Jack TenneyExtra Point

by Jack Tenney, Publisher

September 2002

Gaming the System

Quite often the term "gaming the system" is being used to describe the economic excesses of Enron et al.

I think it's a bit more complicated. Loophole-makers should be held more responsible for the unintended consequences of following the rules than those who merely exploit the rules for their own advantage.

Consider the National Basketball Association (NBA). Hacking a player with the ball is a foul. If the hack is made against a player with the ball but not in the act of shooting, the offensive team is allowed to take the ball in from out of bounds, unless the defensive team has more than six fouls in the quarter. In that case, the fouled player shoots foul shots as if he were fouled while in the act of shooting.

As a result of the rules, defensive teams with fewer than six fouls have what is known as a "foul to give," meaning that team can disrupt its opponent by hacking a player with the ball without giving that player a direct chance of scoring. A bonus to the team with a foul to give is that it may steal the ball by playing aggressive defense. As in any game, risk-reward analysis is a key part of choosing tactics.

The NBA is constantly changing its rules when it becomes apparent that an old rule is being exploited in such a way as to favor tactics which it didn't wish to be advantageous. Currently, the Los Angeles Lakers are repeating champions, although a favorite tactic used against them is the so-called "Hack-a-Shaq" routine. Because Laker center Shaquille O'Neal is not a very good foul shooter but a fantastic field goal scorer, teams are encouraged to whack him anytime it appears he's about to score on the theory that he hits 90 percent of his dunks but only 20 percent of his foul shots.

If that tactic ever proves to be really successful, the NBA rule makers will certainly change the rules, perhaps to an option for the offended player to choose to take one free throw and then take the ball in from out-of-bounds. When it appeared that Bill Russell and Wilt Chamberlain would dominate the game, the league widened the foul lane (keeping big guys from camping out close to the bucket) and outlawed the dunk shot. The foul lane remains wide, the dunk shot is back, and the three-point line has been added. The extra point is that rule makers are constantly fiddling around with the rules and, naturally, those governed by the rules try to figure out how to exploit them.

Do you remember when not-for-profits could sell their investment tax credits? It was basically a sham transaction that allowed taxpayers to mitigate income taxes with the credit by allowing the not-for-profit to have a taste. Well, now the rules changed.

There are tons of examples of tax shelters constructed in response to rules. Feedlots, oil exploration and, for a time, NBA franchise sales were driven more by tax regs than economic laws of supply and demand. Rule makers should accept responsibility for the rules they make and not howl like a scalded dog when someone figures out a way to win.

Remember that, when a beaten defensive back tackles a receiver without the ball favoring an interference call to an uncontested touchdown. Remember that, when your favorite debt-free company goes belly up because it chose to own all its fixed assets with a footnote disclosing lease obligations rather than booking the assets and debts on the balance sheet.

What? They should mess up their debt-to-equity ratio?

Of course, if all you've got is a talent for gaming you don't have game.