Gambling on gambling
Are Vegas casinos in need of a bailout? And could it ever happen?
Wed, Nov 26, 2008 (midnight)
Photo Illustration by Ryan Olbrysh
Las Vegas, like Detroit, is a one-industry town. Call it cars or gambling, but in the end a widget is a widget; the casino industry is the all-purpose engine that funds the existence of the Las Vegas Valley. From restaurants to shopping to companies that supply catering, to the companies that cater to the needs of conventions and down to the advertising in a locals’ alternative weekly (go ahead and thumb through the Weekly’s advertisers and see how many have an address in the resort corridor), we all depend on the casino industry. And, like Detroit’s, our industry is in deep trouble.
The Las Vegas Sands Corporation only recently pulled itself out of a dangerous financial nosedive thanks to vast loans by majority shareholder Sheldon Adelson from his personal, yet fast-diminishing, fortune. He started out owning more than 70 percent of the company and now controls just more than 50 percent. Adelson was trapped by the credit crunch, poor prognostication regarding economic trends and, with the value of hindsight, some very boneheaded decisions about spending money on expansion in other markets.
Then there are the companies that performed stock buybacks at the top of the market that took profitable companies such as Station Casinos and Harrah’s out of the stock market and saddled these new private companies with huge amounts of debt. The goal could not have been less realized. The idea behind going private was to free the companies from the pressure of the market’s short-term thinking in exchange for private ownership’s perceived greater willingness to defer profits to invest billions into opening new resorts—while, of course, waiting years for any return.
- From the Archives
- The shape of things to come (8/7/08)
- Beyond the Weekly
- Even major players feel serious squeeze as revenue drops, debts rise (Las Vegas Sun, 10/19/08)
- Signs are dim, but is Vegas’ future? (Las Vegas Sun, 8/3/08)
A lot of people were skeptical about this back in boom times. And Harrah’s, which spent a considerable amount of energy and resources amassing a huge amount of Strip real estate starting at Flamingo, never announced the new super-casino that would stretch north, sucking Imperial Palace and Harrah’s into the largest gaming company in the world’s answer to Echelon or CityCenter.
Of course, Echelon has had construction suspended due to the credit crunch, and despite hawking half the project to Dubai World, MGM Mirage still needs to solve the pesky problem of financing that last portion of more than $1 billion on CityCenter. Then there is the company that paid a record-breaking among for the land, then quickly tore down the New Frontier, but is having problems getting the $5 billion or so in financing to replace it. They want to build a mega-sized version of New York’s Plaza Hotel. I am sure they could fly a private plane to Washington and explain.
Looking back, hindsight makes clear an industry that was perfectly profitable in 2006 worked hard and fast to create all of the current woes it is facing. “Spend capital like drunken sailors,” is what Harrah’s CEO Gary Loveman told a gaming convention last week, reaching for a reason for the mess casinos face. But why should casinos be the only ones accountable for their mistakes? They were one of the few industries that even made a habit of buying made-in-the-USA Hummer stretch limos.
Of course, Vegas is not in the same dire straits as Detroit’s auto industry or the Wall Street financial institutions in New York. But many think government was years too late to get involved in those cases. And, a government infusion of cash into Vegas resorts can do everything a bailout is supposed to do. By putting a few billion into Strip resorts, the government can create thousands of union construction jobs to be followed by union service-industry jobs, which in addition to saving the signature industry in the foreclosure capital of the country could probably help the state of Nevada with its deficit woes. The economic ripple impact of all those new resort jobs is obvious. And, unlike the auto industry or the unknown value of the bad paper on Wall Street, casinos have a well-tested business plan for paying back constructions loans.
So why not a bailout for Vegas? According to Professor William Thompson of UNLV’s Public Administration graduate faculty, politically, gambling will never be seen as simply a widget. Thompson recalls a conversation with the governor of Nevada over two decades ago:
“After the MGM fire people were out of work. The disaster of lives and money lost was huge. At the time I asked the governor if we should apply for federal disaster aid, as I knew we qualified. And he agreed we qualified, but he did not see the point, as there was no chance Las Vegas would be granted taxpayer money for casinos. The industry has changed in the 28 or so years since, but I still don’t think it could politically be done. Taxpayers in Kentucky are not going to give money for casinos. Resorts can’t ask for public money.”
To illustrate, Thompson points out how expensive expanding gambling can be outside Vegas. “Other industries get tax breaks to enter the community,” Thompson says. “But for casinos they ask the casino company what you are going to do for us. They look at casinos as cash cows just like the voters of Nevada do. They never view the casino as an industry we want to help. It is one we tax.”
Thompson points out another reason why Vegas isn’t getting in line for a bailout: things are actually far better here, even now, than a place like Detroit, which has declined for years, or Wall Street, which imploded with bad debt. “We all see the downfalls in revenues, but at worst we have fallen to where we were a few years ago. And a few years ago we were doing fine.”
Ultimately, unlike other troubled industries where the future is in doubt, Vegas, despite appearing to be a city on the precipice of economic misery, has become a bargain for casino shoppers and builders from outside the United States. Thompson points to the quick licensing of state-controlled Dubai World last week as a precedent for where local gaming regulators appear to be offering flexibility to help the resorts. “With foreign languages and the distance the books have to travel, it could be time-consuming to investigate a foreign country. And they set a precedent by doing that approval quickly, probably because of the economy. The truth is if you can get someone to buy, there is a tremendous bargain in Vegas for resorts. But the money from banks isn’t there. And so I think that we are going to need the money from the Middle East and elsewhere. The money will come into Vegas. We can start and stop and start building. And it would be a good investment to encourage companies to come in, because economically it makes sense if you are looking at the bottom line.”
In other words, our bottom line is too good for our government, resulting in offering great appeal to companies such as ones controlled by the government of Dubai. With Wall Street and the big three automakers, the government is giving money to causes that seem so lost that no one else will throw good money after bad. But to many, gambling in Vegas remains no gamble at all if you own the casino.