Nigh-on a hundred years ago, when betting on horses is something that just about every guy does, there is a guy at the race track that everybody knows: the tout. See, here's what a tout does for a living. You show up at the race track wanting to bet on a winning horse, but you know very little about horses. Or maybe you know what was in the racetrack newspaper, but you suspect that other people know more than that. Up to you comes a guy with a hot tip on a horse. He has made a lifetime study of the ponies that race at this particular track; he was here during warm-ups and work-outs and knows which horses aren't in peak condition today; maybe he has a friend or a relative who works in the stables or with the jockeys and he has an inside line on what the jockeys are telling each other today; maybe he says he eavesdropped on some powerful crime boss over a late dinner at Mindy's when they were fixing the race. However it is that he knows, he knows what horse is going to win this race, or, at least, he's pretty sure. Now, the tout has (he tells you) his own pitiful funds bet on that horse, but it is breaking the tout's heart that he won't make any more money than that off of this sure thing. So here is the tout's business proposition to you: for a small tip, say, a few potatoes, and the promise of a modest slice of your winnings after the sure thing comes in, the tout will tell you what horse in what race is the sure thing.
Racetracks do not like touts. Even an honest tout is doing something dishonest, which is trading on inside information that not everybody has. He is cheating, and nobody likes a cheater. But they have an even bigger problem with what touts do for a living, and that is this: any idiot can claim to have a sure thing and collect a tip. If the tout's randomly chosen pony wins, he shows up to collect his share of the winnings; if not, he takes it on the lam until the sucker goes away. For all that touts will tell you that what they are doing is providing a useful service, and for all of the customers touts will tell you about who made money on their sure things, nobody likes a tout. Which is why being a racetrack tout has been illegal for just about a hundred years, and all the racetracks had at least one racetrack cop whose job it was to chase away the touts.
These days, only a few guys (other than old guys) bet on the ponies, but just about everybody bets on the stock market. You take your money to the stock market, and you want to bet it on a winning stock. But you have a job, and an ever-loving spouse, and chores around the house, and kids to try to ride herd on, so you know that, truth be told, you have no time to learn anything about picking winning stocks. So up to you comes this guy called a broker, and a broker is nothing but a tout for stocks, only maybe not so honest. A broker is a guy who tells you that he has made a lifetime study of the stock market, and who has watched the stocks on this exchange all day, so he knows which stocks are having a good day and which ones are not doing so good today. Maybe he even (very quietly) says that he knows a guy who knows which stocks are rigged. But whether or not he says he has inside information, either way, he can tell you all about a stock (or a bond, or a mutual fund, or a commodity, or any other thing you can gamble on at this exchange) that is a sure thing. Now, the broker says, it is breaking his heart how much money he could make if only he had more money than his own to bet on the sure thing. So here is the broker's business proposition to you: pay him a tip, which is called a brokerage fee, and give him all of your money that you want to bet, and he will bet it on the sure thing for you, in exchange for a share of the winnings when the sure thing pays off. It is a lead-pipe cinch.
Except that, again, you will notice that the broker's proposition is even less legitimate than the tout's, and not just because the sums of money are so much greater. The tout, at least, lets you make your own bets. That way, unlike when you are dealing with a broker, you at least know that the money got bet on the pony you wanted to bet it on, and you get to hold your own betting slips. This is why, from FDR's time until Reagan's, there are more cops on Wall Street than they are are at Belmont, looking for dishonest touts. But back in Reagan's time, there are people saying that hey, all these cops on Wall Street cost a lot of money, and because all the brokers are so afraid of the cops they are not even finding all that much crime. Maybe, they say, we do not need so many cops. So we get rid of most of them, and we give the few that are left so little money they can barely afford car fare, let alone court fees. We decide, back around Reagan's time, that the brokers will stay afraid of the cops even after the cops are gone.
The brokers do not stay afraid after the cops are gone.
Now, there is this recently closed-down dodge that is back in the news, today, called MF Global, that until recently is run by a very rich and very famous stock market tout who is nobody other than former New Jersey governor Jon "Fuzzy" Corzine.
Fuzzy Corzine turns out to be a pretty good tout, at that; lots of his customers make money, and they pay him pretty good tips and a pretty good vigorish on the money they make. So now Fuzzy Corzine has a problem that many successful stock market touts have, and that is this: where does he put his own pile of money? There is money left over after paying his expenses. There is money left over after paying off the investors who lent him money. And if you ask any guy at a race track, he will tell you that a guy who has his expenses covered and who can pay off his creditors is a very rich man indeed, and Fuzzy Corzine is rich even beyond that. But what's a guy like Fuzzy Corzine going to do with his pile? Put it in a bank that pays 1% interest, when the inflation rate is 1.5%, and lose money every day? This does not seem like a winning proposition to a guy like Fuzzy Corzine, especially one who is such a successful stock market tout. So he joins his customers and bets his own money on the same Sure Things that he touts to them. This is what the stock market touts call "proprietary trading."
Now, see, Fuzzy Corzine does not invent this proposition. This is an old idea. You go back 100 years to when we had race track touts, and there are many sad stories about touts who get to believing their own stories and who lose all of their own dough betting on sure things that, if they were not such sad guys, they would remember that they made up. But you have to remember this: unlike a relatively honest racetrack tout, who lets you buy your own betting slips at the track window, a stock market tout like Fuzzy Corzine holds your money for you, and tells you that he has bought the betting slips he advised you to let him buy for you. And that is why, back when Wall Street was swarming with stock market cops, one of the things they obsessed over was this:
When a guy like Fuzzy Corzine bets all his own dough on a sure thing, only to end up with that sure thing getting beaten at the wire by a dirty nose, he is apt to look at the pile of dough you gave him to bet on other sure things that won. And, he is likely to reason with himself, you did give him those potatoes to bet with. And, he is likely to further rationalize, it's not like you will keep making money without a smart stock market tout like him, so it is in your best interest as much as it is in his best interest for you to cover his bet. After all, it is not as if it is the fault of a smart tout like Fuzzy Corzine that his sure thing stumbled at the last second. What is he supposed to do, go broke, and welch on the debts he owes, and not even cover his expenses like his girlfriend or his ever-loving wife? No, if the cops do not stop him, a guy like Fuzzy Corzine will take your money, and bet it on the next sure thing he hears about, thinking that he will put the money back when that sure thing pays off. This is what the stock market calls "co-mingling of funds" and it is a very bad thing, and, in fact, it is very illegal.
There are no more cops on Wall Street stopping guys like Jon "Fuzzy" Corzine from doing this, not any more. And his next "sure thing" breaks a leg coming away from the gate. And so it comes to be, a couple of years ago, that Fuzzy Corzine goes broke, and when he goes broke, to the tune of billions of dollars (because these are not just ponies he's touting), and has to explain to his girlfriend and his ever-loving wife and his very scary creditors that they will just have to give him more time, it also comes to the attention of the customers who gave Fuzzy Corzine their money. The customers whose sure things did, in fact, pay off all ask, "where are our winnings, Fuzzy?" and Fuzzy has to admit to them that, even though it is plain illegal, he bet their winnings on a sure thing, only in his own name, not in theirs. Only, he says, it was an accident.
Today, the handful of cops who are still on Wall Street admitted to reporters, quietly, that because they barely have enough money for car fare, and no money whatsoever for court fees, that they will not be able to explain to a jury that Fuzzy Corzine is just a dishonest tout who stole his customers' money to bet it on a sure thing, and it wasn't even a sure thing. They say that convincing a judge and twelve honest citizens that such things happen is too expensive for them to be able to afford.
And that is why, today, Fuzzy Corzine tells a reporter that once this is all over he will go back to being a stock market tout. After all, like every other tout, he points to all of the customers he did make money for. Why wouldn't he? It's not like there are any cops to chase him away from the Wall Street betting window lines.