In the freezing desert night air, helicopters delivered their hot cargo of high rollers to the casinos’ roof-top helipads. On the neon-bathed Las Vegas strip, Jay-Z, the rapper, counted down the clock to midnight and blasted out Vegas State of Mind, backed by Coldplay.
It was a swell New Year’s Eve in Sin City and this year there was more to celebrate than the advent of 2011. Yesterday marked the grand opening of Las Vegas’s latest casino, the Cosmopolitan.
Vegas casino owners usually toast resort openings personally. Steve Wynn, who has built five casinos there — including the modestly-named Wynn Las Vegas — and Sheldon Adelson, boss of the Las Vegas Sands Corporation, which owns the 7,200-room Venetian and Palazzo, always cut the ribbon when they open new properties.
But the hosts of Friday night’s $25m (£16m) bash, bankers Josef Ackermann and Thomas Fiato, were watching from the sidelines. Perhaps the strain was too much to bear. You would probably be pretty nervous, too, if you had made the biggest bet anyone has ever made in Vegas.
In backing the Cosmopolitan, Deutsche Bank has in essence put $4 billion on black. Talk about casino capitalism.
Deutsche Bank executives watched Vegas’ biggest bet from the sidelines
The story of how the sober Deutsche Bank, where Ackermann is chief executive and Fiato is head of corporate investments, bet, bet and bet some more to build the casino in a gamble it desperately hopes will be too big to fail, is one of the most remarkable of the boom and bust years. Not even Martin Scorsese, director of the acclaimed Las Vegas mob movie Casino, could dream this one up. And it is not over yet.
It begins in 2004. It’s boom time in Sin City. Vegas is the hottest leisure destination in America and the local economy is on a winning streak. Enter Deutsche executives on a jet from Wall Street.
They take a look around town and decide to advance a modest, by Wall Street standards, sum — $60m — to a developer called Ian Bruce Eichner. Eichner needs the cash to buy a few hectares of land on the north side of the Las Vegas Strip to build his dream: the glass-facade, 3,000-room Cosmopolitan.
Gambling and hotel revenues soar in 2006 and 2007. Nobody has heard of the credit crunch. The more casinos that sprout from the dusty desert scrub, the more visitors come to fill them. Maybe it’s the Nevada sunshine, maybe it’s the cocktails but the bankers catch the gambling bug and soon up the stakes, pumping almost $1billion into the Cosmopolitan.
Bad move. When the global economy tanks in 2008, the ultimate boom town suffers the ultimate bust. Visitor numbers collapse, leaving the gambling floors so empty you can hear the casino bosses’ tears above the twittering electronic goblins’ chorus of the fruit machines.
Unable to get credit, Eichner defaults on a $760m construction loan in January 2008, prompting Deutsche to foreclose.
The bank looks for new investors but Vegas is suddenly as toxic as the dud derivatives Wall Street once traded with relish. Even President Barack Obama tells firms to stay away from Sin City. Joint venture proposals with more established hotel and casino players, including Hilton Worldwide and MGM Resorts, come to nought. Deals with hedge funds fall through.
So, $1 billion in, and now alone in town, what do the Deutsche bankers do? They can’t stick. Cosmopolitan is a worthless eight-storey concrete stump. They must throw in their hand and walk away, writing off their high-profile investment, or twist.
They decide to do what an inveterate gambler would: they double down. Deutsche takes on the Cosmopolitan itself, putting in its own money to finish it. How difficult can it be?
The bankers approach their task with zeal. They ditch some of Eichner’s more razzle-dazzle interior designs, notably rooms with leopard-skin wallpaper and an entry hall featuring 28ft robots programmed to box, dance and play 12ft Fender Stratocaster guitars.
They hire their own designers and architects to build their own vision of a world-class casino. $4 billion later, the end result has 83 casino tables, 1,474 slot machines and a three-tier Chandelier Bar, encased by 2m crystals dripping in strands from the ceiling, where revellers partied throughout the night on Friday.
While Jay-Z has been “bigging up” the Cosmopolitan — encouraged, no doubt, by the $1m fee he trousered for Friday night’s concert — Ackermann and Fiato have been studiously low-key.
“I’m sorry I can’t talk to you,” Fiato said when The Sunday Times telephoned.
Deutsche Bank chief executive Josef Ackermann made a $4bn bet on the casino (Thomas Lohnes)Search for Fiato’s name and his face on the Deutsche Bank website and the message reads: “Your search query did not match any documents.” Try Cosmopolitan or Las Vegas and you get the same result. As for Ackermann, his comment is: “No comment”.
The only public statement the bank has made recently about the Cosmopolitan is a single sentence. “As a financial investor in the project, we are convinced that the executive management team will build an outstanding business and serve our shareholders the best they can.”
It’s not hard to explain why Deutsche is so backward in coming forward. Opening the most expensive single casino in history at a time when Wall Street itself is pilloried as a giant casino, is a bankers’ PR nightmare. The Cosmopolitan is also an expensive distraction at a time when Deutsche needs scarce capital for other purposes.
Worst of all, Ackermann and Fiato could turn out to be the biggest losers in history. The last thing Vegas needs right now is another casino. Thanks to the recession, there are already too few high rollers and fat-bottomed girls in trucker caps for all the existing casinos to make a buck.
Gaming revenues are down and hotel room rates are so low that Cosmopolitan’s next door neighbour, CityCenter — MGM Mirage’s $9 billion four casino and hotel development that opened last year — is already struggling to stave off bankruptcy. A study released by the Brookings Institution and the London School of Economics last month ranked Las Vegas’s economy as one of the world’s five worst.
Unemployment in the city peaked at 15.5% in September. Vegas has America’s highest foreclosure rate. More than 70% of homeowners with mortgages owe more to the bank than their houses are worth. Whether it’s house prices, visitor numbers or gambling revenues, “the numbers are bumping along the bottom”, says Stephen Brown, director of the Centre for Business and Economic Research at the University of Nevada, Las Vegas.
Thanks to the recession, there are already too few punters for all the existing casinos to make a buck
If all that weren’t enough, analysts point out that, as an independent newcomer in Vegas, the Cosmopolitan has a big structural disadvantage. Unlike almost every other big resort on the Strip that is owned by large gambling groups, it has no base of loyal gamblers it can exploit.
Bill Lerner, who used to work for Deutsche Bank and is now an analyst at Vegas-based Union Gaming Group, reckons the Cosmopolitan is likely to find the going tough.
“If you take a look at everything that’s opened in recent years, these properties have all struggled out of the gate. I’m not sure why this [the Cosmopolitan] will be different,” he said.
Deutsche has already written off some $1 billion on the Cosmopolitan — about what it would have lost had it walked away in 2008.
In February last year, Stefan Krause, the bank’s chief financial officer, told analysts that Deutsche had assigned a value of “above $2 billion” to the casino. “This asset is now very well valued and fairly valued within our book and has a lot of upside potential,” he said.
The American-registered company that the bank set up to own the hotel listed the value of its land and construction at more than $2.7 billion in September, according to a US regulatory filing.
Deutsche hopes the Cosmopolitan will attract a new type of Vegas customer: one looking for relaxed, boutique-style luxury. The property is smaller than most Vegas resorts. If the Cosmopolitan is successful, the bank aims to sell it and get out of town as fast as possible, hoping that everyone will soon forget its ill-judged, ill-timed flutter. “They hope what happens in Vegas stays in Vegas,” joked one observer.
The casino’s chief executive, John Unwin, said: “I think we are at the beginning of something new. Las Vegas has a great history of reinventing itself. I don’t see this as an end to an era, I see this as a beginning of an era. People are going to stand up and recognise that we have something different to offer.”
Vegas veterans, however, disagree. They argue a team of bank-led consultants cannot recreate the success of more single-minded Las Vegas casino visionaries, such as Wynn and Adelson. Adelson himself said: “I don’t see a rationale for Cosmopolitan to succeed.”
Independent analysis shows that, even in the most optimistic projections, it will take Deutsche 15 years to recoup its investment. Nevada gaming regulators are so alarmed they have demanded assurances that Deutsche will continue funding the Cosmopolitan if it ends up bleeding cash. Fiato has told regulators the casino “is a very large and important investment to the bank. We are fully committed to seeing that investment through”.
As the sun cracked the shell of the frozen desert night yesterday and the last partygoers emptied their champagne flutes and headed off to bed, local hustlers began handing out fliers for the Cosmopolitan, using the resort’s very Vegas advertising slogan. “Just the right amount of wrong”. Ackermann and Fiato must be hoping it’s more than a tagline: it’s a financial projection.
Wall Street gamblers
Deutsche isn’t the only bank to become a casino developer. Morgan Stanley initiated a $2.6 billion project in Atlantic City, New Jersey, called Revel.
It eventually contributed $1.2 billion, only to pull its backing and write off most of its value.
JP Morgan Chase is now trying to find fresh funding for the scheme.
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