Hard Times in the City of Sin

The bar on the 64th floor of the Mandalay Bay Hotel offers what could arguably be the best view of Las Vegas at night. A mile-long strip of brightly colored neon lights and gigantic, floodlit casinos glitters through the bar's floor-to-ceiling windows. Still, as you survey the otherwise dazzling city of nocturnal light, you can see conspicuous patches of darkness dotting the landscape.

One of these black craters is the construction site for the Fontainebleau Hotel casino and the 4,000 rooms it is supposed to offer. When the investors ran out of money, 70 percent of the project had already been completed. If you look diagonally across the street, you can see the site of what is supposed to be the Echelon complex. Only eight of its planned 57 stories were completed before the construction cranes pulled out.

VIDEO: To boost its economy Las Vegas uses its sinful side to attract tourists.Play

There is even a dark, gaping hole next to the Trump Tower. A twin had been planned for the site, but it will most likely never be built. Las Vegas, the global symbol of gambling and glitz, is hurting.

Super-Sizing Paradise

Over the last two decades, no other American city grew as quickly as Las Vegas. In 1980, it had 460,000 inhabitants; now it has 2 million.

Nowhere else was the boom wilder, consumption more excessive and the delusions of grandeur more extreme. New houses and apartment complexes shot up by the tens of thousands. Dozens of new casino hotels were built, many of which boasted 2,000, 3,000 or even 4,000 rooms. Celebrity chefs came to the city to open satellites of their famous restaurants, while junk shops gave way to stores offering exclusive fashion labels.

The Tunnel PeoplePlay

During that era, the strip was crowded until even 4 a.m., mainly with drunk, carefree Americans who could hardly believe they could walk around outside with a beer in their hand, that they could still smoke in public establishments and that there were swimming pools where women could go topless.

In a country notorious for its puritanical bent, Las Vegas is an anything-and-everything-goes kind of place. But now, the recession has blasted open one of its deepest craters here in this city surrounded by the Mojave Desert. Las Vegas now has the country's highest rate of home foreclosures, and more than 70 percent of homeowners here owe more on their mortgages than their houses or condos are worth. Since 2006, the average home price has dropped by a half.

Unemployment, on the other hand, has risen -- from about only 3 percent to over 13 percent. The city's luxury hotels have seen tens of thousands of reservations cancelled. Major casino operators are deeply in debt. In the spring, one of them, the MGM, barely escaped from having to declare bankruptcy.

In the meantime, economists are already warning that the collapse of the US residential real estate market could be followed by a similar disaster in commercial real estate. And if that bubble bursts, it will hit Las Vegas first.

Migrating Money

For more than two decades, banks, investment funds and financials firms attracted by the chance to make hefty profits and a seemingly limitless boom pumped billions of dollars into the city. They supplied the financing for casinos, shopping centers and entertainment venues. One of Las Vegas's biggest investors was Deutsche Bank.

Germany's largest bank is seen as one of the three major players in the local construction industry and in the financing of casinos and hotel complexes worth billions. Indeed, the Frankfurt-based banking giant is mentioned as an investor in connection with many major projects in the city.

To almost everyone -- and especially the Germans -- Las Vegas seemed recession-proof. But now, since the summer of 2008, gambling revenues have dropped by more than 10 percent (see graphic) after having plunged to as much as 25 percent in the months immediately following the bankruptcy of Lehman Brothers.

The city's future is now uncertain. There are still plans on the table to add 40,000 new hotel rooms to the 140,000 ones that already exist by 2012. The pending development projects are valued at $20 billion (€13.6 billion). But now people are wondering who needs all the additional rooms anymore and who will provide the financing for them. Even the city's wealthiest residents, who have consistently topped the lists of America's richest people, must now keep a close eye on the assets they have left.

For example, Sheldon Adelson, the owner of the Las Vegas Sands Corporation, whose assets include the luxury Venetian Resort, has seen his company's stock value plummet from $149 to $1.38 a share. Kirk Kerkorian, who has been one of the most important investors in Las Vegas since 1955, has been forced to sell many of his holdings in industrial companies, such as the automaker Ford. MGM Mirage, the city's largest casino operator, is almost $14 billion in debt and has only staved off bankruptcy with difficulty.

The banks, which once fueled the city's growth with attractive loans, are now much less willing to part with their money. "Ownership structure on the Strip five years from now is going to look different from now," says Rich Moriarty, director of the Union Gaming Group, which advises financial investors, hedge funds and banks on investing in Las Vegas.

Re-Branding a City

At first glance, Vegas doesn't seem to be particularly hard-hit by the crisis. The casinos resonate with the incessant "ding-ding-ding" of thousands of betting machines. Gambling and alcohol go hand-in-hand, and some gamblers are already drinking at 11 a.m. The casinos are windowless in order to deliberately keep out daylight and, consequently, a sense of time.

Lured by drastically reduced hotel rates, the curious are returning to Vegas; but they are spending less. Double rooms in famous luxury hotels -- such as the Mirage, which was home to the entertainment duo Siegfried and Roy for many years -- can now be had for less than $100 a night. Many hotels are renting their rooms at prices below cost -- which is better than not renting them at all. The visitors who are coming to Las Vegas now don't go out to dinner in the casino, Moriarty says. "It is a lower quality customer. They go across the street to the mall to have dinner rather than stay on the property."

Ironically, over the last decade, the trend in Las Vegas has put an increased focus on luxury. In some restaurants, appetizers go for $30, while the hottest nightclubs regularly won't let people in who aren't willing to fork over $400 for a bottle of liquor.

With its new foray into luxury tourism, Las Vegas has moved miles away from its first few successful decades. Those were the wild years. Since banks and corporations didn't want to be associated with gambling, only the Mafia was willing to invest in casino development. Those were the years when criminals like Bugsy Siegel, Meyer Lansky and Anthony Spilotro openly controlled the city and when crooners like Frank Sinatra and Dean Martin performed in relatively shabby venues, such as the Desert Inn.

It wasn't until the 1980s, when Wall Street discovered the gambling oasis in the Mojave Desert, that the casinos and hotels became not only flashier, but also more sophisticated. "The entire amount of new supply is all high-end, luxury rooms," says Moriarty.

For Alan Feldman, the head of communications at MGM Mirage, there is only one option: "We have to expand the market." Feldman wants to attract people from new target groups, including the "cosmopolitans" and "urban elites" -- in other words, those for whom Las Vegas has always been, as Feldmen says, "too kitschy" or "unreal". If only a small percentage of Americans can be convinced to come to Las Vegas, as Feldman hopes they will be, even the new hotel rooms will soon be full.

At the same time, the city's tourism officials have stepped up their efforts to attract visitors from abroad, who have traditionally only accounted for about 15 percent of guests. For example, tourists from Germany have almost no effect on the city's total number of visitors. The few that do come to Las Vegas are usually on their way to the nearby Grand Canyon.

Deutsche Bank to the Rescue?

Things look much different in the city's financial world. Deutsche Bank has "massive exposure" in Las Vegas, to the tune of a figure of double-digit billions, says Moriarty, who launched his own business with a partner this spring after having managed Deutsche Bank's investment banking arm in Las Vegas for years.

Since the end of 2008, Deutsche Bank has even been in direct control of one of the city's largest construction projects. At the time, the developer of the Cosmopolitan Resort & Casino could no longer service a $760 million loan, so Deutsche Bank acquired the 3,000-room behemoth for $1 billion.

"They are even picking out the wallpaper," themselves, says one insider. The banks are doing everything not to lose their investments.

Even so, the bankers will still not be able to operate the casino themselves. Instead, they will have to hire a professional with a license to run a gaming operation. The resort is scheduled to open in 2010. Deutsche Bank already took a €500-million ($741 million) write-off on the property in the second quarter of 2009.

Financing Competitors

Likewise, as a result of its other lending projects in the city, the bank actually has a hand in financing its competitors. For example, the owners of the Fontainebleau Hotel Corporation were convinced that the Germans wanted to "destroy" their Las Vegas development project. Construction was halted in the summer on the 3,800-room complex, which was 75 percent complete, after an $800 million loan, of which Deutsche Bank held a significant portion, was withdrawn.

In May, the owners of the Fontainebleau sued Deutsche Bank, accusing it of trying to "minimize competition with the Cosmopolitan." It was for this reason, they claim, that the bank "aggressively pushed for" other lenders, including the crisis-shaken German bank HSH Nordbank, to back out of the deal.

Deutsche Bank calls the allegations "baseless." Meanwhile, Fontainebleau, struggling with a possible bankruptcy, has withdrawn some of its charges, but it hasn't abandoned its lawsuit.

Even without the Fontainebleau suit, the Frankfurt-based bankers are already likely to encounter major problems with their casino. The CityCenter, which is the largest private development project in the United States, is being built right near the Cosmopolitan. Designed by a number of famous architects, including Daniel Libeskind, Helmut Jahn and Norman Foster, the CityCenter comprises three luxury hotels with a total of 6,000 rooms, thousands of condominiums, dozens of restaurants and a number of gambling facilities.

The huge development, a joint venture of MGM Mirage and investors from Dubai, will cost $8 billion. The plan almost imploded in the spring for lack of funds, but now the center is slated to open after all next spring.

To fill the mammoth developments, the owners hope to attract more trade fairs and corporate events. Las Vegas is the world's largest meeting and convention city. In 2008, more than 22,000 events took place there, ranging from large-scale affairs, such as the International Consumer Electronics Show (CES) with its 140,000 visitors, to the annual meeting of the American Society of Anesthesiologists. And then there are thousands of company meetings large and small, many of them little more than trips meant to reward deserving employees who, after a meeting in the morning, can spend the rest of the day gambling and drinking.

Mafia Vegas vs. Vegas Inc.

For years, such meetings helped sustain the city. And that was the case until a new president came on the scene and -- in a single sentence -- declared Las Vegas the country's most dangerous spot for companies. "You can't go take a trip to Las Vegas or go down to the Super Bowl on the taxpayers' dime," President Barack Obama said at a televised town hall meeting in February. A short time earlier, details had emerged about how Wells Fargo, a major US bank, had booked a 12-day company event in the city -- after having been saved from bankruptcy with billions in government bailout funds.

In the end, Wells Fargo canceled the event -- and many other organizations followed suit. "They are trying to make it out that Las Vegas has become this toxic city you can't even go to," complains Phil Cooper, a leading event manager. In the first quarter of 2009 alone, more than 400 conferences and trade fairs were cancelled.

"I certainly was not happy about it. What it did is put the imprimatur on Las Vegas being a place of excess," says Las Vegas Mayor Oscar Goodman, a lawyer who became a celebrity while defending the city's most notorious gangsters. In fact, Goodman plays himself in "Casino," Martin Scorsese's 1995 Oscar-nominated film about the Las Vegas underworld. But this hasn't stopped city residents from electing him to three terms as mayor.

Can today's Vegas even be compared with the city in its wild years, when it was dominated by the Mafia rather than Wall Street? The big corporations have made it more impersonal, says Goodman, as he glances at the hundreds of photos on his office wall that show him with famous people, such as Bill Clinton and Michael Jackson.

"I liked life in the old days better," says Goodman. "I'd like to be able to shake a person's hand and have a deal rather than have a contract in writing. I think with the shakeout we are having now, many of those corporate properties will go into private hands and that will be more like the old Las Vegas."

If you're looking for the old Las Vegas, it can still be found north of "the Strip," in neighborhoods beyond the sparkle of the casinos. These are the neighborhoods where run-down wedding chapels advertise their services by claiming that Elvis Presley got married there once, and where the gamblers seem as seedy as the decades-old small gambling houses, where old people with pale faces and empty-looking eyes spend hours in front of slot machines that cost only two cents a game.

But the new, modern Vegas demands a different clientele. It needs companies and businesspeople, the kind who burn through their expense accounts and spend a few days having fun on the company's dime.

Desperate Times

Since this spring, the city has invested millions in an advertising campaign that also focuses directly on businesses. For example, according to a 10-page ad the city placed in the Wall Street Journal, "Business meetings in Las Vegas offer the best value proposition on the planet." It sounds a little desperate.

And no wonder: With each empty room, more and more jobs in Las Vegas are threatened. The rule of thumb is that each hotel room equals two and a half jobs. Tens of thousands of jobs have already been lost.

Las Vegas is now surrounded by empty developments with names like Azure Canyon and abandoned bedroom communities in the "Mediterranean style." Richard Plaster, one of the city's top developers, says that 30,000 houses -- or the equivalent of a new small city -- were built every 12 months. Parts of Las Vegas are only five or six years old.

The houses were all built along roughly the same lines: five rooms, three baths and two garages. There is plenty of space around Las Vegas. Most are now dark and empty -- either because they were never lived in or were quickly abandoned. Every month, there are foreclosures on an average of 2,000 buildings.

It's eerily quiet on the freshly paved streets. They have names like "Evening Melody" and "Dancing Breeze," names meant to evoke a pleasant life in a place where it never gets cold. Here and there, empty or half-developed properties form voids in the endless rows of houses, like gaps in a row of teeth. Plaster is convinced that "there are long, hard times ahead."

Translated from the German by Christopher Sultan