Column: Should the Federal Government Join Gambler's Anonymous?

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Mr. Thompson, Professor of Public Administration, University of Nevada, Las Vegas, is the author of Gambling in America: An Encyclopedia.

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The case of Mr. Poindexter and latest move of the federal government to get into the gambling business is troubling, but there are precedents for such bad taste.

The attempt of Poindexter to set up a futures market for when or where terrorists would attack fortunately was foiled and led to his dismissal from government service. The federal government's ventures into the gambling business prior to this episode have not turned out all that well either.

The first federal attempts to sponsor gambling occurred during the Revolutionary War. Four times the Continental Congress sought to sell lottery tickets to raise funds for the army. The results were disappointing. Lotteries have also been used as a means to select conscripts for wars. A lottery drum that was used in 1863 is on display at the New-York Historical Society Museum on the west side of Central Park. The drum appears in good shape, belying the massive property damage which followed its use--damage in the New York City draft riots.

Las Vegas is a city that knows what shame is, bad taste we do better than anyone else, but we do try to stay away from the "sick." Yet sometimes it gets to us. This summer's episode of the "sick" in Vegas was a scheme to entice "players" to pay $5000 each to pose as "great male trackers" and scurry about
"hunting for Bambi." That is, with paint guns in hand, the hunters would seek to find and shoot naked ladies as they ran about in some sort of wooded area. The story was circulated worldwide. But it was a hoax! It didn't happen! If only we could say the same about the Defense Department's scheme, one much more odious than "hunting for Bambi."

But in 1980 when nurses at a hospital in Las Vegas were betting on the times elderly patients would die, sadly it was not a hoax. But the city didn't exactly accept this "sick" episode as "business as usual." One nurse was accused of "pulling the plug" in order to win. She was indicted for murder and put on trial. The jury did not convict her, but the word was out that this betting pool was not acceptable.

The Defense Department notion that there should be betting on when terrorists might strike was perhaps generated by news stories that appeared in the Tel Aviv newspaper, Maariv, in June 2002. The Maariv reported that an illegal gambling ring had been exposed in the southern Israeli town of Kiryat Malachi. The Tel Aviv newspaper reporters had obtained betting forms. The minimum bet was 10 shekels ($3.50). Players would wager on the place of the next terrorist attack by Arabs on Jews. If the bettors choose Eilat and the attack was there, the pay-off was 17-1, the port of Ashod won 13-1, the Azrieli Twin Towers in Tel Aviv came in at 15-1, while general bets on the Tel Aviv region, if "successful" won 9-2, and those around Jerusalem won 6-4 payouts. Again there was little official amusement. Although illegal gambling is tolerated by Israeli authorities for the most part, this gambling was not, and an official investigation ensued and arrests were made.

But there was not shame at the Pentagon, albeit, the days following 9-11 had revealed some strange and heavy futures betting before 9-11 on certain stocks in public trading markets.

The Pentagon Terrorism Futures program actually began to register 1000 traders on Friday July 27, 2003, under the direction of Admiral John M. Poindexter. The program was part of DARPA, a Pentagon unit that seeks intelligence. Traders could put their money on events such as a biological attack on Israel, a North Korean Missile attack, or an assassination. Eight million public dollars were appropriated for setting up the operation. Of this amount $750,000 was actually spent.

It was not a hoax! It was real! The government did not respond in outrage with arrests and indictments and trials. The government ran the program--that is, until it was revealed in discussions by U.S. Senators and the idea was dropped. Minority Leader Tom Daschle was correct to be outraged. He stated, "This program could provide an incentive actually to commit acts of terrorism. (It is a) plan to trade in death." Barbara Boxer simply called the idea "sick."

While in extremely bad taste, the idea has some legitimate origins --in the world of betting anyway. Experts can use betting patterns on sports games for predictions of outcomes. In one system of betting that has been known to produce favorable outcomes for horse race bettors, the bettors closely follow the betting for first place (win) and third place (show) horses. Using their charts and other historical information, the bettor determines the two best horses for the race. He then sees how heavily the horses are bet to place first (win). He accepts that betting as the expected outcome of the race. He then looks to see if one of the two best horses (as bet and according to previous performance) is "underbet" for third place (show).

If there is a major discrepancy in betting patterns for first and third positions for the horse, and the horse has better relative odds for a third or show bet (meaning a first, second, or third place finish), the bettor places a wager that the horse will show. Of course for show bets, the payoffs are not as great as when you bet on the nose (to win), but the payoffs are better than the odds in this system. By casually watching the betting board at Churchill Downs one Saturday a few summers ago, this writer had 6 winning show bets in seven races--made the price of admission and meal and beverages. Credit where credit is due, this is the basis of what is called the Dr. Z. system, named after Management Science alumni professor William T. Ziemba of the University of British Columbia.

The point is that a betting public will have knowledge. However, the scheme works only if the betting public collectively possesses good information, and if the betting public cannot change the course of events. In some very high stakes betting situations, those making wagers care not to wait to see what the public chooses in the way of favorites. Instead they make their bets and then set about to make sure the game ends as they wish it to end. Bribery of players is one tool they may use. The 1919 World Series is a case in point. With betting on terrorist activity, a high roller (and when people invest millions of dollars--they sometimes do funny things) just might seek to have some person perpetrate an act upon which he wagered, even if it is a vicious act. Futures results must be independent of the control of futures investors if there is to be a true market.

This most recent case of federal stupidity in the gambling and sin-games arena is only its latest round. This recent case offers sufficient reason why the federal government must really stand back away from the gambling business. Perhaps at times they can offer some regulatory support for state authorities, but they must not try to offer more. Of course, this is the historical position taken by the Las Vegas gambling industry and I am but mouthing their position--albeit, I believe it: Federal government: STAY OUT OF GAMBLING.

A few recent cases lock up my position.

The private Bicycle Club started operations in Bell Gardens, California, in the early 80s. Under California law the private casino could offer table games that featured non-banking games. These are games where the players compete against each other. The casino deals the cards and charges the players a service fee for participation. The popular games consisted of various kinds of poker as well as several Asian style games, pai gow, pai gow poker, pan, mahjongg. The Bicycle Club was for a period of time the largest table-games-only casino in the world.

In 1990, the facility was seized by the United States Department of Justice under RICO statutes that call for forfeiture of property that was related to organized crime activity. The government determined that the major owners of the Club were involved in the large scale illicit drug trade in Florida. They were convicted of federal criminal actions. The property was placed into the hands of the United States Marshal Service, an agency that was charged with disposing of the facility.

The Marshal Service, however, decided to hold on to the property for a while and operate the casino. They also held on to the existing management team, which previously had worked for the drug lord owners. The manager of the Asian games room continued his business as usual--loan shacking and cheating customers--now under federal supervision. It was not until 1995 that he was removed from his very lucrative post after his conviction for criminal activity at the Club.

The federal trustees who were charged with finding a buyer were paid enormous salaries, one receiving over $700,000 a year. The "gig" would, of course, be up if a sale was actually made, so no good buyers were found for over eight years. In the process trustees kept coming up with "unqualified" and "unlicensable" (under California law) buyers. Allegedly, one prospective buyer was in the Nevada "Black Book," a listing of people so notorious that they are not permitted to set foot in a Nevada casino or even stand in a casino's buffet line.

The Marshal's Service enjoyed being a casino owner as the revenue flow was mostly pure profit--indeed, it was like unappropriated funds for the Service, funds they could spend as they pleased-unaudited. Without having to support capital expenditures, they could make profits and give away the shop at the same time. They did. One place the federal trustee spent profits (which in fact were funds belonging to the people of the United States of America) was on political campaigns. The trustee took federal dollars and gave them to candidates for state office in California. (Concept: Federal Government BUYS state elections). Campaign funds were also used to help anti-gambling forces defeat propositions for establishing card casinos in nearby communities. A Trustee bought ads telling the voters of the towns that casinos would bring, "Prostitution! Loansharking! Gangland attacks! Children playing poker and smoking cigars!

He knew well of that which he spoke. In 1996, the Senate Permanent Subcommittee on Investigations held a hearing in Washington. Witnesses including Club employees testified alleging persistent management problems and "criminal activity at the Club, including skimming of profits, drug dealing, extortion, loan sharking and money laundering."

When the property was finally sold, a minority owner who had been allowed to keep his investment sued the federal government for $150 million claiming that under federal management the value of the property had declined severely.

If that experience of the federal government making a foray into a business that is best left to control of governments like Nevada is not enough, consider this. The "Feds" also went after the leading business in another industry where Nevada has a monopoly (in the United States). Only Nevada has legalized prostitution, but the legality is confined to private licensed brothels located outside of the two urban counties (Clark County and Washoe County, locations of Las Vegas and Reno). The most famous brothel has been the Mustang Ranch. While owned by Joe Conforte it went under bankruptcy protection in 1982, and it persisted as a Chapter 11 property until 1990. Get this, for an eight year period of time the bankruptcy courts--part of the federal government--managed a brothel.

But Conforte kept the books, and over the eight years the biggest remaining creditor became the I.R.S. Finally in 1990, the I.R.S. demanded the $13 million they were due. The money was not forthcoming. The property was seized by the I.R.S. which became its direct owner. Whether the doors were opened for business during any of the I.R.S. ownership period is open for debate, but the Federal Government did own a whorehouse! However, within a year, the property was sold to a group of businessmen for $1.5 million, in effect canceling the tax obligation. The businessmen then hired Joe Conforte as their general manager and the Mustang was back in business, another small business rescued by actions of a caring federal government.

"We the People of the United States" created a federal government to "establish justice, insure domestic tranquility, provide for the general defence, promote the General Welfare, and secure Blessings of Liberty...." We did not create a federal government to go into the business of running whorehouses, running Pai Gow games, or promoting the business of gambling on when terrorists would attack innocent people.

These "sin" businesses, and especially the gambling business, should be left in private hands. And then state government regulators can make sure the wagering is only on games that entertain, not games that kill. And bad taste--leave it to us in Las Vegas, we can handle it better than the federal government can!

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More Comments:

afrucher - 8/28/2003

I agree with your distinction between past govenrment enterprises such as the mustang ranch being run for profit and the DARPA propsed "terror futures market," which would not have been. In addition, I think it is important to point out this distinction. However I'm not sure if the author was insinuating that the pentagon profited from futures trading prior to the 9/11 attacks, I think he was just saying some shadowy figure out there did. If he was making a veiled assertion to that effect, he is a lunatic.

Wesley Smart - 8/26/2003

I don't dispute your point or the authors that the idea was sick, and prone to the danger that someone might actually cheat to win (something that also happens in the insurance business, such as when someone sets fire to their own house in hopes of collecting the payout).

Paragraph eight, though says this: "The program was part of DARPA, a Pentagon unit that seeks intelligence. " It isn't. I stand by my point that this example didn't have a profit motive for the operating entity, while other examples of state-sponsored gambling did. Note his insinuation that the Pentagon was involved in 9/11 related futures trading.

afrucher - 8/26/2003

I don’t think the author was suggesting that DARPA functioned as an intelligence gathering agency. I think he was well aware that its purpose is to identify new methods and mechanisms for other agencies to conduct gathering activities. Intelligence has become a cross spectrum priority of the national defense apparatus and DARPA has, correctly, shifted all related issues to the top of their list of priorities (as we see not just with the proposed “terror futures market,” but also with their equally ill conceived national “gait” data base).

In addition, and more to the point, the “sick” aspect of the futures trading fiasco applies to the possible profit-by-terror scenario of any entity, be it the federal government or an individual. And this is a risk inherent to the concept, as it is the personal incentive factor that drives and defines the so called unsurpassed accuracy of futures markets in the prediction of upcoming pricing conditions.

Wesley Smart - 8/23/2003

Mr. Thompson no doubt knows a great deal about the history and scope of gambling, and for his knowledge he is no doubt respected. However, this piece and his analysis is seriously off-base. The Pentagon program, as was widely explained when revealed, was not a program designed to make money off of terrorist activities, as Mr. Thompson insinuates. This is in direct contrast with the other examples that he cites, particularly the operation of a gambling center by U.S. Marshals. DARPA's program was designed as measure to tease out information (as he insightfully demonstrates for the horseracing field) in an area where the U.S. government is not one of the entities that possesses all the information but certainly would like to. Thus: the United States government was not running a gambling operation with the intention of making a financial profit on the outcome!!

At a more core level, Mr. Thompson's argument suffers from a serious misunderstanding of what DARPA's role actually is and its reason for setting up the program. It is not, as he suggests, an entity "that seeks intelligence" [except in its potential employees!] It is the Defense Advanced Research Projects Agency, and its job is:

"to develop imaginative, innovative and often high-risk research ideas offering a significant technological impact that will go well beyond the normal evolutionary developmental approaches; and, to pursue these ideas from the demonstration of technical feasibility through the development of prototype systems." [see]

In other words, its a place where scientists and researchers sit around and try to come up with new ideas on how to do things, both weaponry and tools for use by the military. Among its other creations (over the years) was the forerunner of the internet. The Defense Department unit that seeks intelligence, by the way, is the Defense Intelligence Agency.