I had declined the mint juleps, on the grounds that they had too much sugar for anyone raised north of the Mason-Dixon line to tolerate. So we were drinking a cocktail of my own invention. It was simply a dry gin-and-tonic with a bit of mint crushed into the bottom of the glass. It was to the northern shore of the Long Island Sound what a mint julep is to Kentucky or a Mojito is to Cuba.
“Glad you like it,” I replied. Before settling on these, we had tried to match the day with various drinks. And when I say various drinks I am giving away the Rosetta Stone of my life. “How do you have the nerve for your scams?”
“I have a secret defense—I am interested in life.”
“Of course. So am I, but…”
“You are interested in a person, not in life. What is the phrase? ‘A respecter of men.’ And people leave us—they die, they graduate, they move to Los Angeles. Our search for divinity runs aground the shitty little mortality of others. In short, other people are a constant disappointment. I am interested in the greenness of mint, and sharpness of tonic. Every drink ends with an empty glass or half-melted ice but I have discovered the immortality of life itself, of creation, if you will.”
It almost goes without saying but I will say it anyway: for the last few years Katherine has worked for a multi-strategy hedge fund. The fund founded by three liberal arts majors who have since hired nothing but quants. Katherine being the sole exception to this rule, as she is to almost every other rule I have ever come across.
Katherine shook her empty glass. I took the glass from her hand and walked into the house. Behind the bar was Danny Red, a huge boulder of a man who had been serving drinks at this party for a dozen years. He poured me a pair of the drinks. “I’m thinking of calling these Stingers. After the things that wasps have,” he said.
In the next room the gamblers were lined up to place bets with my brothers, Brian and Tim, who play the bookies of the party. Brian calculated the odds on lap-top computer, and Tim took the bets and handed the bettor a slip of paper with numbers indicating the size of the bet, the number of the horse and the win-place-or-show outcome. Although this was a social event, the guests took the placing of bets very seriously. Even more so the collection of their winnings when they picked the right horse. I did not envy my brother this task.
My responsibility at the party was much simpler. I ran the pools. There were two five-dollar pools and two two-dollar pools. The lettered tickets were sold by pretty girls as the guests passed through the Doric columns at the top of the front steps to my parents' house. You didn’t know which horse you were going to get but the odds were good: for a five-dollar ticket you stood to win one hundred dollars in a twenty horse race. And for most people, betting blind was not much more of a handicap than betting ignorantly on a horse they chose. (This is a pattern familiar to anyone who has compared the results of choosing stocks by throwing darts at a dartboard and choosing stocks by following the advice of Wall Street’s brightest analysts.) After all the tickets were sold, we revealed which letters corresponded to which horses.
I held the money after the tickets were sold and before the race was run. It amounted to two-hundred and sixty dollars. I watched the bets being placed, and thought about Katherine and about Katherine’s legs and about the way Katherine always had money but never worked for it. Someday she would marry someone fabulously rich and then he would die and she would spend years in court battling his progeny from his first marriage, and each day in court she would wear a different, stunning outfit. This was one fate for her, but I was beginning to imagine others.
I cooled my throat with the mint-blanched gin and walked in front of the betting table. “I will take two hundred and sixty dollars on Street Sense to win,” I told Tim. Street Sense had been picked by CNBC’s Erin Burnett the day before as her favorite for the derby, presumably because the name was so much like her show “Street Signs.” More importantly, the Wall Street Journal's By The Numbers columnist had explained that Street Sense was the only horse running who had been a runner-up in one of the four preparatory races run in the month or so before the Derby: he Florida Derby, Arkansas Derby, Santa Anita Derby, Blue Grass Stakes or Wood Memorial. Apparently, it’s a losing bet to bet on the winners of those races but a winning bet to bet on the losers. The soundness of this jujitsu logic was completely persuasive after five Stingers.
My brother looked at me incredulously. He knew where the money I was betting had come from. “This is what is called leverage,” I told him. “Simple financial leverage. I owe this money, true, but those debts don’t come due until the race is won. At which point I will have won far more from you. You will learn this if you ever go to business school.”
He scribbled the numbers on my ticket beside a large W. I didn’t tell Tim the other thing I knew. I had bought a pool ticket with the letter ‘O’ which turned out to be the ticket for Street Sense. I was placing all my eggs in one basket, counting my chickens before they hatched, preferring the dozen in the bush to the one in hand. I had no hedge to fund, no multi to my strategy. The wisdom of the world was against me.
I won’t try to build suspense about the race because everyone knows who won on Saturday, with Street Sense surging ahead over the sloppy track and beating out pacesetter and early leader Hard Spun. For the first minute of the race, Street Sense was in 19th place. If there had been a margin call at that point, I would have lost everything. Less than a minute later, with Street Sense sliding up along the rail then pushing outside and ahead of Hard Spun to cross the finish line first, I felt like a genius. Or, at least, like someone who had just called the direction of natural gas prices correctly. It was a good race, and I had made a good bet. The odds were good and my leveraged gamble put a good piece of cash into my pockets.
After the race I looked for Katherine to tell her how things had turned out. The spot on the porch where we had spent the afternoon was taken by Dan Red and his sister, busily chatting about a guest who had been discovered passed-out in the bathroom. Katherine had already left with a few of the other guests for late dinner party in Manhattan. She had left a note with the simple message: “Congrats on your winning. Sorry I had to run. xoxoxo--Kat.” I couldn’t help but feel I had lost a different kind of wager. Despite my daring bet, I was still a respecter of persons.
A Loser's Game [Wall Street Journal]
Street Sense Wins Kentucky Derby [Wall Street Journal]

“Kynikos Associates, had put a large slice of its $3bn in assets on a bold punt that shares in the internet gambling sector were about to go into free-fall.
And on October 2, shares in the companies did precisely that as about $5bn was wiped off their value in just a few hours of trading in response to a US Senate decision to introduce tough new laws cracking down on gambling on the web.”

Chanos had been bearish on the internet gambling stocks for several months.
In an interview today, Chanos described to DealBreaker three reasons, in addition to possible legal risks, that underlay his view of online gambling companies. “First off, we all believed that it was a cut-throat industry with no barriers to entry. Second, there was the faddish nature of poker. Television ratings were already down. Third, there was the silliness of the whole concept of Americans sending their money to off-shore companies with very little assurance about the way these operations were run,” Chanos said.
An internal Kynikos email dated September 9th, a colleague of Chanos describes the legal risks faced by the online gaming industry detailed in an article that appeared in the Guardian:

“The first paragraph is worth noting as it mentions that there are seven states that have internet gambling laws and that could be as a big a threat as the federal wire Act. The bottom part of the article is also worth noting because it shows this stuff is and should not be a surprise with respect to PRTY to anyone or at least as long as they read the prospectus and the section about violating state laws.”

Chanos is also quoted in the September 29th issue of Value Investor Insight newsletter from an interview he gave earlier.

Chanos also expects the plaintiff’s bar, representing gambling addicted clients, to be a threat. “When you run an illegal enterprise out in the open,” he says, “you’re exposed to all sorts of problems.”
The risks don’t appear to have been lost on PartyGaming top management.
The company has gone through two CEOs since going public in June of last year and three other top executives have left over the same period. “The early guys cashing in tells me they think the best is past,” Chanos says.

Indeed, Chanos was warning about online gambling as early as February 2006, when he addressed Kynikos Associates “Bears In Hibernation” conference on the subject. Later that year, in May of 2006, he addressed a conference at Goldman Sachs and reiterated his warnings about the risks faced by the industry. In June Chanos was interviewed on Bloomberg television, where he told Bloomberg's Deirdre Bolton that “a shakeout is actually eminent” in online gambling.
(The story on the website also made a big deal out of Chanos’ connection to former Nevada Attorney General George Chanos, Jim’s cousin. “I have never discussed internet stocks with my cousin,” George Chanos told DealBreaker. “And I never discussed the legislation with Senator Ensign.”)
This seems more than decisive to us. Chanos didn’t need a conspiracy to tell him that online gambling was in trouble. He just needed to keep his eyes and ears open. So there you have the answer we asked in yesterday's headline, "James Chanos: Genius Shortseller or Politically Well-Connected?"

We are not believers in information socialism or “illegal insider trading” but of Occam’s Razor. This wasn’t a bold trade based on a research edge – it was a simple information advantage.
FT called the trade a “million-to-one-chance,” it would be - if your cousin wasn’t close with the Senator.

Is any of this true? We have no idea. It wouldn’t be the first time that this sort of “honest graft” has helped make someone rich or richer. And the question of the legality of trading on inside information about upcoming legislation has long been debated. Frankly, the whole chain of information Roman proposes seems unnecessary. Even if it didn’t happen exactly like that—Frist to Ensign to Chanos to Chanos—it wouldn’t be surprising if James Chanos connections to Nevada’s gambling community helped him anticipate the legislation.
Kynikos Associates could not be immediately reached for comment on the story [MidasOracle]
'Million-to-one' gamble pays off [Financial Times]

… Peter Dicks, 64, chairman of London-based Sportingbet PLC, was taken into custody by airport police after he arrived on an overseas flight at New York's John F. Kennedy International Airport. He was held on a criminal warrant issued by the state of Louisiana. After the arrest, Sportingbet asked the London Stock Exchange, where its stock is listed, to halt trading in its shares.

Uhm. This is the second such arrest is this summer. Everyone take a memo: if you run an internet gambling site, now might not be the best time to fly in to the US.

Latest Arrest Chips Away at Online Betting [LA Times]

So the legal casinos are correct that they offer a measure of control over gambling: by offering only bad odds, they reduce the demand for their product.

What’s interesting about this is that one possible casino response actually makes the case for online gambling stronger. Casino operators no doubt would like to deny that their odds are worse than online gambling—and that they make up their higher overhead by providing other services like splashy shows, restaurants, spas and luxury shops. But since spending money on these things isn’t any more “productive” or responsible than gambling, this actually makes online betting more responsible. At least the gamblers aren’t wasting their money watching Celine Dion!
Internet Gambling--Posner [The Becker-Posner Blog]