated trading.[/Quote]

 

http://www.reuters.com/article/idUSN0522103020090705

 

Your link; Even if the derivatives were known in advance, this would have no bearing or relevance to there sale or promotion. To be honest, the only thing this means to me is Aleynikov, was trying to out wit the Stock Market, via long and short pending orders. In many cases shorts get out ahead of the markets ability to handle, if the price even begins to decline, pending orders based on a certain price and not reported as transaction. If you place an order, to buy, sell, long or short, that's recorded only after the sale. Insider trading by Aleynikov, at worst, which can be very bad for him.

 

I think the take away from all of this is that the derivatives market needs to be regulated. Unfortunately while Obama seems committed to this, little has been done in Congress. I was hoping after the passage of the healthcare bill this would get addressed, but sadly not much has happened. [/Quote]

 

What more can be regulated, short of guaranteeing the risk taking investor they will suffer no losses. If the Housing Bubble had never happened, there would have never been a problem. I have serious problems with Hedge Funds, short selling, the low margins involved but as explained earlier, it's no different for the small investor who buys long, a stock going down, even knowing the cause. Then if the shorts are near the same, it can produce a bottom for the equity, the markets rarely accomplish. That, is they usually involve large purchases (margins), at a certain point which can if warranted establish that bottom.

 

Well, I understand the House has passed their bill (HR 4173), the Senate will take it up this week and Obama will be running around trying to sell it, this week to Joe Six Pack, who certainly knows best? I'm sorry, but I see no way, the intent of the bill is possible and I certain don't like ANOTHER 50B$, being set aside to bail out anything (Think may be dropped), but will hold off further complaints, until more is know, the House passing anything means little these days.

 

 

Regulation of Derivatives: Regulates, for the first time ever, the over-the-counter (OTC) derivatives marketplace. Under the bill, all standardized swap transactions between dealers and “major swap participants” would have to be cleared and traded on an exchange or electronic platform. The bill defines a major swap participant as

anyone that maintains a substantial net position in swaps, exclusive of hedging for commercial risk, or whose positions create such significant exposure to others that it requires monitoring. [/Quote]

 

http://financialservices.house.gov/Key_Issues/Financial_Regulatory_Reform/FinancialRegulatoryReform/4173summary120809.pdf

 

 

For a breakdown;

 

http://financialservices.house.gov/Key_Issues/Financial_Regulatory_Reform/Financial_Regulatory_Reform.html

[bascule]

If toxic to GS, it should have been detected by any prospective buyers of those derivatives well.

 

What you're missing (and you didn't bother to quote that part of my post) is it's provably impossible for prospective buyers to identify toxic assets when combined using Goldman's software. This now proven impossibility was not known to the buyers at the time.

 

Read this paper:

 

http://www.cs.princeton.edu/~rongge/derivative.pdf

---

Merged post follows:

Consecutive posts merged

What more can be regulated

 

At the very least institutions should have to report their trading in derivatives. This was attempted in the early '90s but shot down by the likes of Greenspan. Watch this Frontline episode for more details:

 

http://www.scienceforums.net/forum/showthread.php?t=45258

[D H]

Read this paper:

 

http://www.cs.princeton.edu/~rongge/derivative.pdf

Interesting paper, but perhaps a bit off-topic to the topic at hand with respect to these specific charges of fraud.

 

Besides, it's going to be very difficult to use that argument in a jury trial. The vast majority of Americans are proud of the fact that they barely passed high school algebra.

 

 

The newsies are presenting this current case as being "complicated". It doesn't matter who's reporting it; all the networks are using ridiculous analogies, trying to dumb it down as much as possible. It's as if the are presenting the story to a bunch of people who are proud of the fact that they barely passed high school algebra.

 

This case is not difficult. It is easy to understand. Goldman Sachs let an outside agency with a vested interest in the outcome advise Goldman Sachs of what to package in those derivatives. There would have been no problem if the interests of the outside agency and the interests of the investors were co-aligned (maybe a slight problem with the law, but who gives a shit about the law?) However, the interests of that outside agency and the interests of the investors were anti-aligned. Paulson & Co. were betting that the derivatives market would fail. They were shorting the very stuff they were selling through Goldman Sachs. Goldman Sachs knew Paulson & Cos. agenda. If this ain't fraud I don't know what is.

 

So far this is small potatoes. I suspect there is more to come. For one thing, why haven't Pauson & Co. been charged?

 

 

What more can be regulated

The existing laws that are already on hand would be a very good place to start.

[jackson33]

Traditional economics argues that nancial derivatives, like CDOs and CDSs, ameliorate the negative costs imposed by asymmetric information. This is because securitization via derivatives allows the informed party to nd buyers for less information-sensitive part of the cash ow stream of an asset (e.g., a mortgage) and retain the remainder. In this paper we show that this viewpoint may need to be revised once computational complexity is brought into the picture. Using methods from theoretical computer science this paper shows that derivatives can actually

amplify the costs of asymmetric information instead of reducing them. Note that computationalcomplexity is only a small departure from full rationality since even highly sophisticated investors are boundedly rational due to a lack of requisite computational resources. See also the webpage http://www.cs.princeton.edu/~rongge/derivativeFAQ.html for an informal discussion on the relevance of this paper to derivative pricing in practice.[/Quote]

 

bascule, if this Abstract is correct/true, don't believe it is accurate (buyers have rights to any requested information), this only makes the buyers guilty of neglect. If the seller gives false information on hand or block access to other sources where the information can be obtained, AND misrepresents the value or alters any information to make the item, seem more attractive, their would be no REGULATION, that could control those illegal actions. I find it highly unlikely any body at GS, would either offer or authenticated an illegal contract, sold through an exchange or over the counter.

 

I could go through SOME of their calculations, may question some, but it's frankly not worth your time or mine. Most these derivatives were valued on a make believe price from the start, no one could predict where the bottom was and STILL CAN'T in all locations, with 100% accuracy. I'd guess some based in area properties less hurt, the Dakota's for instance of with some Commercial Loans have probably been rising in value through all this nonsense. I keep trying to relate stocks, since most people understand this easier; While 90% of stocks may never reach their record highs, some are already well over their peaks of a couple years ago. Fed Ex, Apple and many international operations have done well, were US Stock or any concerned with US Financing have done little or nothing in the past couple years. Maybe simplistic, but the no market immune from possible loss or excessive gains.

 

At the very least institutions should have to report their trading in derivatives. This was attempted in the early '90s but shot down by the likes of Greenspan. Watch this Frontline episode for more details: [/Quote]

 

Think exchange traded are reported, if I'm wrong and over the counter sales both go unreported, then yes maybe they should be. The point however and again; If a person or the Company itself really wants to operate illegally, there is no amount of regulation that can stop the transaction, a willing buyer of anything is subject to the sellers honesty...In my hay day, I bought several properties at half the asking price. This housing thing today, is not much different than it was in the 70's.

[iNow]

Jackson - Caveat emptor doesn't quite apply when the only information made available to prospective buyers is fraudulent.

[bascule]

bascule, if this Abstract is correct/true, don't believe it is accurate (buyers have rights to any requested information), this only makes the buyers guilty of neglect.

 

This paper shows it's computationally infeasible to know whether purchasing any particular derivative is safe, or rather, that the derivatives market itself is fundamentally unsound.

 

Unfortunately, everyone is already trading in derivatives, so if you want to play it safe, your only option is to cut yourself out of the derivatives market.

 

Goldman Sachs discovered this particular property of certain types of derivatives when the market for them was already huge.

 

This may be a case where the government needs to step in and ban CDOs. I don't think the market will produce a solution for this problem, other than completely collapsing and hopefully teaching everyone why they're fundamentally unsafe. However, the free market has often repeated the same mistakes.

 

If the seller gives false information...

 

The problem posed in this paper isn't that the seller is giving false information. The seller can give all the information the buyer wants, truthfully, and there is no way for the buyer to assess the risk. That's the problem. From a theoretical computer science perspective you cannot calculate the risk from the composition of the CDO. It's infeasible due to computational complexity.

 

A comparable analogue is the game of Blackjack. Using the technique of card counting, groups like the MIT Blackjack Team have been able to extract large amounts of money from casinos. This is because thanks to techniques like card counting, the game of Blackjack is fundamentally vulnerable. The only way to close this vulnerability is to stop offering the game of Blackjack at your casino, but if you did that, you'd be cutting yourself out of the Blackjack business, which all your competitors offer.

 

The difference with Blackjack card counting teams and the trading of CDOs is the stakes are immensely higher when we're talking about people doing this sort of thing at the level of the worldwide financial system.

 

---

Merged post follows:

Consecutive posts merged

Interesting paper, but perhaps a bit off-topic to the topic at hand with respect to these specific charges of fraud.

 

True enough, but I certainly hope it comes up in the course of this case.

 

Besides, it's going to be very difficult to use that argument in a jury trial. The vast majority of Americans are proud of the fact that they barely passed high school algebra.

 

Beyond that there's the issue that this knowledge was disclosed via source code stolen from Goldman Sachs. I'm not a lawyer, but basing your case on stolen intellectual property sounds like a bad idea to me.

Edited April 18, 2010 by bascule
Consecutive posts merged.

[D H]

Jackson: First a comment about your posting style. Look at the quote below.

Note how it starts with "Originally Posted by jackson33 ".

 

That does two things:

1. It tells the readers who I am quoting. Your name is right there for all to read.
   
2. It gives the readers a link they can click on (the little icon) to see the text I am quoting in its full context.

 

Your style is quite different. I can't tell who you are quoting, and I can't go to the source. STOP THAT!

 

Use the button please, and then please leave the first generated QUOTE command intact. You can delete the name and post number on subsequent posts; you already gave the necessary context, but do leave that stuff intact on the first quote.

 

I've been needing to get that off my chest for a while. Now back on topic,

 

 

If the seller gives false information on hand or block access to other sources where the information can be obtained, AND misrepresents the value or alters any information to make the item, seem more attractive, their would be no REGULATION, that could control those illegal actions.

Have you ever driven 65 MPH on a freeway with a 55 MPH speed limit and not received a ticket? Surprisingly (or not so surprisingly), not everyone does go 55 in a 55. I'll assume you are among those who doesn't quite believe the 55 MPH applies to you. Just because you did not get a ticket does not mean there is no regulation. It just means you got away with it. Try driving 90 the next time and see if you still get away with it.

 

I find it highly unlikely any body at GS, would either offer or authenticated an illegal contract, sold through an exchange or over the counter.

That's rather naive. One reason the SEC exists is to investigate and prosecute violators. If there were no violators, why would the SEC need an investigative arm? One of the charges against the SEC is that they have been lax in their enforcement duties.

 

f a person or the Company itself really wants to operate illegally, there is no amount of regulation that can stop the transaction, a willing buyer of anything is subject to the sellers honesty

That is precisely why we have regulatory agencies like the SEC. There are people out their who do want to operate illegally; Bernie Madoff for example. We are a nation of laws precisely because of people like Bernie Madoff. If we were a nation of sheep we wouldn't need laws.

[bascule]

Well uncanny, I just found this article:

 

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7602217/Goldman-Sachs-faces-4bn-profit-row.html

 

Apparently certain members of Congress are pursuing a ban on CDOs, or rather, a ban on large financial institutions trading in them. Instead, they'd have to spin off their derivatives trading divisions into separate companies.

 

This seems like a huge step forward to me.

[D H]

The difference with Blackjack card counting teams and the trading of CDOs is the stakes are immensely higher when we're talking about people doing this sort of thing at the level of the worldwide financial system.

There are other differences. For one, everyone involved knows that blackjack, and everything other form of gambling offered by the gambling industry, is (legally) rigged so that the casino is the winner and the gamblers are losers. (The casinos were much taken aback when they found that the system wasn't quite as rigged as they thought.) The investment industry is supposed to be different. In particular, it is supposed to be win-win.

 

Another difference is that the gaming industry can ban people who violate the rules, the key rule being against those who win too much money. The gaming industry can even hire thugs to enforce those rules. The investment industry is not supposed to operate that way. Doing so would be against the industry's self-interest.

[bascule]

Another difference is that the gaming industry can ban people who violate the rules, the key rule being against those who win too much money.

 

Blackjack teams can constantly cycle players in and out, and the managers will continue to make money. If the blackjack teams constantly rotate the people involved with the scam, and space out how often particular players are used and what people are seen together, the casinos are none the wiser and will continue to lose money, and there's nothing they can do about it except ban the game of Blackjack. A successful Blackjack team is one that hides the pattern of the players involved from the casinos, much like a successful CDO trader is one who hides patterns of toxic assets from potential buyers.

 

There are other differences. For one, everyone involved knows that blackjack, and everything other form of gambling offered by the gambling industry, is (legally) rigged so that the casino is the winner and the gamblers are losers.

 

This works to the advantage of Blackjack teams, which are composed of a large number of members who sit there and play Blackjack basic strategy while keeping track of the count, and a single "high roller" member who will make larger bets and take cues from the other members of the team.

 

By rotating which members play which roles, your average member of a Blackjack team will appear to lose the majority of the time, even though their "winning streaks" will net them more money than their losses from playing simple basic strategy. While statistically unlikely, they'll have the perfect excuse: "I was feeling hot tonight, so I bet more money". The casinos have no real way of telling people who think they're on a winning streak (which is a common human behavior) from members of a Blackjack team who use knowledge of the count to game the casinos.

 

So long as you don't have the same "high roller" constantly winning in multiple games in a row, the casinos can't tell. Otherwise, they're not feeling so "hot", so they make smaller bets. That's exactly how your average, uneducated gambler operates.

Edited April 18, 2010 by bascule

[Mr Skeptic]

I thought casinos use multiple decks and randomly (unknown to players) shuffle the deck, to make things hard on card counters.

[padren]

I thought casinos use multiple decks and randomly (unknown to players) shuffle the deck, to make things hard on card counters.

 

You can't do the MIT style "counting over +1/+2" etc anymore, but apparently if someone can handle ranges of probabilities in their head they can still make enough to get kicked out and banned. (Anecdotal)

[bascule]

I thought casinos use multiple decks and randomly (unknown to players) shuffle the deck, to make things hard on card counters.

 

Yeah true enough they started doing that recently, so the analogy is imperfect.