Asymmetric Skills Make For Mismatches In Regulation

In December 2007, I agreed to become a consultant to the Kansas Lottery Commission to assist them in introducing casino gaming in the state. My initial agreement with the commission was to work for 90 days, with an option for them to extend for an additional 60 days. But the arrangement went well beyond this time frame, for December 2007 was the start of what was to become known as the Great Recession.

My primary assignment for Kansas was to evaluate the financial wherewithal of those firms submitting bids — first to ensure that they could deliver on their promises, and second, to attest to the managerial competence of the bidding companies to operate a casino facility.

I was living in Laguna Beach, California, at the time, and my home was near the top of a hill with a narrow access road. Early one morning in 2008, a large delivery truck daringly navigated that road to deliver about 60 bankers’ boxes of documents to my home, representing the responses requested by Kansas from those firms desiring to secure one of the four available casino sites in the state.

While assessing managerial competence was fairly easy, the financial wherewithal aspect became a substantial challenge. The economy was in disarray and the bidding firms’ financial statements were changing rapidly.

The Great Recession, which was the deepest financial decline since the Great Depression, was in full swing. 

This reality placed greater emphasis on my evaluating the financial records, for Kansas did not want to award a license to a firm that could not then execute the project for financial reasons. Not only were the bidding firms’ financial statements going through all kinds of trauma associated with the poor performance of the economy, but financial markets were also experiencing their own drama. In talking with my supervisor in Kansas, the last thing we wanted was some steel-framed skeleton in Kansas serving as testament to how a casino project had to shut down for lack of capital while under construction.

Analyze, re-analyze, rinse, repeat

One of the bidding firms was Harrah’s Entertainment, then the largest casino company in the world. The company had been subject to a leveraged buyout involving Apollo Global Management and TPG in 2006 for just shy of $30 billion. This deal closed in January 2008, my first month working with Kansas.

Because of the Great Recession, the Kansas job was one that continually renewed itself. Once I would complete an analysis of the financials of an entity, the entity would then announce that its financials had changed — and it was never for the better. This meant I had to secure new documents from the bidder and restart the analysis, and on and on it went.

Because of the dour economy, some of the firms withdrew their bids, and that helped reduce the number of balls I was juggling. Things got somewhat crazier for me in March 2009, however, when Harrah’s announced through a filing with the Securities and Exchange Commission that based on its financial performance, it might not be able to service its $23 billion-plus of debt or to secure new funds. In other words, it was potentially heading for a financial cliff, and Kansas certainly needed to understand the different potential scenarios of that journey.

I gathered all of the financial information I had on Harrah’s, along with a great deal of supplemental information we had requested, and headed to the beach house of a friend in San Diego. I started on a series of 16-hour days of working through every detail of the Harrah’s documents. This included covenant testing on a ton of debt instruments.

During this time, I had a number of conversations with my supervisor in Kansas, and I became fond of telling him that I had fallen into Harrah’s financials and could not get up. It was all overwhelming.

Fast forward to 2014, and I was speaking at a gaming conference in Philadelphia. Harrah’s had changed its name to Caesars Entertainment, but this did not solve its problems, for the financial situation had deteriorated for the firm. At this time, a number of lawsuits were swirling about the different actors involved in the Caesars drama, and the company entered bankruptcy the following year. 

While I was speaking at this conference, the financial chaos of Caesars did come up, and I made the somewhat joking comment that, based on my work for Kansas, I did not believe that there were five people on the planet who understood Caesars’ financials. Like I said, I was joking — somewhat.

After the panel, I was approached by a number of people. Two of these folks headed regulatory agencies, and they both made the point that “their people” were on top of what was going on with Caesars. I did not think too much about these statements at the time, but have certainly thought about them often in the passing years.

Caesars Palace page turner

Fast forward again to March 2021. This marked the publication of the book The Caesars Palace Coup: How a Billionaire Brawl Over the Famous Casino Exposed the Power and Greed of Wall Street. This book chronicled the period from the leveraged buyout through the bankruptcy. Max Frumes and Sujeet Indap authored this tome, and it has played to excellent reviews and accolades from the financial press.

I have had the honor of meeting these gentlemen, was invited to and attended the book’s publication party in New York City, and was fortunate to be invited to join the two of them on a podcast. They both carry serious credentials in finance and as journalists, and they spent more than four years working on the book. 

The two authors will also suggest that another individual by the name of Richard J. Davis could be considered the third author of their book. Davis, once an assistant U.S. attorney on the Watergate Task Force, was appointed as the examiner in Caesars’ bankruptcy and provided an approximately 1,800-page analysis that did not speak particularly well of many of the folks involved in the series of transactions surrounding Caesars. It is a fascinating read.

One of the inevitabilities following the bankruptcy proceedings was that the restructured entity needed to be licensed by the gaming regulators. While this took time to get through all of these different jurisdictions, it was accomplished.

And during these jurisdictional investigations, it seemed that no one was terribly bothered by the legacy bond issues, the separation of assets into the “good Caesars” and the “bad Caesars,” the dropped bond guarantees, or the behavior and approach of individuals such as Apollo’s David Sambur. I believe that these issues did not surface because the regulatory reviews took place a number of years before Frumes and Indap’s book was published, and the regulators did not find these issues — or if they did, did not understand their significance.

This would also be consistent with the notion that the regulators had not worked through the 1,800-page analysis by the bankruptcy trustee, Davis.

Also after the bankruptcy approval, it was noted in the press that Leon Black, the chairman and largest shareholder of Apollo, had paid Jeffrey Epstein over $158 million for something, and he’d also been making payments to model Guzel Ganieva in excess of $9 million in support of a non-disclosure agreement. Ms. Ganieva later claimed that Leon Black had raped her. One would think that a thorough attempt by the regulators to follow the money of the largest shareholder and chairman of Apollo would have stumbled upon these somewhat significant transactions.

How did regulators miss these details?

My sense is that there are several things going on here. One is the asymmetry of skills and experience between the people who are structuring these transactions and the regulators who are reviewing these transactions. On one side are some of the smartest financial people on the planet who make huge incomes on large and complex deals; on the other side are people who work within a state bureaucracy and probably have a degree in accounting from a state college and make a medium-to-high-five-figure salary.

So, too, it is with legal skills. Payments to lawyers in the restructuring process probably exceeded $300 million, paid to some of the premier law firms in the land. The regulatory legal assets used by the state agencies did not command these payment or experience levels — by a long shot.

The concept of asymmetric warfare is relevant here. When one side has a material advantage in the tools and assets available, the matchup becomes a contest between a professional football team and a high school champion.

In the past, I have joked that it was a requirement of politicians, regulators, and industry participants in some states to mention the term “gold standard” at least once a day when referring to the jurisdiction’s regulatory assets. This joke is most appropriate in Nevada, where it became a cottage industry to sell the “gold standard” image. 

While I have the greatest respect for a great many men and women within regulatory agencies across the United States, it is also important to understand that they are relatively poorly paid and work within a state-run bureaucracy. The agencies are also generally understaffed. In addition, there seems to be a lack of political will in many states to police the industry aggressively.

This all has become a very unfair fight, and we should quit working to create the myth that it is not. Until we remedy the asymmetry, the expectation should be that we will continue to see revelations of misconduct come from the press — as was apparent with Steve Wynn and his organization and also the details surrounding the Caesars/Apollo relationship — and not from the regulators.