Bank owns the most expensive casino ever built in Las Vegas - the Cosmopolitan of Las Vegas, which opened in December.  So, what is DB's exit strategy?  Apparently, there aren't a lot of options.  Industry experts say it could take years, if not decades, for Deutsche Bank to recoup its $4 billion investment.

“There has to be pressure on Frankfurt to do something.  They are a bank, and I don’t think they have any interest in running a casino.”  - - Bill Lerner, an analyst with the Union Gaming Group, a research firm . 

        Genesis of the Investment.   The investment began as a $768 million construction loan.  But the bank reluctantly inherited the Cosmopolitan in 2008, when Bruce Eichner, then-owner of the casino and a developer, ran into cash-flow problems and defaulted.  Upon when he defaulted on the loan, Deutsche Bank foreclosed on Mr. Eichner and took control of the property.  Prior to entering Vegas, Mr. Eichner had been known mainly for developing high-end residential properties in New York and South Beach. 

“With the world coming to an end in 2008, I wouldn’t have done that project if someone had a gun to my head.  I suspect they will look for a liquidity event over a short period of time.”  - - Bill Lerner

Once it took over the property, Deutsche Bank spared no expense on the Cosmopolitan, whose casino floor is dominated by a 3-story glass chandelier that encompasses a cocktail bar.  Guests rave about the oversize luxury hotel rooms with wrap-around terraces, which are often sold out.  And management has lured popular restaurateurs and retailers. 

The Cosmopolitan is missing just one major component:  a deep base of gamblers.  It's betting on a relatively young demographic, a challenging crowd that usually prefers partying.  On a recent Saturday night, the casino was almost empty as visitors flocked up one flight to the Marquee nightclub, where one inebriated partygoer threw up in line.

“It’s a story that’s closely linked to that of Las Vegas’s fortunes.”  - - Anthony Curtis, former professional gambler who now runs the Web site Las Vegas Advisor.

The investment is also putting Deutsche Bank at odds with its own clients.  In 2009, it hired the general manager at Caesars Palace to run the Cosmopolitan - a move that upset the parent company, Caesars Entertainment, a crucial customer of the bank, according to people with knowledge of the situation who were not authorized to speak publicly.

        Deutsche Bank: In Company With Goldman and Others.   While big banks bristle at comparisons to casinos, big banks - by choice and by circumstance - have become a force in Las Vegas and other gambling hot spots.  Goldman Sachs acquired the Stratosphere in 2008 for about $1 billion.  Bond powerhouse Cantor Fitzgerald runs the sports books at the Tropicana and other locales.  Until recently, Credit Suisse owned a stake in the Hard Rock Hotel and Casino.

But few companies have as much riding on the industry as Deutsche Bank.

Many big lenders and opportunistic investors ended up owning troubled, half-built properties in recent years.  Some walked away, like Morgan Stanley, which took a $1 billion write-off on the Revel in Atlantic City.  Others decided to wait out the economic downturn.  Billionaire Carl C. Icahn, who picked up the unfinished Fontainebleau resort in Las Vegas in bankruptcy for $156 million in 2009, still has not restarted construction on it.

        Deutsche Bank Doubles Down.   But Deutsche Bank chose to double down on the Cosmopolitan, opting to go it alone after failing to find a partner.  Almost immediately, the bank scrapped Mr. Eichner’s vision for the Cosmopolitan, which was originally planned as a modern residential building with 28-foot robots playing guitars in the lobby area.  The bank also provided the project with a low-interest loan, potentially making the bank liable for roughly $4 billion.   Deutsche Bank soon recruited a high-powered management team, led by John Unwin, the former Caesars executive.  The Cosmopolitan, say rivals who have lost staff, is offering pay packages 30% higher than the industry standard.  Mr. Unwin collected $1.8 million in 2010, including a $1 million bonus.

Now, 3 years later, and with an enormous financial commitment, the Cosmopolitan opened late last year to favorable reviews.  Many of the hotel rooms, which are retrofitted condos from the housing bubble era, come equipped with kitchens and terraces that overlook Bellagio’s famous water show.  Room rates, which can top $300 a night, are among the most expensive in Las Vegas, and the property is often filled to capacity.  The Cosmopolitan also has attracted a distinctive lineup of retailers and restaurants, many of which are new to the local scene. The trendy British clothing line AllSaints chose the casino for its first Las Vegas shop.

Deutsche Bank also had to contend with a tricky plot of land - the Cosmopolitan sits on only 8.7 acres, compared with 120.5 acres at the neighboring Bellagio, the resort modeled after an Italian palazzo.  So Deutsche Bank had to build up rather than out, drawing comparisons to a New York City brownstone.  The casino occupies the first floor, while restaurants, retailers and a common area with a pool table take up the next two.  It is a challenging design, as it forces customers to leave the casino floor for food and shopping.

All that has left Deutsche Bank struggling to attract a critical mass of gamblers. At most Las Vegas properties, the casinos typically represent half of revenue, with the balance coming from lodging, retail and the like.  It is less at the Cosmopolitan, according to industry analysts.

        Bank Executives Keep Low Profile.   Behind the scenes, executives at Deutsche Bank have balked at some aspects of casino ownership. The Cosmopolitan created a risqué advertising campaign featuring farm animals and proclaiming that the casino had “just the right amount of wrong.”  Senior officials in Germany felt the commercials were too “racy for a bank,” said a former Deutsche employee who spoke on the condition of anonymity. Despite Deutsche’s concerns, the Cosmopolitan ran the ads.

The bank’s senior management has also kept a low profile in Las Vegas. Its chief executive, Josef Ackermann, has visited the Cosmopolitan only twice in recent years.  He was also notably absent from the opening party, a $12 million affair on New Year’s Eve with A-list appearances by Beyoncé, Coldplay and Jay-Z.    [NYT Dealbook, 4/18]