May 18, 2012

Introduction

These are desperate times for US state and local governments. More than half a million state/local workers have been laid off and more will be soon as Federal support dries up. Where can these governments find more revenues? The Massachusetts and New York governors have hit on the solution: gambling casinos. They echo one another in saying: why should our citizens gamble in Connecticut, Delaware, Maine, New Jersey, Pennsylvania, and Rhode Island? Why should our citizens help pay their taxes? The questions sound sensible, or do they?

US Overview

Gambling casinos exist in 15 states. As Table 1 indicates, their gross revenues in 2011 were $62 billion, with Indian casinos taking in just under half. The NE/Mid-Atlantic States took in about a third of the US gambling tax revenues. Governors Cuomo and Patrick want part of the action.

Table 1. – Gambling Revenues, 2011

Sources: American Gaming Association, various state gaming commissions,

 Macau Gaming Inspection and Coordination Bureau

As a point of reference, Table 1 includes gambling revenues from Nevada and Macau. It is amazing how rapidly Macau surged by Las Vegas. However, the Macau product is very different than the one offered in the US. While US casinos promote the image of “family experiences” (like going to Disneyland), Macau has a somewhat “harder” image that features gambling, drinking and prostitutes.

Slot Machines and Video Lottery Terminals (VLTs)

While gambling casinos have typically been places where one can play “table games” (Poker, Blackjack, etc.), the role of slots and VLT’s are growing. Operated like vending machines, slots (pull a handle) and VLTs (push a button) are easy to maintain and are normally programmed to return 9% of the amount gambled to the house. As Table 2 indicates, the vast majority of US casino gambling revenues come from slots/VLTs. In striking contrast to the US, slots account for only 4% of non-pari-mutuel gambling revenues in Macau. There, Baccarat is extremely popular, generating 91% of gambling revenues.

Table 2. – Slots/VLTs by Locale, 2011

Sources: American Gaming Association, various state gaming commissions,

 Macau Gaming Inspection and Coordination Bureau

Current Conditions in the New England/Mid-Atlantic Gambling Markets

As I have noted earlier, the demand for US gambling products behaves far more like a discretionary item than an addiction need. The global recession hit US gambling quite hard, and the industry is still trying to recover. For example, gambling revenues in Nevada fell 20% in the 2008-2009 period, and there has been very little recovery since then.

The two largest casinos in the world, Foxwoods and Mohegan Sun (both in Connecticut), are in dire straits. With $2.3 billion in debt, Foxwoods is effectively bankrupt. Mohegan Sun is not far behind, even though it has just refinanced some of its debt. Foxwoods does not have a very positive view of the gambling market moving forward. As an alternative, Foxwoods is building a 300,000 square foot outlet mall for 75 stores. In Rhode Island, the Twin River Casino has just emerged from bankruptcy. New Jersey has several casinos emerging from bankruptcy. Trump Entertainment Resorts, the owner of 3 Atlantic City facilities, is emerging from bankruptcy for the 3^rd time.

The Market for Additional Gambling Facilities in Massachusetts and New York

Cuomo and Patrick hope to build 3 new casinos each, with additional slots/VLTs in other selected locations. Looking only at Connecticut, Maine, New Jersey, New York and Rhode Island, there are already 71,053 slots/VLTs in operation. Are more needed? Is this a growth industry? To answer this question, consider the demographics of slot/VLTs users. Michael Sokolove quoted Scott Butera, the CEO of Foxwoods, on its slots users: “Our crowd wants to sit in front of a slot machine, smoke a cigarette, and drink…. You look around here, and 45 is young”. Sokolove also quoted Michael Meczka, a casino marketing consultant: “There aren’t any new customers out there. Gaming is an aged community….Anyone who has ever wanted to try a casino has tried a casino.”

There is no question that casinos are attractive to smokers. It is one of the few places they can smoke (and drink) in an indoor public facility. But the portion of American smokers continues to fall. Younger people do not smoke as much as older people. There is another point about younger gamblers. Many of them have become accustomed to gambling on the Internet. In short, the demographics are against much growth in casino gambling.

Conclusions on What Will Happen When MA/NY Move Ahead With Casino Plans

The US casino market is not growing. That means if Massachusetts and New York move ahead with casino plans, they will draw the bulk of customers from other markets. Sitting between Massachusetts and New York, the two Connecticut casinos are likely to be hit hard. An estimated 50% of customers for these two casinos come from out of state. Rhode Island’s two facilities with 6,100 VLTs will lose customers. And Atlantic City, already hit hard by gaming facilities in Mid-Atlantic States, will also lose customers.

Will this trouble Cuomo and Patrick? If they don’t have to put up the money for the new casinos, why should it? And as they often say, if our citizens want to gamble, why should they pay gambling taxes to other states?

Will gambling tax revenues for the NE/Mid-Atlantic region increase? Not much.

]]> http://www.morssglobalfinance.com/the-coming-gambling-casino-glut-in-the-northeast/feed/ 0 http://www.morssglobalfinance.com/the-banks-again-%e2%80%93-when-will-we-learn/ http://www.morssglobalfinance.com/the-banks-again-%e2%80%93-when-will-we-learn/#comments Mon, 14 May 2012 15:19:02 +0000 Elliott Morss http://www.morssglobalfinance.com/?p=1326 by Elliott R. Morss

May 14, 2012

Introduction

In 2007, the banks gambled on mortgages and lost, causing the largest global recession since 1929. They then gambled on European sovereign debt and lost. And now we hear J P Morgan Chase (JPM) just lost $2 billion on a derivatives’ bet. Should this not be the last straw?

There are important lessons to be learned from all this, lessons the bank lobbyists don’t want anyone to hear.

Lesson One – More Regulation Is Not the Answer

The immediate reaction to the JPM fiasco is to look at bank regulatory filings. But note: The New York Times reported that neither the US nor British regulators were even aware of the JPM unit that made the trades until they were tipped off by the media.

Are tougher regulations the answer? No. Banks given the latitude to do what they can do now will always be one step ahead of the regulators. We have had Basel I, II, and III standards. And despite these, we have had the US bank collapse, the Euro near bank collapse, and this latest loss.

How about this? In addition to bank presidents signing off and taking responsibility for all bank reports, let’s ask the regulators to take responsibility as well. The regulators would refuse. They have no idea what banks are really doing.

Do they know anything more than they did in 2008? I doubt it. I believe trying to regulate banks as currently constituted will never work. They are simply too complex to be regulated effectively.

Note further: the US banking crisis is not over yet. More than 50% of the 742 banks that borrowed money from the Troubled Asset Relief Program (TARP) had not even started to pay off their debts.

Lesson Two – The Volcker Rule Is Not Enough

The Volcker Rule is in Dodd-Frank: Title VI, Sec. 619, (a)(1) reads:

“Unless otherwise provided in this section, a banking entity shall not– (A) engage in proprietary trading; or (B) acquire or retain any equity, partnership, or other ownership interest in or sponsor a hedge fund or a private equity fund.…in no case may the aggregate of all of the interests of the banking entity in all such funds exceed 3 percent of the Tier 1 capital of the banking entity.”

And Gabriel Sherman reported that banks were taking steps that made one think the Rule had real teeth:

• Goldman Sachs – “Months before the Volcker Rule is set to kick in, star traders began to leave in droves.”
• Morgan Stanley – “…Morgan Stanley announced …it was getting out of prop trading entirely.”
• Citigroup – “Citigroup announced that it, too, was closing its prop-trading desk.”

And Sherman quoted JPMorgan Chase CEO Jamie Dimon:

“Certain products are gone forever….Fancy derivatives are mostly gone. Prop trading is gone. There’s less leverage everywhere. Mortgages are back to old-fashioned conservative mortgages….”

Volcker’s comment: “My experience with ring fences is the gophers go underneath and the deer jump over it, and you get a lot of lawyers to help them.”

I was doubtful too. So I looked at the top three US banks. Table 1 does not suggest all trading is over.

Table 1. – Bank Assets, Trading and Derivative Accounts, end 2011

Source: FDIC

 Lesson Three – Dodd Frank Is Just What the Bank Lobbyists Want

Let’s go back to the Dodd Frank text. Right after the Volcker Rule statement, it reads:

“Not later than 6 months after the date of enactment of this section, the Financial Stability Oversight Council shall study and make recommendations on implementing the provisions of this section so as to…promote and enhance the safety and soundness of banking entities….”

In short, the bill calls for Federal financial regulators to study the measure, and then issue rules implementing it based on the results of that study. So who will be on this Financial Stability Oversight Council? It will be chaired by the Secretary of the Treasury Geithner – Geithner is looking forward to a job in the financial industry. Other members: the Chairman of the Fed, the Comptroller of the Currency, the Director of the Bureau of Consumer Financial Protection Bureau, the Chairman of the Securities and Exchange Commission, the Chairperson of the Federal Deposit Insurance Corporation, the Chairperson of the Commodity Futures Trading Commission, the Director of the Federal Housing Finance Agency, the Chairman of the National Credit Union Administration Board, an independent member appointed by the President by and with the advice and consent of the Senate. With the exception of Bernanke, this will be a group of politically-driven bureaucrats.

Just after the Bill was enacted, I quoted from an article by Binyamin Appelbaum in the New York Times on what will happen next:

“…Brett P. Barragate, a partner in the financial institutions practice at the law firm Jones Day, estimated that Congress had fixed in place no more than 25 percent of the details of that vast expansion….Interest groups have been preparing for months. When the Consumer Bankers Association convened its annual meeting in early June, there was still plenty of time to lobby Congress. But the group’s president, Richard Hunt, told his board that the group should shift its focus to the rule-making process. The board voted to increase the group’s budget and staff. ‘Now we hope to have a good give and take with the regulators on the best interests of the consumer and the industry,’ said Mr. Hunt….One clear consequence is a surge in the demand for lawyers with expertise in financial regulation, particularly those who have worked for regulatory agencies. Most of the major trade groups are hiring lawyers. The major banks say they are employing more, too.”

So what just happened? According to Senators Carl Levin and Jeff Merkley of Oregon, Dodd-Frank as currently drafted by the agencies charged with carrying out the new law, banks are allowed to amass a single, large bet as a hedge against possible declines in an entire portfolio of securities. Senator Levin: “[That] …is a big enough loophole that a Mack truck could drive right through it.”

Lesson Four – What Dodd-Frank Missed

In earlier times, banks made money by getting paid more from lenders than they had to pay to attract deposits. In bankers’ parlance, they made money on the spread (the interest rate on loans minus the interest rate paid depositors). Banks knew their survival depended on a positive “spread”, so they were very careful to make low risk loans. And after making them, they stayed in touch and worked with the borrowers to insure interest payments were kept up to date.

Everything changed when banks started selling off their loans. Instead of lending to low risk individuals and firms and worrying about how their borrowers were doing, banks focused on generating commissions by selling off their mortgages and other loans. This constituted a fundamental change in incentive structures – from worrying about the soundness of their loans to writing as many loans as they possibly could for commissions. Think about it: when loans are sold off, repackaged, and sold off again, nobody knows (or cares unless payments stop) who the borrower is. As long as banks are allowed to sell off their loans for commissions, they will not make sound loans. Why should they?

Lesson Five – Why Banks Will Fight Against Any Limits on What They Can Do

The primary job of banks should be to protect our deposits. That is, they should invest them in safe loans and make a modest spread on what they earn on loans. Why has banking changed? It has changed because senior bank officials want to make a lot of money, and they can’t if they only do what banks are supposed to do. Today, taking risks are a win-win proposition for bank executives. If they guess right, they make a lot of money and justify their salaries. If they guess wrong, and the government bails them out. Have any of the big bank presidents lost their jobs as a result of the banking collapse in 2008? No.

I fully agree with Senator Merkley when he suggested to JPM President Dimon: If you want to be the head of a hedge fund, be a hedge fund…. Terminate your access to the Fed’s discount window, terminate your access to deposits, and then we have no quarrel.”

Where Do These Lessons Lead Us?

In 1933, Congress required that banks divest their trading arms. In 2012, Congress should insist that “investment banks” divest their banking arms. If you look at the three “banks” in Table 1, their derivative and other trading activities dwarf their deposit banking activities. We should require them to sell off their deposit banking activities. Spin them off in IPOs. This is what investment banks are good at doing. And then require all depository institutions to manage their own loans and not engage in trading for their own accounts. We should not allow banks to engage in any form of trading. It is too risky and regulation will not work.

 May 12, 2012

Introduction

For some time, I have argued the Eurozone is not a viable economic entity. In a recent piece, I predicted that until it is broken up:

• The French and German governments, working on behalf of their banks, will squeeze all they can out of the ‘weak sisters’;
• Unemployment rates will continue to increase with accompanying civil disorder/riots becoming more intense;
• The leaders of the “weak sisters” will commit political suicide by continuing to support the ECB/IMF mandates.

Political developments of the last week make it even more certain that a break up is the only viable outcome. And yet, there are some who disagree. Amar Bhidé, in a recent Wall Street Journal piece, argued that:

“Sovereign over-indebtedness and banking solvency are serious problems for Europe, but the common currency is doing its job just fine.”

Bhidé is not alone in feeling this way. In what follows, I will examine the arguments made by those wanting to keep the Eurozone together.

Giving Up National Currencies

Bhidé asserts: “The argument for fleeing the euro to devalue is misguided. Greece and the other peripheral economies lost little in giving up their national currencies.”

Lost little? What? In giving up their national currencies, countries also lost their ability to use monetary and fiscal policies to achieve full employment. Does this matter? Well, maybe not if all Eurozone countries had the same unemployment rates. But they do not. Take a look at the following table. You have some Eurozone countries near full employment. But the countries starting with Belgium have serious unemployment problems. Monetary policies in these countries should be keeping interest rates low while fiscal policies should be creating jobs. Not so for Austria, The Netherlands and Germany: countries at or near full employment. A common monetary and fiscal policy simply cannot address the vast differences in economic conditions in the Eurozone countries.

Table 1. – Unemployment and Government Deficits in Eurozone Countries

Source: IMF WEO Database

There is one other important point to note about Table 1. The two right-hand columns give government deficits as a percent of GDP. Note that under IMF/German austerity pressure, the deficits of all high unemployment countries are supposed to fall in 2013. They will not.

Devaluations

When all countries have to use the same currency, they are held to the competitive standard: they must adjust their internal costs structures to compete on world markets. Take a look at Table 2. Most Eurozone countries with high unemployment have negative current account balances – an indicator of an inability to compete on world markets.

Table 2. Current Account Deficits (as percent of GDP), 2012

Source: IMF WEO Database

If a country has its own currency, its value relative to other currencies will adjust to make the country more competitive on world markets. For example, if a country is running a current account deficit, its currency will weaken, thereby making its exports cheaper for other countries to buy. This valuable adjustment mechanism is not available to countries using a single currency.

What do the “keep-the Eurozone-together” proponents say about devaluations? I again quote from Bhidé: “Devaluation is a blunt, top-down intervention whose benefits and costs diffuse in unpredictable and often unwanted ways.”

I disagree. Take the US as an example. Back in the 1980’s, Japan became extremely competitive as an export nation. Japan was then the “Asian tiger”. In 1985, a US dollar would buy 239 yen. Today, a dollar only buys 83 yen. That devaluation helped US costs adjust so it could remain competitive on world markets. It was not “blunt, top-down intervention”. Instead, it happened gradually through time.

So what do the Eurozone proponents want to do to make its “weaker” countries’ cost structures competitive? A good example is what they tried in Greece under an IMF monitored standby agreement. I quote from an earlier piece I did on the IMF program:

“In all the years I have been covering the IMF, I have never seen such a long list of policy changes being demanded of any country. The general categories include: fiscal reforms, pension reforms, health sector reforms, Social Security reforms, government performance reforms, and economic system reforms. In order to achieve these objectives, the Greek government has agreed to foreign technical assistance in more than 20 different fields. Ok. So maybe if Greece did everything on the IMF list, they could stay in the Eurozone and compete with the Germans. But don’t hold your breath. This will not work.”

Conclusions

There are two primary Eurozone imbalances that need to be addressed:

1. Unemployment rates – with some countries at full employment and others with 50% of their younger workers without jobs, how can a “zone” with a single monetary/fiscal policy and little migration get unemployment rates down without causing inflation in countries at full employment?
2. The competitiveness gap – without using the devaluation adjustment mechanism, how will Greece ever be made competitive with Germany.

I don’t see how. And of course, a breakup of the Eurozone will have its own risks and consequences.  But until then, I see nothing but riots in the streets and government collapses.

May 2012

Introduction

In earlier pieces, I have written on the global economics of entertainment – how much people spend on different activities to relax and enjoy life. I found that sports ranks 7^th after alcohol, illicit drugs, sex, dining out, movies, and gambling. In this article, I look in more detail at sports. What sports have the highest payrolls? What are the most profitable? And what do the players get paid?

Payrolls

Soccer (the US term for what is called Football elsewhere) has the largest payrolls with a global total of over $5 billion. Britain pays the most for its soccer players and the US the least. For a single sport in a single country, the NFL pays the most at $3.6 billion.

Table 1. – Professional Sport Payrolls, 2011-2012

Sources: Sporting Intelligence/ESPN magazine for all but: auto racing – press releases on

prize money; golf – PGA for PGA, WPGA, European Tour, Champions’ Tour; tennis – WTA, ATP

Average Salaries

Table 2 presents data on average salaries by sport and country. US basketball (NBA) tops the list, with Indian Cricket in second place. The National Football League is in a very strong position relative to its players. Not only is the average salary relatively low, but salaries are not guaranteed. That means if you can’t play because of an injury, the team does not have to pay you.

Table 2. Average Salaries

Source: Ibid.

Highest Paid Athletes (?)

The ESPN magazine recently presented data on the highest paid “players” in a number of different activities. The top 20 on the list are presented in Table 3.

Table 3. – Highest Paid “Players”, 2011

Source: ESPN Magazine

Competitiveness

Most would agree that sports are more entertaining if the teams are closely matched. If two teams dominate a league of ten, the only real excitement occurs when they play each other. One can gauge the potential competitiveness of a league in at least two ways: payroll differences, and final standing spreads.

In recognition of the need for competition, a number of leagues have imposed salary caps that limit the size of a team’s payroll. US baseball (MLB) does not have a salary cap but does impose a luxury tax if the payrolls exceed a certain figure. How do league payrolls differ? A useful measure of this is the standard deviation in the percent difference in payrolls from the mean. These data are presented in Table 4 for selected sports and leagues.

 Table 4. – Payroll Spreads

Data Source: ESPN Magazine

A low spread means team payrolls are quite close. For example, in Australian soccer (spread = .034), the Gold Coast has the highest payroll at $9.2 million; the Western Bulldogs have the smallest at $7.8 million. In contrast, the highest payroll in Scotland (spread = 1.205) is Celtic at $43.9 million; the lowest is Inverness Caledonian Thistle at only $2.6 million. How can a team paying its players only $2.6 million compete with a team with a payroll of $43.9 million? Not well.

To get a sense of how the spread of the salaries influenced the competitiveness of the leagues, I looked at the spread (standard deviation) for each league in the percent of games won. It turns out that the spread in payrolls explained about 20% of the competitiveness of the leagues.

Payrolls as a Predictor of Final Team Standings

How important are total payrolls as a predictor of how well teams do. Table 5 answers this question. The R² indicates how much of team standings are explained by the size of their payrolls. As one might expect, payrolls explain very little of league outcomes where salary caps and other factors keep team payrolls similar, as in US hockey (NHL) and football (NFL). In leagues with large payroll spreads, such as many of the European soccer leagues, payrolls explain far more of team success.

Table 5. – Team Standings Explained by Payrolls

The Most Valuable Team Franchises

Forbes regularly estimates the value of different team franchises. As Table 6 indicates, the vast majority of the most valuable franchises are in US football (NFL).  Teams in the top fifty franchises range in estimated value from $1.86 billion for Manchester United to $609 million for the Philadelphia Phillies.

Table 6. – Most Valuable Franchises, by Sport

Source: Forbes Magazine

A significant portion of the difference in team valuations can be explained by whether the team owns the stadium it plays in and media rights. It appears to have very little to do with team success inasmuch as the Dallas Cowboys (ranked 2^nd valued at $1.8 billion) and the Washington Redskins (ranked 4^th at $1.6 billion have not performed well in recent years.

While the Forbes data are probably indicative of relative values among leagues, valuations among individual teams are more problematic. For example, the Los Angeles Dodgers (ranked 38^th valued at $800 million) just sold for more than $1 billion. Sports teams are “playthings” for many wealthy owners and valuations reflect what they are willing to pay.

 May 3, 2012

When it comes to Eurozone solutions, it is interesting how different ideas take hold. The current idea is that if there is a big enough firewall, all will be well. This is the position of IMF head Lagarde and the strong Eurozone countries. So far, there is more than $1 trillion in the Euro firewall, and the IMF is trying to raise more. The US is at best luke-warm and has made no commitment. And just yesterday, Canadian Finance Minister Flaherty said “NO” firewall monies for the Eurozone.

So there is already $1 trillion available plus the $320 billion the IMF has already raised. How will more firewall funding end the Euro crisis? The table below provides a snapshot of the current economic situation in the Eurozone area.

Note the differences within the Euro area. Germany’s GDP is growing and it has a 5.5% unemployment rate. In the other countries listed, GDP is falling which means the unemployment rates of Spain (24.2%), Greece (19.4%) and Portugal (14.4%) will increase further.

Source: IMF

Spain and Greece have huge deficits. Greece and Italy have large government debts. And while Germany is running a current account surplus of 5.2%, the other countries are running large deficits.

Back to the firewall. How exactly will this firewall help eliminate these imbalances? And this in an area that must have the same monetary and fiscal policy for all its countries? It won’t. All the firewall can do is protect the banks.

As I have suggested earlier, these imbalances can only be eliminated if the Euro area is broken up and the countries go back to their own currencies.