Professor Elam

From the Wall Street Journal

MGM Mirage's debt woes are compounded by troubles with the City Center
project under construction on the Las Vegas Strip. MGM Mirage is being
sued by Dubai World, its partner on the project, over mismanagement and
cost overruns. Dubai World, owned by the government of Dubai, skipped
its half of a $200 million March payment that was due to contractors.
MGM Mirage received special permission from banks to make the full
payment on its own.

Well if one can't trust a bunch of oil sheiks, who can one trust?  We mentioned here a few weeks back that City Center was pressed for funding, now MGM is considering selling its Detroit and Mississppi casinos to fund the incomplete project. Good idea?  Not really.

This is the problem with tying a new project to existing successful projects, if trouble arises, one has to sell the good stuff to fund the untested.  MGM may end up selling the cash generating casinos to end up owning, if indeed the whole thing can get funded, an empty retail center. Whoops….

We study captial budgeting in accounting and finance. The reality of what can go wrong is usually glossed over in the just put it in the spreadsheet and start making assumptions textbook problems. We will continue to track City Center as an example of overlooking risk.

Professor Elam Terribly Thoughtful Observation

The 1990s saw America griped with gambling fever. Las Vegas responded with over 100,00 hotel rooms, in an ironic twist, casinos were modeled on past empires, such as the Egyptian Pyramids (Luxor)  and Renaissance Italy. The Southern Baptist Convention was lured to Vegas.  The National Rodeo Finals left Oklahoma for Vegas, everyone is in Vegas. Over thirty states got into riverboat gambling, arresting private citizens that tried to get in on the gambling fever. Convenience stores became and still are neighborhood 'crap games' as people developed lottery winning theories.  The State of Texas took out ads on television advertising the Lottery Tickets akin to country western dancing, the Texas Two Step. Individuals began to think of long term purchases of lottery tickets as akin to dollar averaging in their 401K, after all, both pay off eventually, right?

Station Casinos actually labeled its annual report a few years back using a college course system, what was it, Gambling 101. The report extrapolated their sales trend continuously into the future. The owners were so taken with this idea,they bought the company out and took it private, before the market crashed. And so the gambling fever gripped the hosts of the casinos themselves. The final gamble so to speak was City Center. And now one partner, Dubai,  has already apparently tossed in his cards. 

As Kenny Rogers observed, 

Ya gotta know when to hold 'em and know when to fold 'em.