The world economy is swimming in debt, and so, not coincidentally, is the American casino industry. This is less a result of the failure to regulate the financial system than it is an inability to temper human expectations, a reality people are slow to accept.
That’s my take-away from Colin Negrych.
Negrych is a bond trader whose compelling perspective on the meltdown was relayed through journalist Nick Paumgarten of The New Yorker in an article last month titled “The Death of Kings”. Cockeyed American optimism, a trickier problem to tackle than shoring up the Securities and Exchange Commission and coming up with a new regulatory regime for derivatives, tells us far more about how we got to where we are today. In the run-up to our collective march off the cliff, the truth-tellers were few and far between, and their impact on the business culture was minimal.
“What constituency is there for pessimism?” asks Negrych. “People believe optimism is necessary, an American right. The presumption of optimism is the problem. That’s what creates the debt we have now.”
Paumgarten also hilariously quotes a French investor who sighs and says, “There is no spirit of resignation in the American people.”
The willing suspension of disbelief is what brought us to the edge of financial ruin, and it took two to tango. The current crisis is too big to blame on Wall Street. Without looking at what went into taking on high levels of debt we can neither begin to avoid a repeat nor think somewhat clearly about the future.
“What Wall Street offers is the continual rationalization that ever-increasing indebtedness is sustainable,” said Negrych. “It concocts believable, defensible arguments for the prices they think things ought to be. Financial engineering fills the gap between people’s desires and their wherewithal. So what you have is optimism buttressed by pseudo-science and statistical legerdemain. Wall Street is the roach walking around on a dinosaur; it’s the symptom, not the disease.”
As many of the top companies in the casino industry struggle to stay afloat financially it’s worth wondering whether they are repeating the cycle of false expectations that brought them such misery in the first place and what role creative financial engineering still plays in the process. Are proven, albeit devalued, assets being jettisoned to support unproven, overvalued assets? Is the basic quest for near-term survival at all balanced against the long-term health of the organization?
One thing should be clear: The industry has benefited mightily from strong leadership companies such as MGM Mirage and Harrah’s Entertainment. If a new “Era of Entrepreneurs” is in the cards their happy inheritance will be more than just sold-off properties.
Meantime, the reality of the here-and-now was on full display at the Southern Gaming Summit last month, where IP President and GM Jon Lucas led a thoughtful panel discussion on current market conditions. For all of the finesse displayed by the speakers I just can’t get Tim Wilmott’s line about Atlantic City “being in a freakin’ death spiral” out of my head. No false optimism there, even though Wilmott, president and COO of Penn National Gaming, can afford to offer unvarnished opinions of a market whose troubles aren’t a problem for his company. Also interesting was Atlantic City veteran and current Isle of Capri Casinos President and COO Virginia McDowell’s warning that the Gulf Coast market needs to avoid the descent into the aggressive couponing of slot play that has long been a problem in Atlantic City. When Mississippi Gov. Haley Barbour stepped up to the podium the next day and predicted that Mississippi would one day in the not too distant future overtake Atlantic City in terms of revenue, the Gulf Coast/Atlantic City comparisons had come full circle. It will be interesting to chart the results of these geographically distant and commercially similar markets going forward.
Common sense and realism similarly prevailed in another panel, “Loyalty Marketing in Tough Times”. Participants regularly admitted to overworking the upper end of their data bases as their first response to the down economy, much to the irritation of their most important players, who felt hounded. Industry consultant Randall Fine seized on an example of self-delusion at one of his Las Vegas Strip customers who said the demise of his high rollers was being offset by growth at the level just below. When asked to check and see how many of his former high rollers were now residing in the next lowest level of his data base it turned out that many of his best players had indeed just traded down.
Operators are split between two modes: problem-solving and survival. All signs are that they are dealing with the operational challenges head-on. Hopefully, the same spirit of realism prevails among those more preoccupied with survival.