FOOL ON THE HILL
Big Brother Credit Cards

The New York attorney general has pressured Citibank to block all online gambling transactions through its Visa and MasterCard credit cards. This helps fight illegal activity but also stymies legal transactions. It's another blow to the horse racing industry, which contributes over $6 billion in goods and services to the U.S. economy.

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By Rex Moore (TMF Orangeblood)
August 5, 2002

Imagine that you've just finished a good meal at a nice restaurant with several friends. The bill is rather large but well worth it to you. After all, you enjoy few things in life more than evenings like this.

The waiter presents you with the check, and you hand him your Citibank Visa card. He hands it right back to you and says, "Sorry, but we cannot accept this. Citibank, under pressure from a politician in another state, has decided that eating out is a waste of your money, and that our rich food is destructive to your health."

As outrageous as that sounds, Citibank and New York State Attorney General Eliot Spitzer have already made a similar determination about another form of entertainment -- gambling. They believe they know what's better for us than we do, and that mature adults cannot think for themselves.

This story began a few years ago with Spitzer's attempts to police online gambling -- specifically illegal offshore virtual casinos. In 1999, he was able to successfully prosecute World Interactive Gaming Corp. (WIGC), whose computer servers were located in Antigua. The State Supreme Court ruled that although Internet gambling was legal in Antigua, any betting that originated in New York was under state jurisdiction.

That was all well and good, but the problem now stems from the fact that the legal gambling industry is being injured by Spitzer's wide swing of the scythe. All Visa and MasterCard transactions carry a code that helps identify what is being bought or sold, and he convinced Citibank, a division of Citigroup (NYSE: C), to block all online gambling transactions with its credit cards. Spitzer may say he's only trying to halt the illegal purchases, but he seems not the least bit concerned that legal transactions are being stymied in the process.

This is particularly cruel to the horse racing industry. Already struggling for survival, it has been hoping for years that the Internet would provide a much-needed infusion of new customers. For potential horseplayers who can't make it to a racetrack, playing the ponies from the comfort of their computer screen (or via telephone) is an obvious solution. But Spitzer's actions have the potential to inflict serious harm on the industry.

"These transactions are particularly troublesome because Internet gamblers can, and usually must, bet on credit," said Spitzer. "Such gamblers can drive themselves deep into debt and bankrupt their families."

The hypocrisy here is stifling. As Andy Beyer eloquently pointed out in a recent Washington Post column -- and as the Fool has been teaching for years -- state lotteries are the most destructive form of legal gambling anywhere. Thanks to massive tax-funded marketing campaigns, it's hard to drive three blocks without encountering a billboard touting a multi-million-dollar jackpot.

Of course, the well-lighted ads don't point out that you're far more likely to be killed in a car accident while driving to buy the ticket than you are to win the jackpot. What's more, states usually skim a full 50% of all money bet on lotteries, while other forms of gambling collect far less -- 17% to 25%, in horse racing's case. Yet, we continue to see state marketing campaigns pushing the "easy money" theme. With the state of New York raking in millions of dollars from the scam, you'll not likely see Spitzer take any action that even remotely threatens state lotteries.

This is the same attorney general, remember, who extracted a settlement from Merrill Lynch (NYSE: MER) because of analyst conflicts of interest. We strongly defended his efforts in that case, but now he faces a conflict of interest himself. While protecting the lottery, he's trampling an important industry that employs hundreds of thousands across the nation: horse breeders, trainers, equipment and feed suppliers, jockeys, agents, and racetrack workers. In all, horse racing contributes over $6 billion in goods and services to the U.S. economy, according to the American Horse Council.

Spitzer can rightly point out that horse racing also contributes to his own state's coffers, but that makes his rhetoric even more difficult to comprehend. In the press release announcing the Citibank settlement, he quotes Sen. Frank Padavan of New York as saying, "As has been documented, online gambling by credit card represents one of the worst forms of 'convenience' gambling -- its effects include destroyed lives and a loss in trust among consumers."

All the while, as Beyer points out, you can still use your plastic to buy pornography on the Internet, purchase weapons, or pay dues to hate groups. "The companies that issue credit cards usually aren't in the business of making value judgments," he says.

They wouldn't be in this case, either, if not for Spitzer. Citibank was feeling the heat because of a New York law against "knowingly advancing or profiting from illegal activity." If Citibank failed to play along, Spitzer could have pressed charges -- even though the company cannot differentiate between legal and illegal online transactions. The nation's largest credit card issuer not only played along, but also included a payment of $400,000 to groups that provide counseling to problem gamblers, and another $100,000 in costs to the state of New York, as part of the settlement.

Regardless of your stance on gambling, it's not hard to feel the bumps on our behinds as we slide down this slippery slope. We must do everything in our power to ensure a moralizing minority doesn't railroad legal forms of entertainment. Sure, gambling, like just about anything else (including the stock market), is harmful to some people. But to the majority, it's an entertaining pastime and nothing more. Whether it's $100 spent on a few pleasurable hours playing the horses, or the same amount spent on a nice dinner... who is Eliot Spitzer to decide for us?

Rex Moore knows the joy of the ocean like a boy knows the joy of his milkshake in motion. At time of publication, he owned no companies mentioned in this column. His holdings, and the Fool's disclosure policy, contain no animal byproducts.