the social milieu that tore the rivergate down
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chapter 6
| gambling:
the social milieu that tore the rivergate down |
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by c.b. forgotston
guide
I. Gambling In Louisiana, It's A Tradition! Louisiana has a long history of gambling. In south Louisiana where most of the voters are located, gambling is no longer a big moral or religious issue. Louisiana is the first state after Nevada and New Jersey where the governor said he was interested in bringing Las Vegas-style casinos into the State. This excludes gambling casinos on Indian reservations which exist all over the United States. Gov. Edwin Edwards quietly talked about casino gambling during his first term, 1972-1976. On 6 January 1986, during his third term, Gov. Edwards launched a campaign to allow ten to fifteen Las Vegas-style casinos in New Orleans. Politically it is easy to sell gambling in New Orleans because legislators outside of New Orleans have the attitude that New Orleans is "Sin City." There is nothing you can do to make New Orleans any worse. Dump on New Orleans; it can't hurt. Land-based casino gambling and riverboat casinos in New Orleans did not bother the people in the Bible Belt in northeast Louisiana just so long as it did not cost a lot of state money. This was the mind-set of the State on the eve of the proliferation of gambling in 1986. To understand the demise of the Rivergate, one must know the players and the chronology of events. The story hangs on a framework of two governors of Louisiana (Edwards and Roemer) and a mayor of New Orleans (Barthelemy): Governors of Louisiana (1972 to date)
Mayors of New Orleans
Prior to the 1991 fall elections, under then-Gov. Roemer (1988-1992), the legislature enacted three forms of gambling: lottery, video poker, and riverboat casinos. In 1990, the lottery passed for the first time since the 1890s; in 1991, video poker and riverboat casino gambling were legalized. These were the political tests for casino gambling that sent a message to the politicians; all of the legislators who voted for gambling made it through the 1991 elections without any serious political damage. The fear that the public would vote against the legislator who voted for gambling had kept the proliferation of gambling in check. (Before the 1990s gambling surge, pari-mutuel horse racing, off track betting, and charitable bingo were all legal.) During then-Gov. Edwards' third term (1984-1988), conservative legislators in the metro New Orleans area -- Orleans and Jefferson Parishes -- could have comfortably voted for the lottery because the public opinion polls showed 75 percent in favor. However, they killed it under then-Gov. Edwards. At the time there was a concern among some legislators that any such operations in an Edwards administration would be fraught with political problems. Lottery (1990) Roemer's efforts at fiscal reform did not succeed. Louisiana still had not pulled out of the oil and gas bust that began in the early 1980s. The lottery was again proposed as a solution to Louisiana's fiscal woes. Conservative legislators who had always opposed the lottery because of Edwin Edwards, not because of gambling, got on board. Roemer rationalized that he did not have to sign or veto the lottery since it was a constitutional amendment. He was merely letting the people decide. A typical political cop-out. By this time, because of his failed fiscal reform effort, Roemer was politically weakened and had lost some of his characteristic cockiness and arrogance. Further, he was plagued by the fact that he had not been elected by a majority of the people. In 1990, the lottery passed with an overwhelming 75 percent popular vote, and general happiness prevailed. The barrier to gambling was broken by the lottery. It appeared clear to the politicians that the public was not opposed to gambling. Riverboat Casino
Gambling (1991) By a small margin, riverboat casino gambling passed in the legislature, and the anti-gambling governor, Roemer, signed it! Video Poker (1991)
In 1991, Edwin Edwards defeated his opponent, David Duke, the one-time Ku Klux Klan Grand Wizard. The stage was set for Las Vegas-style casino gambling. Then-Gov. Edwin Edwards had a well known, well deserved reputation as a gambler. He went to Las Vegas regularly, and he knew all the players there. Since the governor of Louisiana is such a strong force in state politics, when Edwards declared he wanted Las Vegas-style gambling, Louisiana became the focus of the expansion of gambling in the United States. Additionally, the mayor of New Orleans, Sidney Barthelemy, was the only mayor of a major city in the country who indicated a desire to have casino gambling. New Orleans was still in the doldrums, and Barthelemy did not know what else to do to create jobs, nor would he listen to other viable options, such as the Louisiana State University-Tulane University-Charity Hospital Medical Complex in downtown New Orleans, the Port expansion, and the proposed (now developing) research park at the University of New Orleans on the lakefront. By 1991, the lottery was up and running. There were no major scandals, but it had only been in operation for a year. Not a single riverboat casino had been built. And video poker had not come on line. The state's economy was still down. Louisiana had a governor sympathetic to gambling (Edwards was elected to an unprecedented fourth term, 1992-1996), and New Orleans had a lame duck mayor who had nothing to lose (City Charter limits the mayor to two terms). In February 1992, Steve Wynn, owner of the Mirage and other casinos in Nevada, came to New Orleans. Wynn, reputed to be the golden-boy of the casino gambling business, quickly pointed out that there had never been a successful "free-standing" (no hotel or restaurants included) casino. He hired people to study the New Orleans market as a gambling center, spent several million dollars, and walked away from it. Wynn said his preference, if he were going to move out of the traditional gambling venue of Nevada, would be a city like Atlanta rather than New Orleans. Atlanta has a much larger population, a stronger economic base, and is an airline hub, which is extremely important in bringing in gamblers from out-of-state. All of his sound reasons have proved why Las Vegas-style casinos won't work in New Orleans.
V. Snake Oil And Fairy Dust A dapper, smooth talking promoter, Hemmeter painted a picture of revitalizing the riverfront and the decaying downtown New Orleans. A billion dollar development! No one in New Orleans had ever done a billion dollar construction project before. Hemmeter said if the legislature legalized gambling in the coming session, he "might" consider a casino in his plan. City Hall and some of the traditional business and civic leadership of the city, lured by revitalization and the number of jobs it was supposed to create, lost sight of the possibility that it could have been a scam. The super snake oil salesman sprinkling fairy dust fooled a lot of people, including some very bright, successful business people. Two City Councils did not require a financial statement from Hemmeter (it was considered an invasion of privacy). Nor did they require a performance bond. The Times-Picayune sent reporters to Hawaii to investigate Hemmeter, but they did not turn up anything of significance. Just by luck, I became acquainted with an Honolulu investment banker with some New Orleans connections who knew Hemmeter well. He speculated that Hemmeter did not have great wealth and might even have a negative net worth. He said unless Hemmeter went into bankruptcy, we would never see his financial statement.
The bill to authorize a land-based casino in New Orleans, HB-2010 (Act 384 of the 1992 Regular Session), may have been the most controversial vote ever taken in the Louisiana House of Representatives. John Alario, then speaker of the House and an ally of Gov. Edwards, demonstrated the power of his position as well as the power of Edwards when he maneuvered the casino bill through the House on Wednesday 10 June 1992. The previous Thursday a similar bill had fallen seven votes shy of the needed 53-vote majority to pass. It was returned to the calendar. On 10 July, HB-2010 did not appear on the regular order of the day (agenda); instead it was taken out of order and was ready for a vote sending a surprise wave over members of the House. Then-Speaker Alario ordered the electronic vote count to begin. At the electronic count of 53, he ordered the vote halted without the customary few seconds lag between the vote count and freezing the vote, which allows for a little gamesmanship (Maginnis 1995, 30). The legislation specifically defined the location of the land-based casino -- the Rivergate site at the foot of Canal Street. The law did not require the Rivergate to be torn down, and it did not require a new casino to be built. Once the determination was made that Hemmeter's grandiose casino was going to be built, the destruction of the Rivergate was a fait accompli. The passage of HB-2010 was the formal beginning of the casino and the end of the Rivergate. The City Council, apparently pressured by Mayor Barthelemy, awarded to Chris Hemmeter the lease of the city-owned Rivergate site. Subsequently, the Casino Board awarded Harrah's Jazz the casino operator's license. Harrah's Jazz was a partner of Harrah's and the Jazzville group (all local investors) who came together because they thought they had the best chance of getting the votes on the Casino Board to win the license over Hemmeter. They'd worry later whether they could get along.
Point Of No Return For
The Rivergate The second fatal blow to
the Rivergate came when Hemmeter "married" the Harrah's Jazz partnership. To put
the entire Grand Deal together politically, it was necessary to make a lot of smaller
deals. In reality, it was constructing a giant building on Louisiana political quicksand!
A lot of money went to reimburse Hemmeter for pieces of land in the vicinity of the Rivergate that he optioned at exorbitant prices. He seemed to buy into his own snake oil and fairy dust and to believe that the casino was going to be so successful that everything for blocks around would become very valuable. Hemmeter operated on "other people's money." Some of his deals were very cash thin: he might put up $1000 cash for a piece of property that he optioned at $1 million. When the financial deal was closed, the options were exercised with the proceeds from the sale of junk bonds. The inflated land prices took a big chunk of the money. Some of the money was probably spent on "political overhead." It is my understanding that when the junk bonds were sold, all of the parties were made whole for their prior out-of-pocket expenses. The interest rate on the over $400 million in junk bonds was approximately the equivalent of 18 percent. This added substantially to the financial debacle. Although the entire land-based casino project was estimated at $825 million, the unfinished building on the Rivergate site at the foot of Canal Street represents only approximately $200 million including parking garages. Thus, it appears that of the $825 million total project almost $600 million went to "political overhead." As of the filing of bankruptcy in November 1995, approximately $150 million more was needed to complete the facility. Included in the "political overhead" was the renovation of the City's Municipal Auditorium (built 1930) for Harrah's temporary casino. It was to be used for only one year; the cost of renovation was $45 million. The temporary casino actually was in operation for less than seven months. Apparently, cost was no object. In the gambling industry, gross win is determined by the amount of square footage in a casino's gambling area. In Nevada, the average is $2,000 per square foot. In Atlantic City, the win is approximately $3,200 per square foot. On the Mississippi Gulf Coast, it's around $1,270 per square foot. The Municipal Auditorium was renovated on the basis of an $8,000 per square foot win. The casino at the Rivergate site was projected to average $4,000-$5,000 per square foot win. The latest projections
for the bankrupt casino, should it ever be up and running at the Rivergate site, would
require 15,500 patrons who lose an average of $70 each, 365 days a year to merely break
even. The casino would have to draw annually more patrons than did the Aquarium of the
Americas, the Louisiana Superdome, the Flamingo (riverboat casino near the Rivergate
site), plus all of the convention delegates who went to the Ernest N. Morial Convention
Center in 1996 combined! [On 1 October 1997, the Flamingo ceased operation in New
Orleans.]
What went wrong with the New Orleans land-based casino will likely go down as one of the all time great business disasters that will be analyzed by students at the great business schools in America. As with most business fiascos, there tends to be something simple that has been over looked. In this case the gambling promoters failed to do a market study. They appeared to have operated under the philosophy "build it and they will come!" Unfortunately for them that works only in the movies.
The demographics of the ten million annual convention and tourist visitors who come to New Orleans were never analyzed by the gambling promoters. The conventioneers (vast majority of these visitors) represent the cream of the crop of the hospitality market. They tend to be well educated and financially well off, the higher socio-economic level. Such individuals tend not to gamble. What draws them to New Orleans is the Vieux Carré, the food, the music, the architecture, and the general ambience of this historic city. The white elephant building now on the Rivergate site was started in January 1995. The temporary casino at the Municipal Auditorium opened in May 1995, and the whole $825 million project went bust in November 1995. Unfinished and boarded up, Harrah's Jazz Casino is a monument to greed and corruption. The city was left with approximately a $23-million hole in its budget, the state with a $100 million in unrealized revenues, and unsecured creditors owed over $50 million; New Orleans has another political architectural folly!
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