THE BLOG
11/26/2007 06:14 pm ET | Updated May 25, 2011

Bankers and Salesmen and Lotteries...Oh My!

The lottery world has always been full of opportunists. But now a whole new class of salesmen are surfacing. When I was in the lottery lump sum industry, we were always shocked that the titans of Wall Street never nudged us aside to get a taste of lottery honey. "If Wall Street only knew," I'd say after closing a deal.

Well, it turns out Wall Street does know. Not only have major Wall Street firms purchased some of the lump sum companies, but now they're after the really big fish, the lotteries themselves. In essence, the states are considering lumping out their lottery annuities to the private sector for cash today. Big firms have made serious offers to a dozen states, and those states are legitimately considering selling.

The lottery privatization idea is making the people in state government think like lottery winners. The notion of big lump sums of cash, tens and tens of billions of dollars--coming in all at once--is bringing out the worst in the state lotteries along with their new friends on Wall Street. Both sides seem willing to say anything to get a deal done.

There are bad deals brewing here and these folks, the whole lot of them, are in closing mode. As a one time lottery salesman I can assure you, once you smell this kind of money, you stop at nothing to get the deal. Privatizing the state lotteries, is a far bigger playing field than any deal I ever handled. The lump sum deals I did were with lottery winners, not the lotteries themselves. This bet is for the entire casino.

Wall Street has made the states feel weak-kneed by tossing up valuation numbers ranging from $10-40 billion. Numbers like that get your calls returned...fast. The states are making the banks feel tingly by considering releasing control of their lotteries to the private sector. And, if given the chance, Wall Street could make the lotteries gush over with new revenues. But at what cost? To Wall Street, the lotteries are no different than any other underperforming business. But, the lotteries are different. Lotteries make money by convincing state residents to gamble. That changes things, it just does.

The states already run their lotteries as for profit businesses with venomous marketing geared toward making the lottery more attractive to players. Still, the states haven't nearly the marketing reach, resources, or infrastructure of the Wall Street giants. And, if banks can buy control of a state's lottery, they won't have to worry about those pesky do-gooder government folks, much less the voters themselves. The private sector can makeover tomorrow's lottery with new games, new marketing ideas, and new publicity campaigns. Then profits explode.

Bankers are saying what they have to, sending up test balloons, towing the line, staying on message. So too are the former politicians Wall Street's brought in to give the soft sell to former colleagues. Now that these former governors, secretaries of state, deputy governors et al. are in the private sector, they're free to get in while the action's hot, selling their good names for the big lottery dollars.

Robert Black, a spokesman for Texas Governor Rick Perry, says in the New York Times, that selling or leasing the lottery to the private sector "...appeals to the governor because the state can get out of the gambling business." Privatizing the lottery doesn't get Texas out of the lottery business, it just allows someone else to do the dirty work while the states collect. That's like saying you're not in the mob because you don't make collections, you just collect from the guys who collect.

In the same New York Times series, John Filan, chief operating officer of Illinois says, "We're not flexible and agile, especially because lotteries are a retail business." No kidding? Well, the Illinois lottery seemed flexible enough to run the lottery before someone offered them billions of dollars. Now they don't know what they're doing? Sure they do. This is all just sales talk, stuff you say while you're paving the road for a deal, perhaps a deal that's in its infancy, but a deal nonetheless.

The states are obsessed with the idea of upfront cash. But what gives them the right, much less the sense of confidence, to think that the private sector won't put its bottom line considerations before the needs of state residents? The logic is at best flawed and at worst, an outright nightmare for those left holding the ball down the line. Lottery dollars have a funny way of going in a lot of different directions. Mostly, they tend to flow back to the lotteries with the majority of profits going right back to the business itself. No wonder the private sector is licking its lips.

An unabated path to running the state lotteries? Legally exploiting gamblers nationwide? Beware a wolf in banker's clothing.