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Rod Smith

In Depth: Gambling on Las Vegas: Street Smarts

10 November 2003

LAS VEGAS -- Las Vegas, the town made notorious by countless Hollywood movies and TV shows, has gone from a gambling mecca the mob built to a center of development financed and directed by Wall Street in just 25 years.

To understand Las Vegas' transformation from mob to corporate control, longtime developer Steve Wynn offers advice straight out of Watergate: "Follow the money."

The old Las Vegas was built and paid for by associates of organized crime syndicates looking to escape the grip of criminal prosecution. Despite the many myths about the mob years, its control was brief, lasting only about 25 years from the early 1950s to the late 1970s, according to several gaming executives who played major roles in the transition.

The influence of mob figures was erased not by righteous politicians and strict regulators, but by an overwhelming tide of investors looking for their own kind of game -- the world of high-yield finance.

The new Las Vegas, on the other hand, has been built by dreamers and paid for by Wall Street. With high-yield debt markets deep and receptive, Wall Street analysts say it'll stay that way, too.

You can think of Las Vegas, Wynn says, as a dot in the Mojave Desert surrounded by ever-larger concentric circles of people who want to come here, who've always wanted to come here.

The mob influence for which Las Vegas is notorious was an exception to Wynn's rule, and it marked the end of an era in the rest of the country.

So-called mobsters never targeted Las Vegas as an ideal opportunity. Instead, bookmakers, casino operators and bootleggers were flushed out of Texas, Arkansas, New York, Louisiana, Florida, Missouri, Ohio, Michigan and Illinois in the 1950s and early 1960s and landed in the one spot where what they did for livelihoods was legal, says MGM Mirage President Terry Lanni, who arrived in Las Vegas in 1977.

Sen. Estes Kefauver, D-Tenn., helped lead the federal government's charge against illegal gaming in the United States as chairman of the Special Committee on Organized Crime in Interstate Commerce. Kefauver's committee held hearings starting in 1951 that spawned more than 70 local crime commissions, the Senate Permanent Subcommittee on Investigations and the Federal Wire Act of 1961, which effectively blocked interstate electronic cash transfers.

Claudine Williams, longtime Harrah's Entertainment board member, was part of this stream of gaming operators to Las Vegas and symbolizes the era. She says Washington made it impossible to conduct casino business anywhere but Las Vegas.

In 1946, the 19-year-old Williams opened the Bonita Club in Galveston, Texas, which succeeded because Texas authorities were reluctant to enforce anti-gaming laws.

But starting in 1961, Williams says federal officials made it impossible to do business there so she and her husband sold their casino, eventually moving to Las Vegas.

"I don't think the true story of Las Vegas was ever written," Williams says. "A lot of bad things did happen back in those days, but they were so glad to be operating legally, they did great things for this town."

After years of working at the Silver Slipper and then the old Frontier Hotel with Wynn and his wife, Elaine, Williams opened the Holiday Casino on the Strip in 1972, adjacent to the Holiday Inn. Ultimately, it was sold to the Holiday Corp., which in the mid-1980s was taken over by and then divorced from Harrah's in a corporate reorganization.

Racketeers came to town from all over the country for similar reasons during this period, she says, and got their toeholds owning casinos through the financial failures of others.

Boyd Gaming Corp. Chairman Bill Boyd, whose family has been involved in gaming since moving here in 1941, points out that Bugsy Siegel's Flamingo, the town's first mob-controlled casino, was followed by the Thunderbird in 1948. When Marion Hicks ran out of money to finish the casino, he discovered he couldn't borrow from banks and the only source of funds he could find was the mob, Boyd says.

The Thunderbird was small time, but it was the first in a line of takeovers that led to mob domination of Las Vegas. The same thing happened with Wilbur Clark's Desert Inn, the Sands, the Dunes and the Stardust, which Boyd was called in to clean up.

This takeover trend allowed the mob to tap into a very lucrative industry when its earning power elsewhere was being sapped by Senate hearings and local and federal prosecutions.

"The ironic thing is Las Vegas would not be Las Vegas today if it weren't for the mob. They loaned money when the banks wouldn't. They got Las Vegas started," says Boyd, who practiced law for 15 years before joining his father, Sam, in the 1970s to launch a group of casinos under the family name.

Billionaire Howard Hughes' arrival marked the beginning of modern, corporate-run Las Vegas, largely because, unlike the mob, he had essentially endless funds to tap.

Hughes, a leading entrepreneur with no hint of mob connections, moved to Las Vegas in 1966 and, with money from his sale of Trans World Airways, started buying up Nevada casinos, including the Desert Inn, Sands, Frontier, Landmark, Castaways and Silver Slipper, some of which were suspected of having ties to organized crime.

Hughes' goal was not to clean up Las Vegas but to capitalize on his development dreams for the Southwest.

MGM Mirage's Lanni says Hughes snatched up the casino-hotels because he believed there would be a major airport built between Los Angeles and Las Vegas where international flights would land and travelers would be shuttled to the West Coast for business and Nevada for entertainment.

University of Nevada, Las Vegas professor and casino industry expert Bill Thompson says, whatever his motivation, "Hughes simply bought the mob out."

And, Boyd says, more than anything else, "that legitimatized the gaming industry. Banks (soon) said it must be OK."

Still, the Justice Department kept its focus on organized crime, and in 1968 initiated antitrust actions to keep Hughes from buying any more Las Vegas casinos, specifically the Landmark.

With stiff pressure from Hughes and Bill Harrah, Nevada enacted legislation to let public corporations own casinos, something that previously had been illegal under state law.

Harrah, a California native who founded Harrah's Entertainment in 1937 when he opened a bingo parlor in Reno, entered the fray on policy and financing to pursue his dream of building Harrah's Lake Tahoe. The hotel he built in 1973 turned out to be the first five-star, five-diamond hotel in the casino industry. At a construction cost of $100,000 per room, very exorbitant at the time, his casino was way over the top, according to a Wall Street Journal story at the time.

Harrah got part of his funding from Bank of Nevada, now part of Wells Fargo Bank, under Chairman Art Smith, and Chase Manhattan Bank, but ended up taking his company public to raise the total tab.

In 1973, Harrah's Entertainment became the first gaming company to be listed on the New York Stock Exchange, a move that had been prohibited by Nevada law before the passage of the state's Corporate Gaming Act of 1969.

Barron Hilton, with a reputation as clean as Hughes' and Harrah's, soon entered the picture around this time with the acquisition of the International and the Flamingo, bringing with him the availability of public financing and a trail of other hotel companies interested in increasing their yields.

With Hughes, Harrah and Hilton cleaning up the industry's image and with corporate financing, insurance companies and banks started backing the expansion of gaming in the mid-1970s.

Parry Thomas, a Utah native who founded the Bank of Las Vegas (later called Valley Bank and now part of Bank of America) at a time when banks generally refused to advance loans for gaming operators, led this new charge.

"When you look at the development of Las Vegas, it involved entrepreneurs who had to reach out to nontraditional sources of financing who always drove development," says Harrah's Entertainment Chairman Phil Satre. Lanni calls the introduction of corporate investments the "catalyst" for the first major wave of development in Las Vegas.

The new trend toward public financing really accelerated about the time Lanni landed at Caesars World as chief financial officer in 1977.

His career in the gaming industry illustrates the rapid evolution through which the industry was going.

Lanni recalls how two recruiters from Russell Reynolds and Associates, a Los Angeles-based head-hunting firm, approached him about a job possibility while he was working as an advance man for President Ford. The initial interview went on for more than an hour, he says, with Morgan Harris and Buzz Kelly, then eminent leaders in executive recruitment, "dancing around" the identity of the prospective employer.

Finally, Lanni said they'd have to tell him at least which industry they were recruiting for and they confessed it was the gaming industry.

"That was the first time I'd heard it outside hunting. For the next half-hour, (the two recruiters) reasoned with him why he shouldn't leave the room," he recalls.

Lanni agreed to consider the offer that night. At home, he says, he realized that, despite public perceptions about Las Vegas, public financing for the industry was just getting off the ground, meaning growth prospects were great and opportunities for executives should be tremendous. Lanni accepted the position as CFO for Caesars World.

One of his first assignments for Caesars World was to replace the existing Teamster's pension fund financing for the company. He negotiated a first mortgage from Aetna Insurance Co. for $60 million, the first insurance company financing for the gaming industry.

At the same time President Ford was losing at the polls, New Jersey was passing a constitutional amendment, making it the second state in the country with legal casino gambling.

The initial members of the New Jersey gaming commission were public figures who had made commitments to keep any hint of organized crime out of the industry in New Jersey.

"New Jersey was the first to ask the question point blank: `Do you have a relationship or contact with an organized crime syndicate?' Up to that time, no one asked; now, it's routine," Satre says.

Institutional investors at the time all had policies of not lending to any company or industry that was alleged to have ties to organized crime syndicates.

The result of the cleaner-than-a-hound's-tooth regulations in Atlantic City was that companies getting licenses in New Jersey were viewed as untarnished. The companies discovered banks and institutional investors would give them financial backing, Lanni says.

It also brought new attention from major investment groups.

"When Resorts International (in Atlantic City) opened on Memorial Day 1978, the numbers were fantastic. People were standing in line to just play blackjack," Lanni says, explaining that shares in New Jersey gaming companies increased a hundred-fold, and Wall Street decided it wanted in.

When Las Vegas casino operators tried to tap into the New Jersey market, too, they either had their license applications denied or found the process so difficult they gradually pulled their applications.

New Jersey was the catalyst and Nevada followed along, Lanni says.

Tighter gaming regulations spread West, as Nevada politicians avoided the embarrassment of casino operators being black-balled by New Jersey.

The spread of tight regulations to Nevada spelled big opportunities for Bill Boyd -- and a unique experience actually working with the mob.

In 1983, the Nevada Gaming Control Board asked him to take over operation of the mob-controlled Stardust casino because of allegations of skimming. Pending its license being revoked, Boyd operated the casino while reputed organized crime syndicate figures ran the hotel side of the business.

Boyd says it made operation of the casino nearly impossible, with no cooperation from the mob figures whatsoever. After a year, the casino's license was revoked and the Boyd group took advantage of the situation to buy the Stardust.

But working with the mob and cleaning up the aftermath of the operation they had run is an experience Boyd says he would never want to undertake again.

At about the same time Atlantic City was opening to gambling, hotel holding companies, including Holiday Corp. and Ramada Inns, started buying up casino operations. Their earnings had been lackluster and the earnings of casinos won them over, along with the newfound financing sources.

They too, like Hughes, lent the gaming industry respectability, and further enhanced the appeal of the industry in the eyes of Wall Street.

"The SEC gave the hotel companies tremendous motivation to clean up their gaming industry partners," UNLV's Thompson says.

Later, Wall Street would turn on the hotel partnerships, finding the blended balance sheets difficult to finance because of the divergent risk levels between the high-risk casino side of the operations and the safer but less profitable hotel operations.

Harrah's Satre, whose career covered all these changes, says nature really took over the clean up of Las Vegas, as the old-time syndicate figures retired and passed from the scene.

Satre started out as an attorney in Reno where he represented Harrah's Casinos through its transition from a privately held company owned by Bill Harrah, to a publicly traded corporation and then its merger with Holiday Inns. Later, he served as chief executive officer within the Promus Corp. for Harrah's Gaming Group and CEO of Harrah's Entertainment.

"Kirk Kerkorian was another critical factor," Thompson says. "He came in and twice he built the biggest hotel in the world, the International and Bally's. He took the ante from tens of millions to hundreds of millions of dollars.

"And the mob just couldn't come up with that kind of money," Thompson says.

Growth stopped after Bally's and MGM Grand. Nothing was developed until Wynn's Mirage, which took Las Vegas into the corporate world. It was the first pure example of Wall Street providing the financing, and a high-wire developer such as Wynn, a New Haven, Conn., native who moved to Las Vegas in 1967, providing the magic, Thompson says.

Wynn entered the gaming industry when he bought a stake in the New Frontier Hotel. In 1972, he invested his profits from selling the New Frontier into the Golden Nugget. In 1975 he built Bally's resort on Atlantic City's Boardwalk for $440 million.

In 1987, he bought the Castaways from Hughes Corp. and started building his dream, The Mirage, which opened in 1989.

Wynn says the significance of The Mirage was not that it was a new hotel or the first new Las Vegas resort in 15 years.

The significance was "the investment of more than $500 million, over a half a billion dollars, in the largest hotel complex ever built in the world. The savviest Wall Street investors said Las Vegas is a safe place to invest such a big amount of capital," Wynn says.

These big investments of capital were made possible by the final step in the transition to a new world of casino development: high-yield, or junk bond, financing on Wall Street and its major supporter, Michael Milken. Satre, Lanni, Boyd and Wynn all agree Milken was instrumental in the development of modern Las Vegas.

Milken and Wynn first met in New Jersey in 1977 at a time when other investment houses wouldn't give casino developers the time of day. Milken, however, thought the industry was an ideal match for his financing model.

He told Wynn, who met him wearing a T-shirt and with a broken leg, "If you can get a tie on, I want you to repeat (your pitch to investors) in New York. What you can't afford is to be underfinanced." It was the beginning of a decade-plus marriage.

If Las Vegas hadn't existed, Milken might have had to invent it. Here was a high-risk business with the returns to justify his high-yield bonds, which offered investors 14 percent returns and more. "With Steve Wynn, it was the magic of doing something before other people did it. When he built The Mirage, he gambled on 17 percent junk bonds. That was the last trick (Milken) did before he went on his vacation (to federal prison)," Thompson says.

"The Mirage opened with a $1 million-a-day nut just to pay the interest. (Wynn) couldn't do it, but it was so successful, he could float a stock offering and pay off the debt," Thompson says.

"Steve Wynn reached up to give Las Vegas something it had never had before.

"Circus Circus just gave us more of what we'd had before (when it opened the Excalibur in 1990). All the charts show it didn't work, but The Mirage turned Las Vegas around," Thompson says.

For Milken and others on Wall Street, The Mirage proved Las Vegas was a bottomless mother lode, with those concentric rings of people Wynn describes all wanting to come in increasing numbers, as long as more, always more intriguing megaresorts were being built.

Instead of the tap being shut off after Milken was convicted on fraud charges and sent to federal prison, however, it opened full bore.

Wynn says underwriters such as Solomon Bros., the blue bloods of Wall Street that had turned a cold shoulder a few short years before, started flocking to his door, begging for the chance to invest in his projects.

"Can you imagine," he asks. "(By the early 1990s), they were coming to me," Wynn says, illustrating the full transition through which the gaming industry and Las Vegas had gone.

Harrah's Satre agrees. He says he remembers the day when Ken Moelis, then the managing director of Donaldson, Lufkin & Jenrette, came to his office for a presentation. Moelis told Satre that between 1990 and 1996, 45 gaming companies had run up equity capital of more than $30 billion by becoming the darlings of Wall Street, which had infused more than $16 million in high-yield financing.

In those days, with riverboats the rage and tribal gaming getting started, you were gold "on the Street" if you so much as had the word casino or gaming in your company's name, Satre says.

"That was an explosion in the business, the most vivid representation of how the industry had changed from the 1970s," Satre says.

Just as the mob had been flushed into Las Vegas by the Kefauver hearings and their aftermath, it was flushed out by the financial binges of the 1980s and 1990s.

Organized crime could finance a $10 million or $20 million casino; it could probably still do it today, Satre says.

But there is no way it could raise the billion-dollar price of admission on the new midway, industry leaders agree.

"Large scale, publicly financed companies squeezed out smaller operators like the Dunes, the Sands and the Landmark," Satre says.

"If anyone with relations with organized crime (tried to compete), they found they couldn't raise the $300 (million) or $400 million to be competitive. They couldn't access that much money," Satre says.

Some fear the shift from mob to Wall Streets spells a bland future without the interesting characters of the past. But others, especially Wynn, disagree.

Operators of the megaresorts need the managers, financial types and regulators more than ever before, and they are coaxed by investor concerns to steer careful courses.

In the end, it's all been driven by the money, and money will keep being the driver.