Of Course It's a Depression

There is a generally accepted definition of an economic recession-a decline in gross domestic product for two consecutive quarters. But people don't agree on what is a depression.

The difference is like the distinction between neurosis and psychosis. A neurotic may have problems. But a psychotic has at least temporarily lost touch with reality.

The legal gaming industry is facing a psychotic global economy.

Two examples: In mid-2008, Penn National Gaming was in the final stages of being acquired, when banks cut off all financing. Penn Gaming's lawyers had done a great job writing in protections. The banks panicked, and gave Penn Gaming $1.475 billion to not buy the company.

Recently, Penn Gaming's common shares hit $11.82. With about 90 million shares outstanding, this gave the company a market capitalization of $1 billion-a strange valuation for a company that is making money, with little debt and a treasure chest of more than $1.4 billion in cash.

Unlike a recession, a depression is worldwide. In January, the Bank of England cut its interest rate to 1.5 percent, the lowest rate in its 315 year history. In the U.S. the yield on three-month treasury bills actually went negative: In December 2008, investors were willing to pay the federal government to hold their money, rather than risk putting it in banks.

A depression is marked by deflation. Sellers become desperate and prices drop below cost. Casino hotel rooms in Las Vegas are now going for $22.00 a day-free, for local residents.

In a depression, virtually all business dries up. By every measure, this is the worst downturn since gaming was made legal in Nevada in 1931 as average room rates, visitor volume, convention attendance, and total revenue have plummeted.

Whether or not gaming was ever recession proof is somewhat irrelevant. In a depression nearly everyone loses. Plus, a company that makes a majority of its revenue from non-gaming sources, such as overpriced Cirque du Soliel shows, is more susceptible to cutbacks in disposable income.

Economic depressions can cause industries to topple like dominoes. Casinos aren't buying as many new slot machines, so manufacturers don't need as many parts from their various suppliers. This hurts the truck drivers who deliver the goods.

Gaming companies are cutting back on service, even to high-rollers, and laying off employees. The few with cash or available credit, like Penn Gaming, are buying back their stock or looking to pick up brand name casinos at bargain prices. The rest are trying to survive.

Trump Entertainment forced out the Donald immediately before declaring bankruptcy. Herbst Gaming, Greektown Holdings, Legends Gaming, Magna Entertainment, Progressive Gaming and Tropicana Entertainment have also filed. Station Casinos, Empire Resorts, UTGR Inc., Majestic HoldCo., and even MGM is tottering.

Unfortunately, politicians' first reaction is to raise taxes on gambling.

On the other hand, depressions call for desperate measures. New Jersey may be the only jurisdiction in North America to ever roll back a smoking ban-for Atlantic City casinos.

I have been hired by government officials in two states that are looking at major expansions of legal gambling. And intrastate Internet poker may come to California.

Nevada's Harry Reid, the Majority Leader of the Senate, and Barney Frank, a powerful member of the House, may even get Congress to back off of its opposition to Internet gaming.

Just as soon as they get us out of this second Great Depression.

Professor I Nelson Rose is recognized as one of the world's leading experts on gambling law. His latest books, Gaming Law: Cases and Materials and Internet Gaming Law, are available through his website, www.gamblingandthelaw.com.