Transcripts For CNBC 60 Minutes On CNBC 20130812

The New York Stock Exchange was the center of the financial world. But today most trading in stocks is done elsewhere by Robot Computers that buy and sell in microseconds, faster than you can blink an eye. And the computers have done so well that some institutional traders have come to believe that the game is rigged. Are humans ever involved in the trading . Humans are not involved in the trading because humans are way too slow. [ticking] there are close to 850,000 of them in the United States, twice the number of atms. The new slot machines, the Main Attraction at casinos, are like hightech video games. And states across america are increasingly relying on them to raise revenue 38 states and growing, including pennsylvania. But the former governor ed rendell didnt appreciate some of our questions about it. You guys dont get that i do get it. Youre simpletons. Youre idiots if you dont get that. Welcome to 60 minutes on cnbc. Im steve kroft. In this edition, we look at the world of big deals on wall street and in las vegas and examine the impact of highspeed computers in both places. We begin with perhaps the most famous investor of them all, Warren Buffett. His fame extends far beyond wall street, his oldest son, howard, not so much. And yet hes the person Warren Buffett wants to succeed him as chairman of Berkshire Hathaway, the mega Holding Company that buffett built. For most of his adult life, howard has been a corn and soybean farmer in nebraska and illinois. And as lesley stahl first reported in december of 2011, howard doesnt live the high life, and he loves getting down in the dirt. This is the man wholl become the next chairman of the companyacquiring, investmentpicking, moneymaking machine Berkshire Hathaway if Warren Buffett has his way. Howard is a farmer who would rather dig up the ground and drive big machines than sit in a boardroom. Were you stunned . Were you surprised . I was surprised. But no sign that hes about to leave . He wont leave until hes buried in the ground. I hate to put it that way. This is no gentleman farmer. Howard buffett works his 1,500 acres in pana, illinois, himself. Were gonna go pick some corn . Yeah, were gonna pick corn. This year, he harvested 87,000 bushels of corn with his 300horsepower combine that he runs handsfree off gps. Youre like a kid, you know, that can ride his bike without his hands, right . Its a big toy. Its a big toy. But its expensive. But with corn prices soaring, he can afford it. And incidentally, even a farmer named buffett can get farm subsidies. Howard received 300,000 in federal payments over 13 years. Heres something you said once. Heres a quote it seemed nothing i could do would be as successful as what he did, meaning dad. That comment would mean that in the worlds eyes, you know, i would never be seen in the same success as he would, particularly in investing and in business. Thats okay. I mean, you know, and my mom and dad always made it clear that that was okay. Theres no sense in trying to compete with me, because hes not gonna play my game. He should have his own game. Grain shipments were down a lot last week. Warren buffett says he always told howard to find something he loved as much as he loved making money. Naturally i have a lot of top secret stuff, but we got to keep that between us. You always do. So youre all business. I think of you as mr. Indoors. Youve got it. I got it. So here you have this son. I know. Hes a farmer. Hes outdoors. Hes down in the dirt. Are you sure hes your son . Well, i think thats worth checking out. Youll have a big exclusive. Well, he is really different. Explain that. Well, he likes not only farming. He likes machinery too. I mean, i think he likes doing big things, you know, moving dirt. He just is happiest when hes working hard. Im happiest when im just kind of sitting around watching football. Howards different in another way. Hes an active, handson philanthropist who visits up to 20 countries a year. The howard g. Buffett foundation focuses on world hunger, spending 50 million a year on projects like feeding programs in ethiopia and agriculture education in afghanistan. And he records it all through the lens of his own camera. You all of a sudden begin to kind of look around, and you notice theres a lot of people around that dont look too good. And, you know, theyre hungry. And they dont have great living quarters. They may not have access to water. They dont have good sanitation. You were seeing farmers who couldnt feed themselves . Oh, absolutely. I looked at that, and i thought, you know, this is wrong. I understand agriculture. I should be able to do something about this. [ticking] coming up the challenges of philanthropy. You know bill gates. Have you said to him, 80 of what youre throwing down there in africa is not gonna work . Well, ive said it a little differently, i think, and that is that we need to quit thinking about trying to do it like we do it in america. The buffetts and bill gates when 60 minutes on cnbc returns. [ male announcer ] come to the golden opportunity sales event to experience the precision handling of the lexus performance vehicles, including the gs and allnew is. This is the pursuit of perfection. Always go the extra mile. To treat my low testosterone, i did my research. My doctor and i went with axiron, the only underarm low t treatment. Axiron can restore t levels to normal in about 2 weeks in most men. Axiron is not for use in women or anyone younger than 18 or men with prostate or breast cancer. Women, especially those who are or who may become pregnant and children should avoid contact where axiron is applied as unexpected signs of puberty in children or changes in body hair or increased acne in women may occur. Report these symptoms to your doctor. Tell your doctor about all medical conditions and medications. Serious side effects could include increased risk of prostate cancer; worsening prostate symptoms; decreased sperm count; ankle, feet or body swelling; enlarged or painful breasts; problems breathing while sleeping; and blood clots in the legs. Common side effects include skin redness or irritation where applied, increased red blood cell count, headache, diarrhea, vomiting, and increase in psa. Ask your doctor about the only underarm low t treatment, axiron. And experience the connectivity of the available lexus enform, including the es and rx. This is the pursuit of peti Warren Buffett wants his oldest son, howard, to succeed him as chairman of his multibilliondollar Holding Company, Berkshire Hathaway. Its not unusual for a father to want his son to take over the family business. But its a little unusual in this case. Howard doesnt pick stocks, he picks corn. Howard buffett is a farmer. And as lesley stahl discovered in december 2011, he devotes a lot of his time and money to helping others learn how to farm better. [rooster crows] in places like el salvador, hes funding a Training Program for 5,000 poor farmers like carla and edwin trujillo. They learn new planting and fertilizing techniques to improve the quality of their corn and red beans. Carla, im howard. Hola. Mucho gusto. Buenos dias. We tagged along as howard inspected their sixacre plot in the tiny village of san juan el espino. And shes got an irrigation system. No big combines here. And their irrigation . It consists of hoses connected to a barrel of water brought in by a horse. Howard wanted to check on the quality of carlas corn. Does she mind . Tell her i wont destroy her corn crop. And that meant doing his favorite thing. Youre gonna dig it up . Yeah. Come on. He didnt just dig up her corn. He was like a doctor doing an invasive exam, pulling up the roots, ripping it open. You always have tough husks in this part of the world. And cracking it in half. His verdict . Youve done an excellent job with what youve got. Since howards program started, carla has doubled her income. In one way, at least, he is like his dad. He insists that the farmers learn accounting and managing credit and that they buy their own seed. Theyre looking for the standard kernels. Howard buffett is making a big difference but on a small scale. He started out giving farmers the best of modern agricultural technology. But now he only teaches methods they can afford themselves after his projects end. Howards passion for farming started early. When he was just five, he turned the family backyard into a cornfield. His father was fast becoming a multimillionaire, but the family always lived modestly. Did you know, as a kid, that you were rich . No, not at all. And the greatest story is my sister, who, when you had to go around the room in grade school and answer, what does your father do . And, you know, we knew him as a security analyst, and we had no idea what that really meant. And so she basically said, well, hes a security guard. And thats what we thought for a long time. We just didnt know any differently, you know. As his fathers fame and fortune grew, howard seemed to zig and zag on his own path, dropping out of three colleges, one after the next. You must have been worried. I wasnt. You werent . No, i wasnt. He just was kind of finding what he wanted to do. And it made no difference to me whether he found it in a college or not. Really . Now, that is an unusual parent. It is an unusual parent. But it was the way both his mother and i felt. None of our kids graduated from college. Now, if they pool all their credits, we can get a degree. I mean, i thought we ought to do that and pass it around. Once howard settled on farming, warren bought land for him but then made his son pay rent and tied it to his body weight. So if you gain weight, your rent goes up, and if you lose weight, the rent goes down. Something like that, yeah. Financial incentives are supposed to work in some things. They dont work very well in weight, incidentally. But why wouldnt you just give your son a farm . Well, i just dont think thats, you know, the way to bring up a son. I mean, i dont think hes entitled to be given a farm just because his last name is buffett. We didnt want them to see the world, you know, through the lens of a superrich kid that got everything he wanted. You just didnt want spoiled little rich kids. Yeah. Yeah. Warren buffett was famously unwilling to give his money away to charity. Im turning it over to you. So it came as a big surprise five years ago when he donated the vast bulk of his fortune, some 31 billion, to the Gates Foundation. Its a big challenge for us to make sure that this money gets used in the right way. Bill gates is often described as warrens third son. They vacation together, spend birthdays together. So the size of his gift to gates left an impression that the buffett children were given short shrift. Warren buffett doesnt believe in inherited wealth. I dont believe in lots of inherited wealth. I havent been spending my life trying to figure out how to transfer wealth and not have taxes and all of that so there can be a dynasty of all kinds of little buffetts going around for hundreds of years never having to do anything. But dont cry for those little buffetts. Howard, his brother, peter, and sister, susan, have gotten multimilliondollar gifts of money and Berkshire Hathaway stock from their parents. So while hes not on the fortune 500, howard is by any measure a wealthy man. On top the outright gifts, each buffett child is getting 1 billion to go toward their philanthropy. But all that pales next to the 31 billion thats going to the Gates Foundation. So did you know, as far back as you can remember, that you were not going to inherit his money . Yeah, yeah. Youve sort of always known that as you were growing up . Yeah. And from time to time, that was a little frustrating. cause you wanted it, or what do you mean . Well, i just mean, you know, you feel like that there are a lot of things you could do if you had more money. And i think that way even in the foundation. But heres the irony. Bill gates is spending a huge chunk of Warren Buffetts money on poor farmers in africa, giving them hybrid seeds and synthetic fertilizers. Its exactly the kind of hightech approach howard tried and now feels is doomed to fail with farmers who make barely 1 a day. Theyre pushing a system that really is similar to what we have outside this door. But isnt that wonderful . No. What i would argue is that at some point, those guys are gonna go home and the moneys gonna not be there. Its exactly the same thing we did. And i dont feel it worked. You know bill gates. Have you said to him, 80 of what youre throwing down there in africa is not gonna work . Well, ive said it a little differently, i think, and that is that we need to quit thinking about trying to do it like we do it in america. Howies the farmer here, so he can speak with knowledge. Im the city boy on the panel. Bill gates and Howard Buffett were both honored recently at the state department for their work on combating world hunger, work underwritten in both cases by the largesse of Warren Buffett. So your father gives all his money to gates. You come out and tell us what hes doing is all wrong. Im not saying its all wrong. Well, a lot of its wrong. Little bit of sibling rivalry there . No. Maybe . You know, once in a while, we call him brother bill. Exactly. No, you know what . Bill gates is the smartest guy in the world next to my dad, maybe. I better say that if im on tape. How old are you . Im 81, but i feel good. Yeah, you look great. Warren buffett says if the Berkshire Hathaway board approves his son as chairman after he dies, howard would not be paid and would not run the company day to day. Howard would be what warren calls the guardian of the culture. What were you worried about . Well, you worry that somebody will be in charge of berkshire that uses it as their own sandbox in some way, that changes the way that decisions are made in reference to the shareholders. You know, the odds of that happening are very, very, very low. But having howie there adds just one extra layer of protection. I guess someone whos on the outside looking in would say, but what does he know about this business . Oh, he knows plenty about the business, in the sense of the values of the business, sure, sure. I mean, he doesnt know what insurance policy were writing today, you know, or how many carloads the bnsf carried last week or something. But he knows the values of it. Besides, howard is the only one of buffetts children who has been a Corporate Executive in agribusiness and the only one who has ever served on the berkshire board. Let me just make sure i understand you. You will not be picking investments. Absolutely not. And i shouldnt. I mean, you know. Do you have concerns about taking over this big role . Well, as long as i can keep farming, im okay. And as long as he can keep funding projects in remote regions of the world, where, as we found, he is still working on becoming a household name. What did you know about Howard Buffett before . Had you ever heard of him . No a esta hora y. Never heard of him . Nada, nada. Had you ever heard of his father . He has a very famous father, Warren Buffett. Had you ever heard of him . Si. Oh, im impressed. As we reported, Howard Buffett doesnt always agree with bill gates on the best ways to help Farm Development in africa. But that doesnt mean they cant work together. Towards the end of 2011, the Howard Buffett foundation announced it was joining with the Gates Foundation to support the work of n2africa, a dutchled initiative to improve soil quality and increase agricultural productivity in eight african countries. The 2 million donation from the Buffett Foundation will support work in sierra leone and liberia. [ticking] coming up making money faster than you can blink. Are humans ever involved in the trading . Humans are not involved in the trading because humans are way too slow. When 60 minutes on cnbc returns. It starts with something little, like taking a first step. And then another. And another. And if you do it. And your friends do it. And their friends do it. Soon well be walking our way to awareness, support and an end to alzheimers disease. And that . That would be big. 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And as we first reported in october 2010, the securities and Exchange Commission and members of congress are asking some tough questions about its usefulness and potential dangers. [bell ringing] for 150 years, the floor of the New York Stock Exchange was the center of the financial world, the economic engine that helped American Business raise capital and create jobs. Today its still the public facade of wall street and a television backdrop for reporters relaying financial news. But less than 30 of the trading is conducted here now. And the specialists and the noise of the floor is being replaced by the speed and quiet efficiency of computers, and the action is moved elsewhere. There are now more than 80 alternative Trading Systems around the country plus two electronic stock exchanges which most of you have probably never heard of b. A. T. S. And direct edge. Theyre owned by the big banks and by highfrequency trading firms. And neither of them would give us an interview or let us inside to film their operations. But they trade more than a billion shares a day at blinding speed, and most of those bets are being made by machines. The players range from firms like goldman sachs, barclays, credit suisse, and Morgan Stanley to hedge funds and smaller operations like tradeworx, which is the only highfrequency trading firm that would talk to us or let us in. Its run by manoj narang and a small group of mathematicians and scientists called quants, which is short for quantitative analysts. And their highspeed computers trade 40 million shares every day. Are humans ever involved in the trading . Humans are not involved in the trading because humans are way too slow to trade on the kinds of opportunities that were trying to capture. Were trying to capture opportunities that exist for only fractions of a second. This stock over here was down 1. 8 for the past week. The tradeworx computers dont care where a stock is going to be trading next year, next month, next week, or even tomorrow, because theyre going to be in and out of it today, in a matter of minutes. Whats the point of buying and selling a stock that you hold for three minutes . The same objective that all other participants have in the market is to make money. You buy low, sell high. Thats how you make money. And the computer will know when to buy and when to sell . Sure, the computer is monitoring realtime data, and it knows what to do with that data and how to make decisions based on that. What narang and other highfrequency traders tell their computers to do is to make a profit of a penny or less 40 million times day. They scan the different exchanges, trying to anticipate which direction individual stocks are likely to move in the next fraction of a second based on current Market Conditions and Statistical Analysis of past performance. But the computers have no real understanding of who these companies are and what they do. So it doesnt really know whether a company is well managed or whether not at all. And it doesnt care. It doesnt know who the ceo is or what that ceos background is, doesnt know the management team. Whether hes going through a divorce. Exactly. Whether hes just been sued for sexual harassment. Right. It knows information that you can quantify about the company. Its all math. Its all probability and statistics, a procedure that you can define precisely. The trading instructions are programmed into the computers with complicated mathematical formulas called algorithms. Narang showed us how it works with a simple hypothetical example he uses for demonstration purposes. Im going to test a strategy where if a stock went down 5 for the past week, im going to buy 5 of that stock. And if a different stock went up 10 last week, im going to sell 10 of that stock. And im going to do that for every stock thats in my tradable universe simultaneously. Which is how many . Which is over 4,000 stocks, about 4,500 stocks. The strategy, which could only be successfully executed with a highspeed computer, would result in almost as many losing trades as winners but over the past eight years would have produced a tidy profit, something that narang and other highfrequency traders have gotten used to. And how successful have you been . Weve had two or three days in a row where we lose money. But weve never had a week, so far, where we lost. Weve never had a month that was a loser for us. [ticking] coming up is highfrequency trading good for business . Do these highfrequency trades have anything to do with market fundamentals . Valuation is irrelevant. Its all about just moving the price up and down the ladder all day long. Thats ahead when 60 minutes on cnbc returns. 0 we do . I took the trash out. I know. And thank you so much for that. 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So now weve turned her toffee into a business. My goal was to take an idea and make it happen. Im janet long and i formed my Toffee Company through legalzoom. I never really thought i would make money doing what i love. [ robert ] we created legalzoom to help people start their business and launch their dreams. Go to legalzoom. Com today and make your business dream a reality. At legalzoom. Com we put the law on your side. In 2006, highfrequency traders accounted for 30 of the stock trades in the u. S. Recent estimates have ranged as high as 70 . And institutional traders like joe saluzzi of Themis Trading llc have come to believe that the game is rigged. How can you make money day after day . There was even one firm that said they made money four years in a row, every single day. Well, you have to be getting information that other people dont have. Otherwise, statistically, thats an impossibility. Actually, highfrequency traders are getting the same Market Information that joe saluzzi gets. Theyre just getting it a little bit sooner. Its only a few fractions of a second sooner, but if youre running supercomputers, saluzzi says, it can be an eternity. What youre saying is, the people with the Fastest Computers have an advantage. They get the best deals. Every time. Absolutely, theres no doubt about it. I mean, if theyre spending that kind of money and theyre using that type of infrastructure, theyre doing it for a reason, and it is to get a speed advantage in that respect. Its not just the speed of the supercomputers thats important. Its also their physical location. The closer they are to the stock exchanges server, the quicker theyll be able to get critical Market Information. Well, this has been in the works for at least four years at this point. Larry leibowitz, the chief operating officer of the New York Stock Exchange, believes its massive new data center in mahwah, new jersey, will help the exchange regain some of the market share its lost to electronic trading platforms. And hes busy persuading traders to lease space in these stark black boxes for their supercomputers. This is one of the pods . This is one of the pods. This is the nerve center. Its called colocation, a service that highfrequency traders will pay tens of thousands of dollars a month for, and includes access to raw data from the exchange that is almost instantaneous. You know, were getting down to, you know, how fast can the electrons travel at this point . They can predict the price of a stock before you can because of the speed that theyre using. So they actually see the trades before you do . They can see order flow coming into the exchanges before a regular person off of, say, a bloomberg or somebody who doesnt have the colocation, the data feeds, and all the other Sophisticated Technology that they employ, which is not cheap, by the way. Its extremely expensive to set these things up. How much faster do they see it . It could be a few milliseconds. How much of an advantage is a couple of milliseconds . Millions, if not billions, of dollars a year. That edge, joe saluzzi claims, has made highfrequency traders the new insiders on wall street. And he says he spots signs of predatory behavior every day. Saluzzi, who trades large blocks of stock for institutional investors, says the supercomputers are programmed to place and then cancel thousands of orders a second, trying to sniff out which way a market is moving in order to jump in ahead of big rallies and sell off before big declines. He calls them parasites who exploit a technological advantage to suck money out of the market and add no value. Does it raise capital for companies . Absolutely not. If anything, its distracting from the capitalraising process. Do these highfrequency trades have anything to do with market fundamentals . Valuation is irrelevant. Its all about just moving the price up and down the ladder all day long. Each day is new. Each day starts fresh. So you have to question the true valuation of the markets now. Larry leibowitz of the New York Stock Exchange says there is absolutely no evidence that small investors are being hurt by highfrequency trading. Most of them, he says, dont care about pennies when theyre buying and selling stocks, and theyre in it for the longer haul. Look, theres always been charges for as long as trading has existed that people are frontrunning orders, manipulating stocks. This is nothing new. I think now you add to it the element of the mysterious element of the computer, and it makes people even more mistrustful. Leibowitz and other proponents of highfrequency, highspeed Computer Trading say its performed a valuable function tripling volume, reducing stock spreads and transaction costs, and providing liquidity to the markets. Liquidity means that if you want to buy or sell a stock, you could do it right away, and you could do it at a fair price. Thats what liquidity means. And without shortterm traders, there is no liquidity. Traders like manoj narang say their presence in the market is making it cheaper and easier for everyone to buy and sell stocks. But regulators and lawmakers like senator ted kaufman of delaware have other concerns. Clearly, liquiditys way up. But what i say is, liquiditys always trumped by transparency and fairness. You cant have fairness if you dont have transparency. Senator kaufman, who has both business and engineering degrees, says hes a big fan of technology, but he thinks its gotten way ahead of financial regulators ability to monitor it. Right now, its not even possible to determine for sure who is making highfrequency trades or what theyre telling their computers to do. We do not know whats going on inside those boxes. Theres all types of allegations about whats going on inside there. And basically what can happen is, you can have these meltdowns where you can have a computer just go crazy and cause all kinds of problems. Come on which takes us to the mini crash on may 6, 2010, and one of the scariest rides in stock market history, when the dow industrials at one point plunged 600 points for no apparent reason. Turns out it was triggered when a mutual funds computer dumped 4. 1 billion of securities on the market in a 20minute period, which were then gobbled up by the computers of highfrequency traders and sold almost immediately, sending other computers and traders heading for the exits. The events of may 6th scared people. I dont think theres any question about that. S. E. C. Chairman Mary Schapiro had already proposed rule changes before may 6th that would allow regulators to track and tag highfrequency traders, and she is now considering further measures. Are you comfortable with computers making, you know, 50 to 70 of the trades on wall street . One of the concerns is, if one goes wrong, if it operates in an unexpected way, given Market Conditions, whats the impact of that algorithm that has behaved in an unexpected way on lots of other investors in the marketplace . And chairman schapiro says its happened since the may 6th crash after Circuit Breakers were put in place that automatically halt trading in a stock that moves more than 10 in a fiveminute period. A number of times that those Circuit Breakers have been triggered has been because an algorithm operated in a way nobody intended for it to do, causing a stock price to go wildly out of range. The crash contributed to the crisis in confidence on wall street. Since last spring, people have pulled 70 billion out of mutual funds. And the biggest concern of chairman schapiro and senator kaufman is that average investors have lost faith in the integrity of the system. Is that correct . Yes, thats true or correct. And ill give you an example. When i was at wharton, a professor came to me and said, you know, theres a river of wealth that runs through this country. Just a very small number of people know that it exists. Some people can stand on a high hill and see it off in the distance, some people can get up to the edge, and theres other people that are swimming in it. Thats the perception American People have about whats going on on wall street right now. They believe theres a small number of people who are swimming in this river of wealth. There are a lot of people out there who think that the stock market is rigged, rigged in the sense that there are people out there who have advantages the insiders, the big companies. Yup. And i think that we have to do a better job of, first, obviously making sure its not the case. But we cant be evasive about it. We have to make changes that make sense, that give people more confidence in the market, add more transparency, and make people feel like, this is a place i can trust my Retirement Savings to. Since we first aired this story, the securities and Exchange Commission has proposed further reforms. But it hasnt slowed down the highfrequency traders, who are now moving into currency and commodity markets. [ticking] coming up the high cost of highspeed slot machines. It takes your soul. It takes your humanity. Taking a big gamble, next on 60 minutes on cnbc. Peace of mind is important when youre running a successful business. So we provide it services you can rely on. With centurylink as your trusted it partner, youll experience reliable uptime for the network and services you depend on. Multilayered Security Solutions keep your information safe, and secure. And responsive dedicated support meets your needs, and eases your mind. Centurylink. Your link to whats next. Because what you dont know can hurt you. Urance, what if you didnt know that its smart to replace washingmachine hoses every five years . What if you didnt know that you might need extra coverage for more expensive items . And what if you didnt know that teen drivers are four times more likely to get into an accident . sup the more you know, the better you can plan for whats ahead. Talk to farmers and get smarter about your insurance. We are farmers bum pa dum, bum bum bum bum [ male announcer ] its a golden opportunity to discover the heartpounding exhilaration beyond the engineering. Come to the golden opportunity sales event to experience the precision handling of the lexus performance vehicles, including the gs and allnew is. This is the pursuit of perfection. It wasnt that long ago that if you wanted to gamble, youd have to travel a long way. Not anymore. Today to shoot craps or play slots, all you need is a little gas in your car. Theres probably a casino in your state or right next door. As lesley stahl first reported in january of 2011, more and more states across the United States are relying on revenue from casino gambling to help solve their budget deficit. The Main Attraction at these gambling halls is the new slot machines. We americans spend more money on slots than on movies, baseball, and theme parks combined. But with slots, there is the potential for a dangerous side effect gambling addiction. And more people are addicted to slots than any form of gambling. [slot machines beeping] this is what slot machines used to look like, where you pull the handle and hope for three of a kind. [slot machine beeping] this is what they look like today. The modern slots are like hightech video games that play music and scenes from tv shows. You can play hundreds of lines at once, and instead of pulling a handle, you bet by pushing buttons, which means each bet can be completed in as little as 3 1 2 seconds. It looks like great fun, but it can be dangerously addictive. Whether or not its their intention, the gambling industry is designing machines that can addict people. Mit anthropology professor Natasha Schull has studied gambling addiction for over 15 years. Shes interviewed gamblers, casino owners, and slot machine designers. Do you think that most people would even think that a machine could addict you, that a machine can do the same thing that a drug could . What addiction really has to do is with the speed of rewards. And these machines, if theyre packing 1,200 hands per hour into play, youre being exposedyou could see that as being exposed to a higher dose. A higher dose, says schull, because all that speed means more bets, and that means more excitement. And no machine is better for that than the penny slot, the most popular game on the casino floor. Because the bets are small, you can place hundreds of them at a time. Another core aspect of their addictiveness is their continuous nature. Youre not interrupted by anything. Youre not waiting for the horses to run. Youre not waiting for the guy next to you to choose his card to put down. Theres no roulette wheel spinning. Its just you and the machine. Its a continuous flow without interruption. I found that the machines were wonderful. I loved the excitement. I loved the people. I loved the camaraderie, the high fives when you win. It was just very exciting. Sandi hall lives only a short drive from thousands of slot machines in rhode island and connecticut. Married with two daughters, she worked in a bookstore and used to look at the casinos as an entertaining break. But eventually she was playing slots so much, she burned through her retirement funds. My every thought and every being, if i wasnt at the casino, i was figuring out how i was going to get there, where was i going to get the money . You know, you sound like a heroin addict. It takes your soul. It takes your humanity. And you know that youre going down and youre going down and youre going down. I becamefrom a nice person, i became a manipulative, deceitful, lying person. Lies just manufactured themselves. You didnt even have to think about it. Marilyn lancelot, another slot addict, ended up embezzling over 1 4 million from her employer in phoenix, arizona. My daughters lived within two houses away. They did not know i was stealing money or gambling until one day, seven police cars drove into my yard and took me away in handcuffs. Thats how they found out. Handcuffs . Yeah. This is gambling for gamblings sake. And the aim is not to win a jackpot. Shes not talking about most people who go to casinos. Shes only taking about addicted gamblers. Are you saying that theyd rather stay in the game than win the money . Yeah, not only am i saying that, but i found instances where gamblers who won a jackpot then became irritated because it stopped the flow of play. Researchers at the university of waterloo in canada measured how players respond physiologically while they gamble and showed that the new machines can make them think theyre winning even when theyre not. The gambler almost always gets some money back. If he puts in a dollar, he might get back 50¢. But the sounds and flickering lights trick his brain into thinking he came out ahead. The constant feeling of winning creates so much pleasure, says Natasha Schull, that regular players can slip into a trancelike state, a place she calls the zone. One gambler told me that when hes in the zone, he couldnt remember his childrens name. You go into that trance, that zone, that box. Nobody can touch you. You have escaped from reality. No one can ask you for anything. When you sat in front of those machines, did you get in the zone . Did you have a buzz . I was having a love affair with that machine. It was the same as a kiss from a lover. Really . It was sweet, sweet. [ticking] coming up the gambling debate heats up. Youre not getting it. Those people would lose that money anyway. Dont you understand . Thats next when 60 minutes on cnbc returns. 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[ baby giggles ] [ male announcer ] you wait all year for summer. This summer was definitely worth the wait. Summers best event from cadillac. Let summer try and pass you by. Lease this cadillac srx for around 369 per month or purchase for 0 apr for 60 months. Come in now for the best offers of the model year. [ticking] playing slots is one of the most popular forms of gambling in the United States. Its claimed that new highspeed slot machines are fueling a gambling addiction. But not everyone is convinced, including howard shaffer. Hes the director of the Harvard Medical School division on addiction and the man the gambling industry loves to quote. Your position is, machines are not addictive, that machines, inanimate objects, are not addictive . Machines didnt make me do it. If slot machines caused addiction, then most people who played slot machines would develop addiction. And its the opposite. But at one point, you said slot machines were the crack cocaine of gambling. I did say that. And how does that square with what youre telling me today . Not everybody who uses crack cocaine becomes addicted. Yeah, but nobodys gonna sit here and try to tell me crack cocaine isnt addictive. And if this is like crack cocaine, the conclusion is that its addictive. I dont come to the same conclusion. How could you not . Because the majority of people that have used cocaine have not developed cocaine addiction. Only a small minority have. And the same would be true with gambling. The problem is that that small minority that does get addicted is hit hard. You are getting a little dose of gambling in your brain every three seconds. Its a gambling i. V. , and theres a drip, drip, drip. Doctors robert breen and Henry Lesieur are gambling Addiction Specialists at rhode island hospital. Theyve treated 1,300 slot addicts who, when they try to stop, look like heroin addicts in withdrawal. And theyre coming in, and, quite literally, they have shakes. Really . The cravings are theyre physically having these responses. And you tell yourself, they got to be on something. And it turns out that theyre withdrawing from the gambling. Slots in particular. And yet state after state is turning to slots as an easy way to raise revenue and increase jobs. And no state has been more aggressive in luring gaming in the last few years than pennsylvania, where the opening of the sugarhouse in september 2010 made philadelphia the largest u. S. City to house a casino. Former governor ed rendell has championed the casinos. Look, gambling is not anything we should say, oh, thank the lord. We have gambling. But it is a decent way to raise revenue where the upsides thats produced is significantly better than any downside that comes from it. You said there were downsides to gaming. What are they . The biggest downside is that some people lose their paychecks. But understand, lesley, theyre not losing their paychecks because pennsylvania instituted gaming. Those people were losing their paychecks in atlantic city, in delaware at the racetracks, or in west virginia. So why not lose it here . Is what youre saying. Well, if theyre gonna lose it anyway, lets get the upside. We were getting all the downside and none of the upside. The upside, he says, is the 1 billion the state got in gambling revenue in 2010, which was used to provide a 200ahome property tax reduction plus more relief for senior citizens. People have been gambling since organized society was formed on the banks of the tigris and euphrates. They were gambling. And they will gamble as long as there is life on this planet. And thats a fact. No ones saying that people cant gamble. This is about government using gambling to prey on human weakness for profit. Les bernal is head of the National Organization stop predatory gambling. He and massachusetts state senator sue tucker have been fighting a move to bring casinos and slot parlors to the bay state. Were in the worst economic crisis since the great depression, and the daily voice of government to most americans is, were gonna push casinos, and were gonna push lottery tickets. Well, but you have a situation where states are desperate. Theyre way over budget. They have to find revenue somewhere. They know people will gamble. As a revenue raiser, it defies every principle. Its regressive. In other words, it takes far more money out of lowerincome peoples pockets than higherincome. It is cannibalistic. In other words, it eats other forms of revenue. When you have your citizens dumping 2 billion down the slots, theyre not buying a new car, and you lose that tax. You brought these casinos to this state. Do you ever just say to yourself, oh, my god, there are a lot of people who are suffering, and theyre taking whatever money they have. Lesley, you dont listen. And theyre throwing it away in these casinos . And do you ever just say, oh, what have i done . You dont listen. Anyone who has that bent would be doing it in other places had pennsylvania not legalized gambling. The counterargument is that youre creating new gamblers and lots of new gamblers. Youre not creating new gamblers. Well, cause its down the street, byi mean, just logically those people play the lottery. They bet on football. How much money is bet on the super bowl . People are losing money for the state to get its revenue. Theyre losing money. Let me answer this. You haveive always ive known you for two or three decades. Youre a very smart person. But not now. But youre not getting it. Im dumb now. Youre not getting it. Those people would lose that money anyway. Dont you understand . Our pressing him on this point led to this. You guys dont get that youre simpletons. Youre idiots if you dont get that. We couldnt figure out why all the emotion. But his main point was that gambling is good entertainment and people should be allowed to make their own decisions about it. But since the first casino opened in pennsylvania in 2006, calls to gambling casino hotlines in the state have tripled. Sandi hall says her problems didnt start till three casinos opened near her. I cannot read my local newspaper without having fullpage ads of Upcoming Events and slot play and free this and free that. The exposure is phenomenal because of the proximity of three casinos. Fewer than 25 of massachusetts residents went out of state to gamble. But thats a lot of people. 75 didnt. I know, but 25 . Thats the group the industry wants. They want the 75 that can get on the t and go to a nearby casino and get in trouble with gambling. Thats the playbook. The longrunning massachusetts casino debate came to a close on november 22, 2011, when governor Deval Patrick signed into law a bill allowing casino gambling in the bay state. The new law allows for construction of three casinos in separate regions of massachusetts. Echoing many other governors around the country, governor patrick says that the new casinos will put people to work and strengthen the massachusetts economy. Well, thats our edition of 60 minutes on cnbc. Im steve kroft. Thanks for joining us. Er this program contains mature sexual content. Viewer discretion is advised. This is a cnbc original production. Woman its here, and people wanna see it. Man 1 i think that people enjoy seeing sex a lot. Man 2 i was fully addicted to the material. Woman i had a business drive like, i wanted it. I wanted to be a sex symbol. I always have. Man 3 we made hardcore into hard to believe core. Woman when i was miss usa, i had certain responsibilities to uphold, and i did that. Why, if people can get it free, why pay for it . Man the first thing we need to do is combat piracy. Woman it really actually turns me on that people watch me. Female audience is the largest growing demographic, by far. Man i was acting out sexually, even in spite