House Of Cards: Morgan Stanley's Casino Investment Is A Metaphor For This Leverage Cycle ...

NOTE: The 2 lines of the title and the final line are all taken from the classic song “Atlantic City” by Bruce Springsteen.

"DOWN HERE IT’S JUST WINNERS ANED LOSERS…"
…John Mack gets caught on the wrong side of that line

Morgan Stanley owns a partially finished Casino in Atlantic City.

Really.

30 years ago a top tier Wall Street bank would have turned up its nose at accepting a casino company as a banking CUSTOMER, now Mack & co actually own one. Well, a partially finished one anyway.

The fact that Morgan Stanley is investing in a $2bn project in Atlantic City certainly raised eyebrows in our office. Revel Casino, which will have 3,800 rooms, is scheduled to open in two years and will be one of AC’s largest casinos. Taking current AC market conditions into account, this is certainly a risky move. MS is still seeking financing for the project. While a $2bn bridge loan will not ruin the company, the move certainly raises more questions about the leadership at the firm – something we’ve had our Eyes on constantly of late.

The development of the Revel by Morgan Stanley subsidiary Ventura Holdings seems to have been dogged by problems since inception in 06. The fun Started when Resorts International launched a fraud suit against the bank for last year, claiming that Morgan Stanley had enticed RI’s CEO to steer a prime 20 acre property that had come on the market to them in return for the CEO spot in the new Casino. According to a separate suit filed by RI’s former CEO, Audrey Oswell, Morgan Stanley reneged on that offer as soon as the land was purchased.

Yesterday’s NYP Article highlighted the very latest bump in the road. A ruling by a state judge last week removed a bond referendum from an Atlantic City ballot that would have provided $56 million in assistance to the Revel project. How ironic: the Federal Government is willing to bail out John Mack’s mortgage trading casino but Atlantic City won’t be rescuing his actual Casino.

We at Research Edge have highlighted the issues with Atlantic City in general. The addition of new towers has not prompted any sort of growth; revpar trends are in decline and there has been no market gaming revenue gained from the new towers (see “AC: UNDERROOMED? TRY OVERROOMED” 9/2/08). Furthermore, the ongoing uncertainty regarding the smoking ban (“AC: THE GOOD NEWS….” 9/15), high gas prices, and general decline in consumer markets, make the odds long on this MS gamble paying off.

“Everything dies baby, that’s a fact.”

Andrew Barber
Director
Research Edge LLC

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