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Explore the thrilling origins of information arbitrage where the American Mafia turned telegraph lines into a money making machine. This episode dives into the early twentieth century racing wire, a telecommunications network that gave bookies and gangsters an unbeatable edge over bettors. We trace the evolution from John Payne’s hand mirrors to Moe Annenberg’s massive AT&T backed monopoly. Learn how the velocity of data created a financial empire so powerful it drew the scrutiny of the United States government. Witness the intersection of high speed tech and organized crime, proving that the first to know the truth always wins everything.
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00:00Long before the high-frequency traders of Wall Street, the American Mafia discovered that the
00:05true formula for fortune wasn't luck, but the speed of a telegraph wire. Welcome back.
00:12Today, we are going to tell a story that sits at the strange, smoky intersection of two worlds that,
00:18on the surface, have absolutely nothing to do with each other. On one side, you have the grimy,
00:25violent, cigar-chomping world of the American Mafia in the 1920s and 30s, guys with names like
00:32Bugsy and Moe, running numbers and dodging tax evasion charges. On the other side, you have the
00:40sterile, quiet, chalk-dust atmosphere of MIT and Bell Labs, inhabited by introverted geniuses who
00:48juggle on unicycles and think in pure mathematics. You might ask, what is the thread that ties a mob
00:54boss like Al Capone or Moe Annenberg to a scientist like Claude Shannon? The father of the digital age?
01:01The answer is. The edge. The answer is information. We are diving deep into the opening chapters of
01:09William Poundstone's masterpiece, Fortune's Formula. And the premise we need to start with is this,
01:16information is a commodity. Today, we understand this intuitively. We live in the age of fiber optics,
01:23high-frequency trading, and the internet. We know that if you get the news a millisecond before the
01:29other guy, you make a billion dollars. But what we're going to look at today is the genesis of that
01:35idea. We are going to look at how the concept of information velocity, the speed at which a fact
01:42travels from point A to point B, created the modern world. And how it was funded, initially,
01:48by organized crime. Let's go back. Way back. Early 1900s. Cincinnati. Imagine a man named John Payne.
01:59He's a telegraph operator for Western Union. Now, in the early 20th century, Western Union is the
02:06internet. It is the backbone of communication. But they have a policy. They won't transmit horse racing
02:13results because they don't want to be associated with gambling. It's a morality issue. John Payne
02:20looks at this situation, and he sees an opportunity. He sees an arbitrage. He realizes that a horse race
02:27happens in real time, but the result travels slowly. There is a gap. A time gap. If the horse crosses
02:36the
02:36finish line at 2 p.m., the bookmakers in the city might not know the winner until 2.05 p
02:42.m.
02:43In those five minutes, a past poster, a cheater who already knows the result, can place a bet on the
02:50winning horse. The bookie takes the bet because he thinks the race is still running. So, Payne quits his
02:56job. He creates the first racing wire. And the technology he uses is laughably primitive but
03:04brilliantly effective. He hires a guy to stand at the racetrack. When the winning horse crosses the
03:11line, this employee doesn't run to a phone. He uses a hand mirror. He flashes a code in the
03:17sunlight to another guy standing in a skyscraper window overlooking the track. That guy decodes the
03:23flash and instantly telegraphs the result to Payne's network of pool rooms. Think about the physics of
03:29that. Speed of light. Mirror to eye. Then telegraph. Payne's network got the results to the bookie
03:37seconds before the official channels. Why does this matter? Because Payne wasn't selling gambling.
03:44He was selling insurance. He went to the bookies and said,
03:48If you pay me, I will tell you who won instantly, so you can reject the bets from the cheaters.
03:53He was selling speed. He was selling the edge. This little Cincinnati hustle didn't stay small.
04:01It metastasized. It grew into a national infrastructure. And like all things that
04:08generate massive piles of untraceable cash, it attracted the sharks. Enter Montanis.
04:14Enter the General News Bureau. And eventually, enter the heavyweight champion of information
04:20monopolies. Mose. Mo. Anenbig. Now, Anenbig is a fascinating character. He wasn't just a thug.
04:29He was a businessman who understood vertical integration before they taught it in business
04:34school. He bought the daily racing form, the Bible, of horse racing data. Then he took over
04:41the wire services. He ruthlessly crushed the competition. There is a story in the book that
04:47perfectly illustrates the power of information warfare. Anenbig had a rival named Irving Wexler.
04:54Wexler was trying to set up his own wire service, stealing Anenbig's clients. So, what did Anenbig
05:01do? He didn't just send guys with baseball bats. Though he probably did that too. He used the network.
05:09Anenbig knew Wexler was tapping into his phone lines to steal the race results.
05:14So, Anenbig staged a sting. He waited for a specific race. When the winner crossed the line,
05:21Anenbig's men sent the correct result to his own loyal bookies instantly. But on the lines that he
05:27knew Wexler was listening to, he delayed the result. He held it back. Wexler's bookies are sitting there,
05:35thinking the race is still running. Meanwhile, Anenbig's men, who already know the winner,
05:41run into Wexler's betting parlors and place massive bets on the horse that has already won.
05:46A few minutes later, the result comes through to Wexler. He realizes he's been cleaned out.
05:52He has to pay out on bets he never should have taken. It bankrupted the rival syndicate in a
05:58single afternoon. That is the power of the time gap. That is information as a weapon.
06:04But here is the detail that really blows your mind. You have to ask yourself. How did these
06:11mobsters build a national telecommunications network in the 1930s? They didn't build the
06:17poles and string the wires themselves. They leased them. From AT&T. This is the silent partner
06:24aspect of the story. By the mid-1930s, Mo Anenbig was AT&T's fifth largest customer. Think about that.
06:34The American telephone and telegraph company, the bluest of the blue-chip stocks,
06:38the most respectable corporation in America, was making a fortune leasing lines to the mob.
06:45The lawyers at AT&T knew it. They weren't stupid. They wrote, morality clauses, into the contracts
06:53saying, you can't use these lines for illegal acts. But did they enforce them? Of course not.
07:00Not until the government put a gun to their head. It's a tale as old as time, corporate greed
07:06providing the infrastructure for illicit profit. It's the 1930s version of banks laundering cartel
07:12money. The infrastructure of the underworld ran on the hardware of the overworld.
07:18So, we have this massive machine. The. Wire. It's generating millions of dollars. It's the
07:26lifeblood of organized crime. If you cut the wire, the bookies go blind, the betting stops,
07:32and the mob starves. This brings us to the inevitable conflict. The government wakes up.
07:38We enter the era of the Kefauver Committee in the early 1950s. Senator Estes Kefauver. He decides to
07:47drag these guys into the light. He labels the continental press, the successor to Anandberg's
07:52empire, as public enemy number one. This is the moment where the old world starts to crack. And
08:01nothing symbolizes this better than the testimony of Frank Costello. Costello was the prime minister,
08:08of the mob. He was smart, polished, and terrifying. When he was called to testify on television,
08:15and this was one of the first major televised political events, he refused to show his face.
08:22So, the cameramen did something artistic. They focused the camera on his hands. For hours,
08:29America watched Frank Costello's hands. They fidgeted. They danced. They tore up pieces of paper.
08:36They poured water. It was a ballet of nervousness. It showed the public that these untouchable gods of
08:44the underworld were human, and they were scared. When they asked Costello,
08:49What can we do to stop gambling? He gave an answer that was pure, cynical logic.
08:54He said, Burn the stables and shoot the horses. In other words, as long as the event exists,
09:01people will bet on it. As long as people bet on it, someone will sell the information.
09:07But the mob had a problem. They had a loose cannon. A man named Willie Moretti.
09:14Moretti is a tragic, almost Shakespearean figure in this saga. He was a high-ranking mobster,
09:20but he was suffering from advanced syphilis. The disease was eating his brain. He became erratic.
09:27He loved the spotlight. He was the guy who allegedly put a gun in Tommy Dorsey's mouth
09:33to get Frank Sinatra out of a contract. The real-life inspiration for the Godfather.
09:39Scene. But during the hearings, Moretti talked too much. He was joking with the senators.
09:46He was charming the cameras. And the other bosses, Vito Genovese and their combination,
09:52they looked at this and said, This guy is a liability. His brain is rotting,
09:58and he's going to spill the secrets. So, in 1951, Willie Moretti goes to Joe's
10:04elbow room in New Jersey for lunch. He orders a meal. And four men walk in and shoot him dead.
10:11It was a mercy killing, in a twisted way. But it marked the end of an era.
10:16The wire was being dismantled by the law. The old guard was dying out.
10:22The brute force method of controlling information, bombing your rivals and bribing the cops,
10:28was becoming obsolete. And right as the door closes on the violent, analog world of the mob,
10:34a new door opens. A door that leads to a laboratory in New Jersey.
10:40This is where the book makes a brilliant pivot. We leave the smoke-filled rooms and we enter the
10:46mind of the most important man you've likely never heard of, Claude Shannon.
10:50If you are listening to this podcast right now, you owe your life to Claude Shannon.
10:56Every email, every JPEG, every streaming video, every bit of data stored on every hard drive in the
11:02world is based on the mathematics he invented. Who was he? He was a Midwestern boy,
11:08born in Michigan. A tinkerer. A genius. People compared him to Einstein. But while Einstein
11:16gave us the theory of the universe, Shannon gave us the theory of the digital universe.
11:22The book introduces us to Shannon in the 1950s, right as the mob is crumbling.
11:28He's at Bell Labs, the same Bell Labs owned by AT&T, the company that wired the mob.
11:34The connections are everywhere. Shannon is, different. He's not a stuffy academic. He's
11:41a guy who rides a unicycle down the hallways of the world's most prestigious laboratory while
11:46juggling three balls. He builds chess-playing machines. He builds a mechanical mouse that
11:53can solve a maze. He's playful. He treats science like a toy box. But underneath the eccentricity was
12:01a mind that could see the invisible architecture of reality. In 1937, at age 21, Shannon wrote a
12:09master's thesis at MIT. It has been called the most important master's thesis of the 20th century.
12:16Here is what he figured out. He looked at. Boolean logic. This was a system of philosophy from the
12:231900s developed by George Boole. It dealt with statements that are either true or false.
12:29No maybes. Just true or false. Shannon looked at electrical circuits. Switches. A switch is either
12:37on or off. And he had the epiphany that changed history. He realized that the on-off of a switch
12:44is the exact same thing as the true-slash-false of logic. This means you can build a machine that
12:50makes logical decisions. If switch A is on and switch B is on, then light C turns on.
12:57That is a thought process. That is. If-slash-then. Logic. Before Shannon, circuits were just about
13:05power, sending electricity to a lightbulb. After Shannon, circuits were about information.
13:12He turned the physical into the logical. But he didn't stop there. In 1948, he published
13:19a mathematical theory of communication. This is the Magna Carta of the Information Age.
13:25In this paper, he coined a word. A word we use every day. The. Bit. Short for binary digit.
13:34Shannon proved that all information, a Shakespeare sonnet, a picture of your dog, a telephone
13:40conversation. The genetic code in your DNA can be broken down into a string of yes-slash-no choices.
13:47Ones and zeros. He quantified information. He turned it into a measurable physical quantity,
13:55just like mass or energy. Why does this matter to our story about gambling?
14:01Because Shannon was obsessed with the idea of noise versus signal. He worked on cryptography
14:08during World War II. He built the system, Sixley, that allowed Churchill and Roosevelt to talk securely
14:15over the ocean. He proved that for a code to be truly unbreakable, the key has to be totally random.
14:22Shannon understood that the world is a chaotic place full of static. But if you have the right
14:28math, if you have the right formula, you can filter out the noise and find the signal. You can find
14:34the
14:34truth. And what is gambling? What is the stock market? It is a noisy system. It is a chaotic mess
14:42of
14:43prices and odds and rumors. The formula, that the book's title refers to, Asterisk Fortune's Formula
14:50Asterisk, is about using Shannon's insights to find the signal in the noise of the market.
14:56So, we have these two timelines crashing together. Timeline A. The Mob. They tried to control the
15:03signal, by owning the wire, by bribing the cops, by shooting the competition. They wanted a monopoly on
15:10the speed of information. But they failed. The government crushed them. The technology outpaced
15:16them. Timeline B. Claude Shannon. He creates the mathematical framework to understand information
15:23itself. He moves from Bell Labs to MIT in 1956. He becomes a living legend, but he hates the fame.
15:32He retreats into his house. He stops publishing papers. He starts building gadgets. But here is
15:40the hook. Here is the thing that makes you lean in. Shannon had a list. A list of his past
15:47passions.
15:48Things he was obsessed with. The list included things like chess genealogy and unicycles. But it
15:57also included this phrase. Participation in the underworld. Shannon wasn't just a theorist. He was
16:05fascinated by the application of his math to the real world. He looked at the roulette wheel. He looked
16:11at the blackjack table. And he didn't see a game of chance. He saw a physics problem. He saw a
16:18system
16:19that was leaking information. If you can track the speed of the roulette ball, and the speed of the wheel,
16:24you can predict, not perfectly. But with an edge, where the ball will land. Just like John Payne used
16:33a mirror to get the horse race results seconds before the bookie. Shannon realized that if he
16:39could compute the physics of the roulette wheel fast enough, he could get the results seconds before the
16:45dealer called. No more bets. It's the same hustle. It's the exact same concept as the racing wire.
16:52But instead of using a telegraph and a mirror, Shannon was going to use the bit, and the
16:58transistor. And that brings us to the convergence. The summary tells us about the invention of the
17:04transistor in 1947-1948. William Shockley shows it to Shannon. It's a tiny speck of germanium.
17:14It replaces the big, hot, fragile vacuum tubes. Shannon looks at this tiny device, and he sees the future.
17:21He sees a world where his, bits, can be processed at lightning speeds by these, transistors.
17:29He moves to MIT. He is surrounded by the smartest people on earth. He is working on artificial
17:35intelligence before the term even really exists. He is thinking about machines that can learn.
17:42But in the background, the allure of the, New Jersey underworld, is pulling at him.
17:47The book sets the stage for a collision. You have the theoretical perfection of Shannon's mind,
17:54and you have the gritty, probabilistic reality of the casino floor. The first chunk of this book
18:00establishes the need for speed. The mob proved that if you have the info first, you win.
18:06The second chunk establishes the tool for speed. Claude Shannon proved that information can be tamed,
18:13measured, measured, and processed mathematically. As we move forward in this book, we are going to see
18:19what happens when you take Shannon's brain and apply it to the mob's playground. We are going to
18:24see the birth of the, Kelly criterion, a formula for betting that is so powerful, it scares economists.
18:31We are going to see how a couple of MIT scientists put on disguises and tried to beat the house
18:37in Las
18:37Vegas, not by cheating, but by out-thinking the game. But we have to remember the foundation.
18:44It all started with a guy named John Payne with a mirror in Cincinnati, and a genius named Claude
18:50Shannon juggling balls in a hallway. It's a story about the transition of power. In the old days,
18:57power was muscle. It was violence. It was. Burn the stables.
19:03In the new world, Shannon's world, our world, power is logic. Power is code. Power is the ability
19:11to separate the signal from the noise faster than anyone else. The mob built the tracks. But
19:17the mathematicians built the engine. And as we wrap up this first deep dive, I want you to think
19:24about your own life. We are drowning in data. We are bombarded by tweets, emails, news alerts,
19:31stock tickers. It is a cacophony of noise. Claude Shannon taught us that within that noise,
19:37there is a signal. There is a truth. And if you can find it, and if you can act on
19:43it with the right
19:44formula, you don't just survive. You win. This is the story of how the world moved from the
19:51sure thing of a rigged race to the probabilistic edge of the algorithm. Next time, we're going to see
19:58what happens when the rubber hits the road, or rather, when the computer hits the casino.
20:03We'll meet the man who connected the dots, John Kelly. And we'll see why this. Fortune's formula
20:10is the most controversial equation in the history of finance. But for now, remember Frank Costello's
20:17hands. Remember Claude Shannon's unicycle. And remember, the house doesn't always win.
20:24Not if you know something they don't. Thanks for listening.
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