Halloween Time For DraftKings and FanDuel

Saturday is Halloween! On that day, we’ll all don costumes that hide our true identities, and we’ll indulge in behaviors that would be questionable on any other day.

But financial service organizations don’t wait until Halloween to mask their activities, do they? Do you recall, for instance, AIG’s sales of credit default swaps prior to the 2008 global economic collapse?

In essence, these swaps were insurance contracts that were designed to reimburse lenders in the event of widespread defaults. But AIG didn’t have the capital to cover these contracts when defaults soared at the start of the Great Recession. That’s why the federal government decided to spend $182 billion of taxpayer funds to bail out the insurer.

So why didn’t government regulators stop AIG from writing these insurance policies in the first place? They didn’t do so because AIG didn’t structure the contracts as insurance policies. Instead, the firm swathed these transactions in the costume of swaps contracts, thereby masking their risks and avoiding insurance oversight regulations.

Something similar is happening now at a pair of online fantasy sports gaming organizations. DraftKings and FanDuel collect money from individuals who play fantasy sports games, and then pay money back if the individuals win their games. The firms refer to these services as games of skill as opposed to games of chance, and thus circumvent legal prohibitions against online gambling activities.

But isn’t this what sports bookies do when they accept wagers? They collect money from gamblers and then disburse winnings if the bets pay off. Considering that the home page of DraftKings declares Win Real Cash, while FanDuel promises Real Money, it’s difficult to perceive any difference between such fantasy sports games and gambling transactions.

That may be why DraftKings, now eager to back away from any perceived relationships with gambling operators, has discontinued its relationship with the World Series of Poker. That card game, of course, is virtually synonymous with the casino industry.

Government officials, though, don’t seem to be buying it. Five years after the Dodd-Frank Wall Street Reform and Consumer Protection Act established the Financial Stability Oversight Council to regulate Strategically Important Financial Institutions (SIFIs) like the insurers AIG, MetLife, and Prudential, regulators are deciding to make it more difficult for online gambling services to mask their financial transactions behind the label of fantasy sports games.