#164 © Copyright 2010, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose, www.GamblingAndTheLaw.com

The Great Depression of the 1930’s helped create the modern casino industry. And today’s Great Recession is changing it in ways that are almost as significant.

It is difficult in these days when commercial gambling is legal in every state and territory of the U.S., except Hawaii and Utah, to remember that the federal Prohibition on alcohol was accompanied by nearly universal state prohibitions on gaming. All state lotteries had shut down by the beginning of the 20th century. Betting on races was made illegal almost everywhere. The territories of Arizona and New Mexico were told that if they wanted to become states, they had to close their casinos. Even Nevada, in 1909, outlawed all casino gambling.

In 1931, suffering in the depths of the Depression, Nevada changed its mind.

No other state followed Nevada’s lead at that time with casinos. But states did start reopening their tracks during the Depression. And charities began offering bingo. This was the beginning of what I call “The Third Wave of Legal Gambling,” since it is the third time gaming has spread across the U.S.

The most obvious influence of economic hard times is that legal gambling is seen as a painless tax. All but six states project budget deficits for the 2011 fiscal year. In the past, legislators and governor have often seen gaming as a panacea. Although economic projections are more realistic today, authorizing new forms of gaming or expanding existing ones is still often oversold as an easy short-term solution to long-term problems.

So, the last couple of years have seen dramatic and unprecedented expansions.

I was hired by the Delaware State Lottery to recommend the tax rate for the first legal sports books east of the Mississippi. Pennsylvania slot machines now take in more than all the slots in Atlantic City, and casinos in the Keystone State will soon have table games, as will Delaware and Maryland. Kansas became the first state government to own true casinos. After rejecting casinos four times at the polls – as recently as 2008 – voters in 2009 in Ohio approved casinos for its four largest cities.

At least 18 states are seriously considering expanding legal gambling, including four looking at Internet poker: California, Florida, Iowa and New Jersey.

For states, legalizing casinos has always been about money. Only with Internet gaming do we hear the argument that people are going to gamble (online) anyway, so it would be better for the state to regulate it. A quick survey of who gets casino licenses when only a limited number are available shows that it is the applicants who promise the most, in terms of upfront payments, taxes and jobs.

But the Great Recession has expanded that unspoken standard. Now, a casino operator has to make sufficient money for the state if it wants to stay open.

The Missouri Gaming Commission voted unanimously to revoke the President Casino’s license, not for any alleged misconduct, but because the riverboat casino was “obsolete and underachieving.” The Commission found that its owner and operator, Pinnacle Entertainment, was not doing enough to reverse the recent steep drop in gaming revenue. Since the state gets 21%, this was considered an act “injurious” to the state.

Pinnacle probably could have fought this. The Commission should be congratulated for stating that the reason states license casinos is to get a share of the gaming revenue. But the new standard may be too vague: Will other operators be shut down if they don’t make as much money as the regulators think they should be making? Pinnacle also could have argued that this is eminent domain without compensation: It had a very valuable license, which was taken away before it could be sold.

Gaming is still considered a morally suspect industry, and rarely gets direct help itself. Casinos were expressly left out of the 2009 economic stimulus package. President Obama has twice, in speeches, equated trips to Las Vegas with reckless spending, causing some conventions to relocate to more acceptable, though often more expensive, locales.

Meanwhile, the finances of existing operations have been flipped upside down. Four years ago, the future for the casino industry was clear: more consolidation, particularly purchases by private equity firms. These investors wanted and often achieved returns of more than 20% a year, and they loved casinos’ cash flows.

In June 2007, the private equity firms Fortress Investment Group and Centerbridge Partners offered about $6 billion for the publicly traded Penn National Gaming. At the height of the recent panic, the banks behind the buyout were so desperate to get out of the deal that they gave Penn $1,475,000,000 to NOT buy the company.

As for the enormous money spent on ever grander integrated resorts (“IRs”), it appears that the foundations of many of these plans were built on shifting sand. Except for projects already started, we will probably never see another multi-billion-dollar casino resort built in the U.S.

Small as well as large casino companies tumbled.

The Imperial Hotel and Casino in Cripple Creek, Colorado survived the Depression, but the Great Recession, competition, and a ban on smoking killed the 100+ year old enterprise.

Lake Las Vegas is in bankruptcy, and even before the Ritz-Carlton closes its doors in May, CIRI Lakeside Gaming Investors LLC shut down the Casino MonteLago.

Trump Entertainment forced out the Donald immediately before declaring bankruptcy.

Black Gaming, Mesquite’s biggest operator; Centaur (Hoosier Park, Indiana, and Fortune Valley, Colorado); Fontainebleau; Greektown Holdings; Greek Isles, formerly the Debbie Reynolds Hotel; Herbst Gaming; Legends Gaming (Diamond Jacks, Bossier City and Vicksburg); Magna Entertainment; Majestic HoldCo. and its subsidiary, Majestic Star Casino, LLC, (Fitzgeralds in Tunica); Progressive Gaming; Station Casinos (18 properties), and its subsidiary, GV Ranch Station Inc., (50% of Green Valley Ranch Resort); Tropicana Entertainment; and UTGR Inc. (Twin River, Rhode Island) have also filed.

As of this writing, Riviera Holdings and 155 East Tropicana (Hooters) are tottering, and Empire Resorts (Monticello) is not out of the woods.

Even the biggest were in danger. Harrah’s Entertainment needed to swap and get extensions on billions of dollars in notes coming due. At its worst, the common stock of MGM Mirage dropped 94% and Las Vegas Sands was worse – it fell 97%.

One of the ways MGM saved itself was to sell off assets. So, the consolidation of casino ownership on the Las Vegas Strip reversed, at least temporarily, when MGM spun off Treasure Island.

Defaults by tribal casinos have thrown the lending markets into turmoil. Wells Fargo Bank discovered that I and other gaming lawyers were correct when we said that tribal agreements require special attention: A federal judge ruled the bonds securing the bank’s $50 million loan to the Lac du Flambeau Band for the Lake of the Torches Resort & Casino, violated the Indian Gaming Regulatory Act, and are unenforceable.

With credit still tight, private equity funds have not yet gone back to buying up casino companies. And stock prices are still low, so publicly traded companies are finding it difficult to pick up bargains by offering shares. But there are opportunities for the few gaming companies with cash, like Penn Gaming.

But mergers and acquisitions are flourishing in one area of gaming: the Internet. It is obvious that PartyGaming bought World Poker Tour to pick up the brand name, the same way Harrah’s, which has plans for Internet poker, earlier acquired Binion’s Horseshoe and its World Series of Poker.

Probably the most interesting development from the Great Recession is that the giants of the casino industry are now looking abroad for greener fields. Harrah’s understands the possibilities of Internet poker; as Steve Wynn does with Macau. Las Vegas Sands is about to open its multi-billion-dollar IR in Singapore.

And faced with a choice between Atlantic City and Macau, MGM chose China.

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© Copyright 2010. Professor I. Nelson Rose is recognized as one of the world’s leading experts on gambling law, and is a consultant and expert witness for governments and industry. His latest books, Internet Gaming Law (2nd edition recently published), Blackjack and the Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.