What explains Revel? How could Wall Street banks, hedge funds, investment managers, and elected officials combine to burn $2.4 billion in other people's money on a hotel-casino no one wants?
When New Jersey legalized Atlantic City casinos in the 1970s, the state set out to tame the historically small-time, cash-based, illegal gambling business and make it a safe place - not just for senior-citizen slots jockeys, but for the really big gamblers who bet with Americans' pension, hedge fund, and bank dollars.
Did the state do its job too well?
"When gaming started in Atlantic City, the gaming companies were just starting to get borrowing on Wall Street," recalls Anthony Graziano, executive director at the commercial appraiser Integra's New Jersey office.
"The regulators took over, the industry really got its act together, and they started reporting dollars in real terms, audited by the gaming commissions, certified, like, every month."
Strict reporting made gambling finance transparent, Graziano said. "That brought in the hedge funds and the equity funds," he added. "They were churning huge dollars. Everybody jumped in to be part of that."
By the mid-2000s, when Revel Casino Hotel was projected as a bigger Borgata that would draw new bettors, "Atlantic City was still rocking and rolling," says Graziano. Shore bets took a hit in 2008, "but they blamed that on the economy," he said.
But Graziano went to Pennsylvania and studied table-gaming and slots plans. Gov. Rendell was smart, Graziano told me.
"They were siting places right up to the edge of New Jersey," Graziano remembered. "I said, 'If George Washington had these placements, he'd have won the Revolution in six months.' "
It wasn't just location, Graziano said.
"Pennsylvania didn't have that Atlantic City 500-room licensing requirement," he said. "In Pennsylvania, they build a casino, it's like a Sam's discount store, with fancy black stuff hanging from the ceiling."
Low cost, high profit.
"So I go back to New Jersey, and Morgan Stanley is building this five-star Revel hotel, all that glass, their heating and air-conditioning costs were astronomical," Graziano said. He helped the bank review the project's costs and likely revenues, and concluded: "The only reason this thing has any value is, it's gorgeous. Maybe someone will buy it for their ego."
J.P. Morgan, U.S. Bancorp and Wells Fargo, the American and Oppenheimer investment funds, the Chatham and Canyon hedge funds, which manage New Jersey state pension money, even Alaska's state pension fund, hung on or boosted their Revel bets. Gov. Christie encouraged investors with tax breaks and marketing.
"Money was thrown at the [Revel] developers," said Graziano, "faster than they could spend it."
"Group-think" blinds even smart investors, says Alan Feldman, who heads Philadelphia-based Resource Real Estate and teaches at Penn.
"The fatal flaw of developers is an unusual optimism and ego associated with a large and interesting project. People want it to succeed.
"Once Revel got going, it's as if they forgot that at the end of the day it was 1,400 rooms to rent, a couple hundred dollars a night, 70 percent occupied summer and 30 percent winter: If everything works right, with gambling, a little cash from restaurants, that's worth maybe a couple hundred million - $2 billion, no way."
The problem is also demographic, Graziano said. "Driving from Atlantic City to Toms River, I used to pass 25 buses to the casinos. Last week I passed four," he told me. "People that used to have union pensions, they're dying out. Now, you get to retirement age, you have to keep working, you can't blow $250 once or twice a week on slots."
In casino towns hit by layoffs, home sales are weak, retailers are just hanging on.
"You can still make money in casinos," Graziano concluded. "It just won't be the run they had."