April 9, 2009 * THE STRIP SENSE

Who Could Have Predicted This Mess? Lots of Folks, Actually

By STEVE FRIESS

The competition was trying to be dignified, generous, sympathetic.

“Yes, I think it would be devastating to Las Vegas for MGM to fail,” said Jan Laverty Jones, senior vice president at Harrah’s and former Vegas mayor, to my question from last week’s column about whether MGM Mirage and CityCenter were the Nevada equivalent of an entity “too big to fail.” “But the question becomes, ‘Did MGM really get too big or did the precipitous fall in the economy and consumer confidence cause the size of the project to be too big?’ Could anyone ever have expected this?”

That last question perked my ears up because it was nearly verbatim something Phil Ruffin, the Kansas billionaire taking the Treasure Island off of MGM Mirage’s hands for $775 million, had said an hour earlier.

“This economy is so bad,” Ruffin said. “Who would have predicted any of this would happen?”

Well, here’s the thing: They did. Both of them and/or their corporations.

OK, they didn’t anticipate the historic international implosion of the housing and credit markets. They didn’t know that Wall Street and Main Street would be brought to its knees by bizarre, unsustainable and falsely valued financial instruments or that, for the first time in anyone’s memory, a major economic disruption would turn once-impervious Las Vegas into a tourist’s ghost town and conventioneer’s national pariah.

So, no. This precise event coming to pass? Terry Lanni, Jim Murren, Kirk Kerkorian, Sheldon Adelson and the rest of the MGM Mirage and Las Vegas Sands leaderships are absolved of that.

But how about simply a serious slowdown? A saturation of the marketplace? A pause that refreshes?

Jones and Ruffin know the answer to that one. They did. And they weren’t the only ones.

Let’s go back to 2006, back when MGM Mirage was really getting going with CityCenter. At the very same time, Harrah’s had finally consolidated its hold on everything from the northern edge of Planet Hollywood to the southern border of the Venetian on the east side of Las Vegas Boulevard. Talk raged about their CityCenter-like plans to implode some of its less-desirable properties. There was even, according to Wall Street Journal scribe Christina Binkley’s “Winner Takes All,” a name for the imagined development, Epicentre. It would’ve exploited 350 acres, dwarfing the 67-acre CityCenter. Plus, we all heard about the arena they planned to build behind Bally’s with AEG. So what happened to all these lofty plans?

“We’re a conservative company,” Jones answers. “We felt the timing wasn’t right.”

And just for that, for standing pat to see what happened next, Harrah’s was excoriated! Commentators from Wall Street to the blogosphere mocked them mercilessly for their inability to pull the trigger, to DO anything. True, Harrah’s today has its share of financial problems brought on in pat by taking on too much debt in the $9.4 billion purchase of Caesars Entertainment and then going private and could soon face bankruptcy itself. But at least – at very, very least – they’re not more than half pregnant with a mammoth, unprecedented construction project that must be completed lest the city and state be doomed.

Ruffin’s another interesting case. He unloaded the New Frontier to an overeager Elad Group for $1.2 billion, a record $35 million an acre. In doing so, he made the decision not to develop a resort himself in Las Vegas after a few iterations of a Swiss-themed Montreaux complex. A few month ago when I asked him why he sold out in May 2007, just in the nick of time, his answer was: “I just had a feeling something was going to happen.” Ruffin and condo partner Donald Trump also sensed the weather was changing late in 2007 – long before the Lehmann Brothers or Bear Stearns or AIG disasters – and canceled the second tower.

A few other folks also played it safe. Boyd Gaming, for instance, was savagely attacked for its now-prescient decision in August 2008 to mothball Echelon. Any number of other developers announced condo-hotel projects in the middle of the decade that were nixed before groundbreaking because someone, be it a banker or an entrepreneur or someone’s precocious second-grader, looked at the math and decided the numbers made no sense.

And even Steve Wynn, someone nobody could ever accuse of being afraid of taking huge risks, stepped cautiously and carefully. In 2006, when I was in Macau for Newsweek, I had the bizarre – and probably unique – experience of back-to-back two-hour interviews with Wynn and arch nemesis Sheldon Adelson, the LVS chairman at their respective Macanese properties.

Adelson was furious back then that Wynn did not see the wisdom of plunging billions into development on the Cotai Strip, the area of reclaimed land in the Chinese special administrative region where Adelson was determined to build eight hotel-casinos all at once. Adelson wanted Wynn to build there, too, the better for getting the region up to critical mass where it would become a genuine destination.

“I may get to Cotai eventually, I even have some land over there,” Wynn told me. “But it’s not ready yet. I don’t want to go build something out there now because I don’t know what’s going to happen out there yet.”

Adelson’s take: “We could build 10 Las Vegas Strips over here, there's so much demand!”

Now it’s Adelson teetering on the brink of bankruptcy and having to halt construction on several of those properties because the money dried up. It may get restarted before year’s end, but gaming numbers in Macau seem to suggest that demand for even one fully realized Vegas Strip is soft at the moment.

It’s not that MGM Mirage or Las Vegas Sands shouldn’t have been dreaming big. God bless ‘em for that, that’s how Vegas became so fascinating. They absolutely get higher marks than Harrah’s or Boyd for ambition and creativity, to be sure. And I can’t wait to see CityCenter in all its glory when it’s done, although all of the sturm und drang about how to get it paid for is just a precursor for the real drama to come over whether there’s actually enough market demand for all of that product.

But, looking back on it now, it’s easy to see the game plans of both MGM Mirage and Las Vegas Sands required the popularity of Las Vegas and the broader American economy to keep growing at absurd rates. Any hiccup would cause some sort of financing challenges. They built in no room for error, concocted no plan for what to do if not absolutely everything went exactly right, refused to believe the indicators that Boyd and Wynn and Harrah’s and Ruffin saw would apply to them.

And that’s pretty ironic because they’re casino companies. If there’s one thing they must know, it’s that even in the best-rigged of rackets, the house will lose once in a while.

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