What the casino industry’s dedication to regulation and transparency can teach the rest of the nation

The casino industry has some serious lessons to learn from the extremely painful economic crisis. At the same time, however, the industry has some equally serious lessons to impart. Either way, such lessons cannot be ignored.

On the learning side, the casino industry and all its many moving parts – from Wall Street analysts to suppliers, and from regulators to investors and executives – has recognized that its fate is inextricably linked to the economy at large. What happens in a variety of locations, from Washington to Moscow, ripples through the world and impacts the casino industry.

Spectrum Gaming Group’s Michael Pollock, publisher of  the Gaming Industry Observer for the past 14 years, offers insights to put these lessons in proper perspective.  “For several decades, the casino industry was shrouded in a myth that it was somehow immune to economic vagaries, and was essentially recession proof. It never was.

“Indeed, if casinos did not see their revenues move in lockstep with the economy, it could largely be attributed to the fact that casinos catered to a relatively small segment of the population, those gaming aficionados who liked to play at casinos in good times and bad.”

Pollock cautions that the industry’s growth in recent years – in which gaming is exposed to more adults who are increasingly willing to play – has much upside, but there is a downside: increased economic risk.

“The ongoing recession is proving to be particularly painful for casinos, because we have learned that much of the discretionary income that fueled spending in many leisure industries was funded by money that would have otherwise been saved or invested.

“As consumers watched their net worth increase, thanks to rising housing and stock prices, they felt little compunction to save. Thus, they were able to spend more. It was, to use the Aesop analogy, smarter to be a grasshopper than an ant,” Pollock said.

The lesson is clear. Casinos cannot count on such discretionary spending to rise endlessly. Growth will come as the industry expands to reach more adults, and expectations of that growth must become more realistic.

But what about the lessons that the casino industry can teach the rest of society? For that, we need look no further than the latest in a long line of Wall Street scandals. The Bernie Madoff scandal – in which $50 billion practically evaporated in what is alleged to be the world’s largest Ponzi scheme – caught some otherwise very smart people in its web, according to prosecutors.

Note that, despite all the angst that has developed regarding the casino industry’s ability to generate revenue and earnings in recent months, the industry remains free of taint in such scandals going back years, from Enron and Tyco to Madoff.

Questions now surrounding the Madoff scandal are focusing on the Securities and Exchange Commission, the federal agency responsible for protecting investors against such forms of fraud.

Recent congressional hearings have shown the intense heat is on the SEC, which, by most accounts, failed to note red flags that should have prompted earlier action.

U.S. Rep. Gary Ackerman, D-N.Y., put it most bluntly: “Who is responsible for protecting the securities investor because I want to tell that person that they suck at it. … This is a spike in the heart of the investment community that makes America run.”

Of course, gaming has had instances in which state regulators have taken heat, have gotten it wrong, or have ignored the core principle of maintaining integrity. Still, in states that are the bellwether of gaming integrity – most notably New Jersey and Nevada – the notion of regulators missing warning sign after warning sign is practically inconceivable.

Transparency is at the heart of gaming regulation, and is a necessary to ensure public confidence. A focus on transparency, and a rigorous response to red flags, make gaming regulation effective, and – using the words of Gary Ackerman – it's what makes gaming run. That is a lesson that the rest of the nation should take to heart.