April 2, 2009

When The Fun Stops:
Is MGM Mirage Nevada’s AIG or GM?

By STEVE FRIESS

“Pardon me for asking, but if a company is too big to fail, maybe – just maybe – it’s too big, period.” – Former Labor Secretary Robert Reich

Having evidently learned a little something from the hundreds of acrobats who perform astonishing death-defying feats nightly in their Vegas resorts, MGM Mirage last week leaped headlong into the open air, held the world in terrified suspense as it twisted and turned to avoid a hail of fiery spears and then, at the last possible moment, grabbed the bar and swung to relative, if m omentary, safety.

Yet rather than supplying the raucous applause that greets such moments in the theater, the world just heaved a momentary sigh of relief. Unlike the safe distance we feel watching, say, a Ka aerialist, where we know it’s only his neck that will be broken should he fall, the experience of last week wasn’t a mere spectator sport.

No, that wasn’t just a large casino company flying without a net in the face of oncoming doom, it was each and every Nevadan.

We came to realize with sobering clarity this week, in fact, that MGM Mirage in general and its $8.7 billion CityCenter development in particular are the closest things for this state to entities that are “too big to fail.” Nobody from MGM Mirage would use those four specific words because companies that are TBTF – AIG and GM are usually the ones mentioned – are so important that their significance is what justifies taxpayer-funded bailouts.

But just because a company’s not TBTF on a national level doesn’t mean it’s not TBTF in a local sense. And last week’s events were so frightening precisely because we were told repeatedly that CityCenter’s collapse would reverberate in the worst possible ways throughout the entire Silver State economy.

The week started happily enough with Dubai World, MGM=2 0Mirage’s 50-50 financing partner on CityCenter, suing to get out of the deal. Then we had a minor tempest when I put on the record on my blog what Review-Journal gaming writer Howard Stutz had from an anonymous source in his Sunday column, the fact that Sen. Harry Reid had called major banks on behalf of MGM Mirage to get them to give a fair review to the notion of lending $1.2 billion to the company to finish CityCenter. And finally, we waited breathlessly on Friday to see if MGM Mirage would make a required $200 million payment – Dubai was supposed to pay half and refused -- that could have otherwise spelled a work stoppage for CityCenter. They did. Whew! That was fun.

Along the way, as the best Cirque du Soleil performers always do, MGM Mirage officials tried to both project calm and insist upon the enormity of what was at stake. The Dubai lawsuit had “no merit” and, once Friday’s payment was made, there was an air of “what-was-that-all-about?” in MGM Mirage C.E.O. Jim Murren’s letter to employees telling them to ignore the “extraordinary amount of rumor and speculation.” And yet in the middle of that, it was explained that Sen. Reid – and, it turned out, Sen. John Ensign, too – were needed to step in to encourage major banks to give MGM Mirage the money to finish CityCenter.

Consider the language of Alan Feldman, MGM Mirage’s chief spok esman when asked whether such calls were inappropriate: “Wouldn’t you also be outraged if a senator DIDN’T stand up for the largest employer/taxpayer in his/her state and try to inquire about what issues stand in the way of financing the largest investment in U.S. history and the largest job creator in the nation?”

See what I mean? Sounds like imminent doom, right? Nothing less than the solvency of the state was at stake. And yet all that senatorial wrangling actually failed, the company has not received the $1.2 billion it says it needs and now is facing a recalcitrant partner in Dubai and has hired bankruptcy lawyers but, hey, don’t mind all that pesky “rumor and speculation.” Or, as we call it in the news biz, reporting.

Which should bring us all to this question: How did we get here? How did it happen that the fate of our entire economy, the ability of the government to provide necessary services, the value of our real estate, come to reside in what occurs in the offices of relatively bland corporate building off Industrial Road?

Well, of course, it happened because MGM Grand in 2000 grew into MGM Mirage, gobbled up Mandalay Resorts in 2005 and then maxed out its credit cards to start building CityCenter around 2006 even though it only had perhaps half of the financing in place at the time.

We were all tou ched with such boomtown fever that few in the press or the gaming industry publicly wondered whether such an endeavor made any financial sense. I did say on my podcast that there was no evidence that people actually wanted to live on the Strip, but even as I said it I didn’t want to throw a damper on the excitement surrounding this ambitious effort. My partner and co-host, Miles, said all along that it CityCenter was a mistake, but when does anyone listen to their spouse?

But CityCenter only matters so much because it’s also the marquee effort of a company that probably never should’ve been allowed to become so big to begin with. It’s instructive to see what concerns were raised about the potential merger with Mandalay Resorts; Jane Ann Morrison in the R-J in 2004, for instance, worried about the impact of a concentration of all that economic and political power from the standpoint of the card dealer afraid to be blacklisted if he gets fired or the light bulb manufacturer having to lower its prices to MGM’s demands.

None of us thought to ask: What would happen to our broader economy if MGM Mirage made some ill-advised or ill-timed decisions and found itself in some sort of dire straits? What if there wasn’t even anybody out there willing or capable of buying and operating MGM Mirage’s assets? What would happen if Nevada allowed one company to control so much?

&nb sp; The key here is to get us all through this morass and then learn from it. Those what-if-they-fail questions need to be asked the next time state regulators are asked to rubberstamp another merger. And that’s new for us.

“The reason why it was not part of the conversation was that everybody kept making the points that Las Vegas was recession-proof, remember that?” says economist Keith Schwer, director of UNLV’s Center for Business and Economic Research. “Well, that’s been thrown out the window.”

God, I hope so. Because as good a show as we got last week, I’m not sure how much more the fragile beating heart of Nevada can take.

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