The House Goes Broke

I spent the weekend in Las Vegas attending a collectable card game tournament. I got to spend some time with my friend, and blog reader, Kevin, who was organizing the tournament. Since I’m a poker player by trade, and since there are plenty of places to play in Los Angeles, I didn’t do any gambling while in Vegas. Instead I took the opportunity to show my girlfriend the town. It was her first time, so I took her to my favorite casino, The Bellagio. As always, it didn’t disappoint. 

Before seeing The Bellagio, her understanding of Vegas was a town that was entirely gaudy and flashy town that was entirely devoid of taste; it’s not that she didn’t like the town, but that she felt that the garish, in-your-face, depictions of the city was what had to be appreciated in and of itself.  In essence, she felt that the nonstop carnival nature of the town permeated everything from the design of the casinos to the behavior of the patrons and that that was its charm. If you could appreciate that, you could have a really fun time, but don’t expect to ever see anything that one could objectively think of as tasteful of beautiful. The town was a carnival. If you wanted taste, you came to the wrong place. 

The Bellagio immediately changed her opinion. She was immediately overtaken not only by the amount of wealth that was on display for all to see. As you can imagine, with a construction price-tag of $1.6 billion dollars, there’s a lot of wealth on display. The celling of the lobby has a display of hand blown glass flowers that, apparently cost over $1 million dollars. There’re really quite beautiful. I always have to pause and just marvel at them. She was speechless, and that was just the beginning of her journey of wonderment. Beauty and taste was everywhere. From the Louis XIV chairs used in the phone room, to the world’s largest chocolate fountain in the desert parlor, everything was simply beautiful. 

I’ve often indicated to people that Las Vegas is my favorite city, and The Bellagio is a big part as to why. Of course, it’s a product of the bubble era. The exorbitant cost of its construction was financed by corporate bond offerings by its owner at the time, Steve Wynn who ran Mirage Resorts Limited. Mirage Resorts was later acquired by MGM to form the corporation MGM Mirage which controlled virtually every high end Vegas casino you could name. Unfortunately, the expense of all of the debt used to make all of those big fancy casinos is now getting hard to finance given that people are cutting back on travel and entertainment.

According to MGM’s latest earnings statement, their earnings are down 66.7% year-over-year. That means, for every $1 they made last year, they made $0.43 this year. Investors have not been very forgiving; the stock has lost over 90% of its value in the last year. The company is currently trading at a price-to-book ratio of .35, which would suggest that the $1.6 Billion dollar Bellagio casino is selling for $560 million today.  

The story of the this stock is the story of both Las Vegas and America: the easy money was flowing and it made both consumers and investors a little crazy; investors poured money into extravagant projects designed to capture more of the consumers money; now that the consumers have gone broke, the investors are in danger of doing the same. Another casino operator, Station Casinos, is defaulting on its bonds and is about to file bankruptcy. Trump Entertainment is also probably a goner this year.  MGM will probably do the same as this recession continues to deepen over the next few years. 

It seems clear that, in light of current events, that The Bellagio was a bad investment, but that does not make it any less beautiful. When deflationary crashes grip an economy, people marvel at how anyone could have spent so much money on such ridiculous projects. In the internet era, it was Today, we are beginning to realize that the Iraq War as a ridiculous way to spend our money. The Bellagio is a child of the era of easy money and poor investments. It stands as a monument to consumer excesses induced by easy money. I doubt another such casino will be built in the United States for decades to come.

It may become increasingly reviled by some as a monument to greed and foolishness, but I will never be among that crowd. Yes, The Bellagio was a poor business investment, but, unlike the Iraq War, it didn’t kill anyone (at least, none that I know of). It may have been built far larger than necessary, but, unlike the “bridge to nowhere”, it wasn’t at taxpayer expense and its far more pleasant place at which to spend time. As this recession drags on, we will need some cheer and value in our lives and I think the Bellagio may be there to provide it for us. Sure, MGM may go bankrupt, but the casino itself is an asset that will emerge from bankrupcy under some new owner and eager to attract customers- which brings me back to my original topic. 

Las Vegas is really a town of value if you know where to look. My girlfriend and I got a room with a king-size bed for $45 a night, and the casino was advertising rooms as low as $25. We ate steak and eggs breakfasts for $5, and toured a luxurious casino, including art museum and fountain show, for free. For those of you who are looking for a good value vacation spot, I’d encourage you to visit Las Vegas. One of the most helpful guides I’ve found is the book Comp City by former pit boss and fellow Texan, Max Rubin. The stories in the book alone are priceless, and the insiders view of how to work the Las Vegas comp system is fantastic.

I look at the mistakes and excesses of the city of Las Vegas as a microcosm of the mistakes and excesses we have made as Americans. I had to stifle a laugh as I walked past an office in The Bellagio that was selling exclusive condominiums in a project that hadn’t yet been completed. Given how much cheap housing their is in Las Vegas right now, and how far the housing market has to fall, the room probably represented the worst room you could step into in Vegas. After all, in the table games, all you can lose is the money you put up. In Las Vegas real estate, you stand to lose far more. Hey, just ask the house.

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