(FORTUNE Magazine) – Want to see a white elephant? Just take a look at the photograph on the opposite page.

This particular white elephant sits smack in the heart of downtown New Orleans, wedged between the French Quarter, the business district, the giant convention hotels, and the Mississippi River. Even at ground level, it stands out: The massive, two-story, windowless shell sprawls over an oversized city block--a jumbo-jet hangar on steroids. Inside it's a mess, all rusting storage barrels and twisted metal and piles of dry wall. Escalators rise to nowhere.

Originally, this half-finished building was going to be a casino--but not just any casino. It was going to be the biggest casino the world had ever seen--and one of the richest as well, with early revenue projections running at $1 billion a year. It would create thousands of new jobs, pour hundreds of millions of dollars into the state and city treasuries, and spark a new tourist trade for a tourist-dependent town.

But none of these good things came to pass. Two years ago the lead developer, Harrah's Entertainment, put the unfinished project into bankruptcy. By then the only record it had set was for cost overruns: What was originally supposed to cost $395 million was approaching an eye-popping $900 million. In the intervening two years, as those involved in the debacle have fought over who deserves the blame and what should be done about it, the building has served as a constant, nagging reminder of one of the greatest municipal follies of recent times.

This is the story of that debacle. To be sure, it's not over yet: Just weeks ago, Harrah's agreed to move forward with the project; it hopes to have a casino up and running by Mardi Gras 1999. Even so, the ambitions for the project have been scaled back considerably--and it's still far from certain that it will ever make much money. And in the meantime, bondholders have taken a beating; one part-owner has been wiped out completely; and Harrah's has tarnished its reputation as one of the casino industry's sharpest operators.

In the 20 years since New Jersey first got the bright idea that casino gambling could save Atlantic City, dozens of other places have followed its example. Small mining towns in Colorado, Indian tribes in Connecticut, cities from St. Louis to Biloxi, Miss., have all raced to get into casino gambling--and to extract every possible penny from the casinos. Even as more and more gambling halls opened all across the country--creating fierce competition for bettors--the political impulse to bring in casinos, and to milk them, did not abate. If anything, it got stronger.

New Orleans is where it all came to a head--where the increasingly tough business realities collided with a political culture that viewed casinos as the ultimate cash cow. Yes, politics in Louisiana is an exaggerated version of politics in more sedate locales. And yes, tough-minded businessmen came to Louisiana and lost their heads in a haze of inflated estimates and grandiose dreams. But at a time when the casino business is fast reaching a state of chronic overcapacity, Louisiana may wind up standing as simply an exaggerated version of what's going to happen in lots of places that have bet the house on legalized gambling.

FANTASYLAND

To begin to understand how the New Orleans casino became gambling's biggest disaster, you need to meet the man who convinced everyone it would be its most glorious success. He's an aging golden boy named Christopher Hemmeter, a 58-year-old developer who built a $200 million fortune by following the Trump-like credo that the bigger the vision, the greater the triumph. It was Hemmeter who first created the extraordinary expectations among Louisiana's political leaders that would cause the project to collapse of its own weight.

Now licking his wounds in a Los Angeles mansion, Hemmeter spends his time writing his autobiography, dealing with his personal bankruptcy ($720,000 in assets; $87 million in liabilities), and waxing philosophical. "I lost it all," he muses in an exceedingly cordial phone conversation. "I lost my homes...I lost everything." But when asked if he would do it again, even knowing what he knows now, he immediately brightens. "I'm an entrepreneur," he explains, in a silky, confident tone. "I'm a risk taker. Of course I would do it again. Because that's what an entrepreneur is."

Although perhaps best known as the builder of the Jimmy Carter Library in Atlanta, Hemmeter made his big money in Hawaii, where in the 1980s he pioneered the concept of the superdeluxe fantasy resort. His hotels contained a thousand rooms or more and cost hundreds of millions of dollars to build. But it's the details that really set them apart. Hemmeter's guests could frolic with dolphins in a lagoon. He transported visitors about his resorts by monorail and in carriages drawn by Clydesdales. He built open-air lobbies with the feel of rain forests.

Nor was his personal life much less extravagant. Among other things, Hemmeter collected a string of homes with mind-blowing prices and traveled the world in his own customized 727.

There is no question that Hemmeter's developments were influential, particularly among casino operators in Las Vegas. Facing increased competition as legalized gambling began to spread, the Vegas operators turned to themed resorts to attract customers. Casino king Steve Wynn, for instance, borrowed much from Hemmeter when he built the hugely successful Mirage megaresort.

Which perhaps explains why Hemmeter himself eventually decided to hop on casinos as the next development tsunami. Having cashed out of most of his Hawaii properties by 1990--one step ahead of the collapse of the market--Hemmeter got his feet wet by developing two small gambling halls in Colorado. Then he caught the scent of big money in Louisiana.

Was there any place in the country more ripe for the promise of casino gambling than Louisiana in the early 1990s? It would be hard to think of one. The state was economically depressed and looking for a new source of jobs and revenues. Its largest city had a site that practically screamed out for a casino--the old Rivergate Convention Center in downtown New Orleans, a huge wing-roofed 1960s-era building that had fallen into disuse. And that legendary rogue Edwin Edwards, whose fondness for gambling was no secret, was about to return to the statehouse. Already a bill to legalize riverboat gambling had become law, and a bill creating a land casino seemed sure to follow.

Although Hemmeter was early in sniffing around New Orleans, he was not the first developer on the scene. That distinction belongs to a smalltime Dallas developer named Danny Robinowitz. A New Orleans native, Robinowitz, 58, had fantasized for years about putting up a casino in his hometown. But while he had a number of close relationships among Louisiana politicians, he lacked just about everything else--money, resources, know-how--needed to make such an ambitious project happen. Realizing this, he managed to attract the interest of someone who could make it happen: Mirage Resorts CEO Steve Wynn. In September 1991 the two hosted a pair of junkets to Las Vegas that included New Orleans mayor Sidney Barthelemy and several of Robinowitz's other political friends. Mirage then offered Robinowitz a consulting contract that included a bonus of $2 million a year if Mirage won the exclusive right to operate a land casino.

Catching wind of this, Hemmeter quickly moved to convert Robinowitz into his political guy instead of Wynn's. To keep Robinowitz from signing the Mirage contract, he resorted to a tactic he would use time and again in Louisiana: He dangled an obscene sum of money. He offered Robinowitz a stipend of $90,000 a month, a $2 million signing bonus, a $5 million bonus if they won a land-casino license, a 30% interest in the casino itself, and a piece of Hemmeter's Colorado casinos. Robinowitz figured his stake in the land casino alone would eventually yield $1.5 million a month. Five weeks after hosting his political friends in Las Vegas, Robinowitz found himself hosting the same group in Hawaii--this time with Hemmeter at his side instead of Wynn.

Robinowitz's original idea had been to renovate the cavernous Rivergate building, which was well suited for a casino. But Hemmeter had no interest in anything so mundane as a renovation project. Instead, his proposal, which he unveiled in April 1992, was to raze the Rivergate and replace it with something far grander. Vowing to recast New Orleans as the "Paris of the Americas," he promised not merely a gambling hall but a billion-dollar redevelopment of the city's riverfront. The development would include something for everyone: an opera house, a science museum, an artisans' village, a job-training center, and a ten-acre park with a massive fountain framed by ten-story-high arches commemorating Napoleon and Thomas Jefferson. As for the casino itself, it would contain 250,000 square feet of gaming space--twice as much as any gaming hall on earth. Calling it the "Grand Palais," Hemmeter said its interior would compare favorably with the Hall of Mirrors at Versailles. Best of all, the Grand Palais would rake in, by his estimate, $1.2 billion a year.

As he went around the state selling his dream, he was by all accounts mesmerizing. "Development tends to be a smoke-and-mirrors business," says Darryl Berger, a successful New Orleans developer. "Hemmeter is the master." Yet the revenue numbers he was using to justify the mammoth project--that $1.2 billion--were absurd. For one thing, even the bigger Las Vegas casino complexes have revenues of only around $500 million. And Hemmeter's rationale was ludicrous. He based his numbers on the combined take of groups of casinos in the gambling meccas of Las Vegas and Atlantic City. He justified this by saying that his development would have a land-casino monopoly in one of the world's great tourist cities.

The implication, of course, was that his casino would face no competition. Yet a dozen riverboat operations were in the works, including three in downtown New Orleans. Two Indian tribes were opening gaming parlors a half-day's drive away. And Mississippi--less than 100 miles from the Big Easy--had just legalized dockside casino gambling. Besides, unlike in Las Vegas or Atlantic City, it was far from clear that New Orleans tourists would want to spend their time gambling.

The repercussions of Hemmeter's outrageous revenue estimate were huge. They made it nearly impossible for other, more realistic plans to get a hearing. "By the time other casino operators arrived, the notion of the casino generating $1 billion was an accepted fact," says Mirage vice president Alan Feldman. "If you didn't agree with that, you were in second place going in." They also introduced an ongoing--if self-deluded--rationale that the project's developers would repeatedly employ later on, when costs were spiraling out of control. As Hemmeter puts it, "When you have massive sources of operational income, they can overcome all kinds of problems. Expenses," he adds, "are just expenses."

Most critically, the billion-dollar figure had precisely the kind of effect on Louisiana's politicians that you'd expect. If a billion dollars a year was going to be flowing through the casino, they wanted a big chunk of it. "I wasn't about making money for the casino," admits mayor Barthelemy, who was smitten by Hemmeter's salesmanship. "That wasn't my purpose. Hell, no. From everything I read about casinos and their operations, they make big bucks." And everything Hemmeter did and said only served to further convince Barthelemy--and every other politician--that the casino was an unlimited bonanza.

Thus, as the land-casino bill made its way through the legislature, the politicians began piling on conditions that served political needs rather than business imperatives. The bill, for instance, included a demand for 18.5% of gross revenues as the state's cut--twice as much as in Nevada or New Jersey--with a staggering minimum payment of $100 million a year. Even more ominous, in order to mollify the powerful New Orleans restaurant and hotel lobbies, the legislature barred hotel rooms, most retail shops, and all restaurants (except for a 250-seat cafeteria).

Astonishingly--insanely--Hemmeter agreed, even though such amenities are critical to a casino's success. Indeed, at most large gambling resorts, noncasino sources provide 20%--or more--of total revenues. Wynn, for one, was aghast. "Nobody ever goes for the gambling," he says. "They go for the other things, and they gamble while they're there." In his view, the lack of hotel rooms and restaurants meant that revenues would likely be closer to $300 million a year than $1.2 billion--and would make profits all but unattainable. "This deal was upside down from day one," adds Wynn. "We sat here and said, 'This is going up in smoke.'"

Nevertheless, on June 18, 1992, this was the version of the casino legislation that became law.

RAISING THE ANTE

Five months later, to the surprise of absolutely no one, New Orleans granted Hemmeter exclusive rights to lease the Rivergate property, which under the new law was the sole authorized site for a land casino in Louisiana. By any reasonable calculation, that should have been the end of the matter. Of the nine other casino groups that had bid for the lease, only one was still willing to take him on.

Known as the Jazzville group, it was made up of a handful of politically connected Louisiana residents. Where the outsiders saw a dead end, the local boys saw an opportunity--an opportunity that lay less with the business aspects of the casino deal than with its politics. Under the casino law, the city merely had the right to lease the site. A special nine-member state casino board, appointed by Edwards, would grant the gaming license. This weird division had come about because the city and state distrusted each other, and had refused to collaborate. Even so, it would be crazy to give the lease to one group and the license to another. Yet that is precisely what the Jazzville group now hoped to bring about. If it could throw around its collective political weight and win the license away from Hemmeter, who was still the odds-on favorite...well, it would worry about the ensuing chaos later.

The leader of the Jazzville group was 54-year-old Wendell Gauthier, a trial lawyer who has become something of a national figure of late. Gauthier is the lawyer who organized the effort to bring a nationwide class-action lawsuit against the tobacco industry. More recently, he drew headlines this September when he won a $5.3 billion award in a railcar chemical fire case in which no one was even seriously injured.

Gauthier had assembled his group not long after Hemmeter first unveiled his plan back in the spring of 1992. He and his nine partners, all businessmen or plaintiffs lawyers, were offended that an outsider like Hemmeter might snag so rich a local prize. In the competition for the city's lease, the Jazzville group never really had a chance: They knew very little about the casino business, and their presentation was amateurish. Besides, Barthelemy had made little attempt to disguise the fact that he favored Hemmeter's vision.

But the license fight was another story. At the state level the Jazzville group was extremely well connected. Several of its members were major contributors to the state's top elected officials. Others were from families that had been involved in state politics for generations. One Jazzville member, attorney Mike St. Martin, was a regular hunting buddy of Edwards'. And Gauthier went way back with the governor as well; his father had helped run Edwards' first campaign, for the Crowley city council, back in 1954.

In the spring of 1993, Gauthier and St. Martin made a trip to Baton Rouge to visit their friend in the statehouse and find out if Hemmeter had the state license sewed up. Edwards assured them they would get a fair shake from his casino board.

Even if the Jazzville boys hadn't been politically well connected, the governor had reason to give that answer. After all, the state needed a competitive battle; otherwise it would have no leverage over Hemmeter. Plus, of course, a competition raised the delightful prospect of a bidding war. In fact, Edwards had privately urged Wynn to seek the license. But Wynn had lost the city competition--after blasting the restrictions in the state law--and wanted nothing more to do with Louisiana. That left only Jazzville to compete with Hemmeter. Edwards, however, made a point of telling them that they needed a major casino operator as a partner.

A few weeks later the governor went one step further: He helped the Jazzville group line up a partner. The candidate was Harrah's, one of the best-run casino companies in the country. Harrah's had earlier approached the Jazzville group about joining forces on a riverboat venture; Gauthier responded by urging Harrah's to go in on the land-casino bid instead. Harrah's, of course, said no--for the same reasons that all the other big players had said no. Then Colin Reed, the Harrah's senior vice president in charge of developing new casinos, began getting phone calls from Edwards, who urged Harrah's to join forces with Gauthier. A few weeks later it did precisely that. But why? Today, more than four years after forging that fateful alliance, Harrah's executives offer a variety of rationales. A casino in New Orleans, a city visited by some ten million tourists a year, could help establish the Harrah's brand across the country. Their plan--a variation of Jazzville's city proposal--was saner than Hemmeter's: a Rivergate renovation that would be completed quickly and create a 120,000-square-foot gaming hall, at a cost of only $270 million. The company's equity investment would be limited to $40 million. And finally, Harrah's executives thought it would be fun to be in New Orleans. Says Reed: "We loved being in one of the great party cities of the world."

And yet the economics of the deal were as bad as ever: The suicidal no-amenities clause was still part of the law, and the exorbitant revenue projections were still coloring the way the politicians perceived the casino. What's more, the button-down Harrah's executives were in over their heads in Louisiana's rough-and-tumble political culture. This was obvious even in their dealings with the Jazzville group; although Harrah's agreed to put up almost all the equity, the Jazzville boys wound up with 50.5% of the ownership.

With Harrah's at the table, Edwin Edwards had what he had hoped for: a bidding war. Harrah's Jazz, as the partnership was called, made a dramatic strike: an attention-getting offer of a $100 million gift to the state. Hemmeter countered by offering to give the state a $200 million advance of its casino taxes. Harrah's Jazz upped its gift to $125 million. Hemmeter increased the size of the Grand Palais to 300,000 square feet of gaming space and added an outrageous new touch: a $15 million, two-story ersatz cuckoo clock, which at every quarter-hour would produce a water-and-light show showcasing great moments in New Orleans' past. Though he had had to toss out other parts of his original plan, such as the opera house, the Grand Palais alone now carried a price tag of $500 million. And although the state's 18.5% of the take was already twice the norm, Hemmeter offered to create a sliding scale that would begin at 19% and could run up as high as 30%, depending on the casino's revenues. Harrah's Jazz quickly raised its offer too.

And so it went. Harrah's Jazz had ten politically connected heavyweights. Hemmeter had Billy Broadhurst--best known for escorting Gary Hart and Donna Rice aboard the yacht Monkey Business--as a consultant. Broadhurst was Edwards' former law partner and had just chaired his campaign. Hemmeter hired private investigators to dig for dirt on his opponents; the Jazzville boys rummaged through a Hemmeter consultant's garbage.

Revenue projections also became part of the bidding war. Harrah's Jazz, which should have known better, was estimating a frothy $618 million in revenues, while the Hemmeter camp stuck by its even more unrealistic $1 billion-plus number. Hemmeter had retained Caesars World to run the Grand Palais; John Groom, the Caesars executive sent to New Orleans, tried to argue for more reasonable numbers but to no avail. "We'd come in and be told what the revenues had to be. We told them that was impossible.... Anytime we had a problem getting to where we needed to be, they would just add slot machines." Added Broadhurst in one memo: "This is a beauty contest. We must show a $1 billion market."

But in the end it came down to politics. As the August 1993 vote approached, Hemmeter could count on four of the five votes needed to win; Harrah's Jazz, on just two. The key vote was that of Sallie Page, an African American who was expected to vote with the two other black members of the state gaming board, both of whom favored the Grand Palais. Calling in one last political favor, the Jazzville boys summoned U.S. Rep. Cleo Fields, Page's political mentor, to lobby her, according to Jazzville partner George Solomon. (Page angrily responds: "Nobody talked to me.") Then, having done everything they could, the Harrah's Jazz team went out for dinner at Galatoire's, the famous Bourbon Street restaurant. "It was in the hands of the good Lord at that time," recalls Solomon.

Well, not exactly. The next day, Sallie Page decided to vote their way--and so did four other board members. Harrah's Jazz had won, and the unthinkable had happened. The lease and the license had gone to different entities.

At that point, the Jazzville ten lived up to their role as Louisiana players: They had one helluva celebration. The group gathered outside the Rivergate, where one of the partners pulled up in a van packed with champagne. They started drinking before noon and kept downing bubbly into the next morning. Everyone woke up with a world-class hangover--and it was more than just the alcohol. NOW WHAT? read the giant front-page headline in the New Orleans Times-Picayune.

SHOTGUN PARTNERS

In the immediate aftermath of the board vote, Hemmeter was photographed with his arm around his erstwhile rival Gauthier, and vowed to work out a quick agreement with Harrah's Jazz. By the end of the following week, he had filed a lawsuit. Chaos--entirely predictable--had broken out. Hemmeter was demanding control of the project; Gauthier labeled the idea a "deal breaker." Furious about the state choice, Barthelemy stormed out of a news conference in his City Hall office. Robinowitz, believing that Gauthier had bought one vote by providing a female acquaintance for liaisons with a board member, had investigators compile a dossier, including a photograph of the woman--which he flashed around during a tense meeting between the two sides. (Gauthier denies any impropriety.)

Finally, Edwards stepped in. If the two sides couldn't come to some agreement, he said, the state would hire its own casino operator and run the business itself. He let the news leak that his good friend Donald Trump was meeting with him that very day. "You boys get together," he told the rival bidders. "Pigs get fed; hogs get slaughtered." Playing the part of a political Solomon, the governor offered his own solution: Each of the three groups--Hemmeter, Harrah's, and Jazzville--should take a third of the project. And that's what they ended up doing: dividing the baby in parts. Robinowitz was pushed aside and so was Caesars. (The company would later sue and settle for $5 million; Robinowitz, who also later sued, became an embittered crusader against everyone involved in the project.)

Although this kind of political compromise sounds fair on paper, it was in fact a terrible deal for Harrah's. Hemmeter, who had already spent more than $40 million just buying up land around the casino site, was getting low on funds, and the Jazzville partners had already shown, in their early dealings with Harrah's, that they weren't interested in putting up serious money. So any extra equity that was needed could come from only one source: Harrah's. Yet Harrah's pushed forward, eager for the deal even on these lopsided terms. "They were like a bridegroom on his wedding night," Edwards told FORTUNE. "Except they got what the bride gets."

Then there was the sticky issue of what to do about all the promises both sides had made while trying to win the license. It made good business sense to begin trying to pare back some of the more outrageous ones; it made good political sense to honor them all. Needless to say, politics won out over business. The Grand Palais had run up $50 million in expenses? The new Harrah's-led group would pick up the tab. Ditto the $125 million gift Harrah's Jazz had promised the state, the annual obligation of 19% of gaming revenues, and the $100 million minimum payment. Not to mention the $14 million annual minimum to the city, the $2 million to city schools, and the $200,000 a year earmarked to purchase aquarium tickets each year from the Audubon Institute. And on, and on.

But even that wasn't the biggest problem. No, the biggest problem was the issue of which casino would be built. Would it be the Harrah's "no frills" casino, which involved renovating the Rivergate? Or would it be Hemmeter's, which meant tearing down the Rivergate and constructing the Grand Palais? Harrah's executives say today that they wanted to renovate the Rivergate but that mayor Barthelemy insisted they tear it down. Indeed, both Harrah's Reed and Jazzville's Gauthier told FORTUNE that an informal part of the shotgun marriage was that Hemmeter would talk Barthelemy into letting the Rivergate stand. "The contract--the verbal contract--called for Chris Hemmeter to get the city to let us renovate the Rivergate," says Gauthier flatly. But Hemmeter vehemently denies this account. The bankrupt developer calls the notion that he was supposed to convince Barthelemy "preposterous," adding: "I wouldn't have done it.... I'm not going to sell my soul." In any case, Barthelemy simply refused to accept any plan that allowed the Rivergate to stand.

And so, in February 1994, Harrah's announced that it would raze the Rivergate and build a new casino with 200,000 square feet of gaming space. To be sure, that was 100,000 less than the Grand Palais, but it still qualified as the world's largest. Though a new mayor, Marc Morial, took office in the spring of 1994, nine months before the Rivergate fell, there was a sense by then that the train had left the station. "I told them quietly in June or July of 1994, 'If you want to keep the Rivergate, I would be willing to entertain that request,' " he says. "At that point, they had already teed up their investment-banking effort." Reed concurs: The new mayor's suggestion came "far too late."

'IT DIDN'T FEEL GOOD'

In order to start generating revenues as quickly as possible, both state bidders had always planned to operate a temporary casino while the real thing was under construction. The original (and sensible) Harrah's Jazz plan had been to put the temporary casino in the Rivergate while it was being renovated. The Hemmeter plan had been to run the temporary casino out of the Municipal Auditorium, a rat-infested building located next to a housing project north of the French Quarter. As usual, the worst solution was the one chosen. As usual, politics was the reason why.

Barthelemy, of course, had insisted on the Municipal Auditorium option. No surprise there: Harrah's would have to spend $41 million to give the building a face-lift, and a depressed neighborhood would suddenly have a source of jobs. That the deal made no sense at all for Harrah's--which would be operating the temporary casino far from the tourist traffic--was never part of the equation.

So even as Harrah's was preparing to raze the Rivergate, it was also committed to renovating the Municipal Auditorium. By that time, the overall price of the casino project had soared to $670 million--and the added millions wouldn't add a penny to the casino's potential take. "That's the first time we began to assess whether this was a project we ought to be proceeding with," says Harrah's CEO Phil Satre. "On a cumulative basis, it didn't feel good."

Yet Harrah's, feeling that it was in too deep now to change course--and still deluding itself about the potential revenues--resolved to proceed. And the star-crossed deal, meanwhile, continued to impose its own harsh reality. Thus, the junk-bond market--the source for $435 million in financing--headed south just as various delays kept Harrah's Jazz from completing its offering. When it was finally ready in November 1994, the interest rate on the debt had climbed from 12% to 14.25%, plus an equity kicker.

Meanwhile, the deal's investment bankers were insisting that the partners, who had contributed $70 million in equity so far, kick in another $100 million--pushing the project's total price north of $800 million. When the Jazzville partners failed to come up with more cash, Harrah's put up their $33 million share and threatened to take more than half of Jazzville's stake. Gauthier responded by drafting a lawsuit, which was waved in Reed's face; Harrah's finally agreed to set a timetable giving the Jazzville partners--whom Harrah's executives had begun calling the "bully boys"--more time to come up with the money.

And then came the moment when Harrah's was finally supposed to make a little money on its ballooning investment. On May 1, 1995, the Municipal Auditorium--recast as Harrah's New Orleans Casino--began taking bets. Naturally, the site was a disaster.

How could it not be? Although the auditorium had been given an expensive renovation, the grounds were teeming with guards. Tourists stayed away in droves--and there was nothing Harrah's could do to bring them in. It had originally planned to bus them in, but the city had refused to allow the company to run shuttle buses. After all, it had a cabbie lobby to placate! But cabdrivers were warning out-of-towners to stay away because the neighborhood was too dangerous.

Harrah's had been counting on the temporary casino to throw off $33 million a month in revenues--money it needed to defray the cost of the construction of the real casino, which was now under way. But in the slow summer months, the temporary gaming house consistently collected only about a third of that and was running deeply in the red. In August, Harrah's Jazz laid off 460 workers and pulled the plug on a quarter of the casino's slot machines. It even started paying cabbies a bonus every time they delivered a fare to the temporary casino. Harrah's had hoped that things would pick up in the fall, but they didn't. In early October, influential Merrill Lynch analyst Richard Byrne urged holders of Harrah's Jazz junk to dump their bonds, and warned that the temporary-casino problems could produce a cash crisis. A few weeks later, CEO Satre flew down to New Orleans and gave pep talks to nervous casino workers. Tensions were high with the Jazzville ten as well. Gauthier's group had missed its deadline; Harrah's had diluted Jazzville to 14%. The "bully boys" responded by filing suit.

In early November 1995 a casino board member questioned Reed about an unsubstantiated tip that Harrah's had consulted with bankruptcy counsel about the New Orleans casino. Reed indignantly denied the report, calling it "irresponsible, malicious, and unfounded." The following Sunday the casino took out a big ad in the Times-Picayune, carrying the giant headline HARRAH'S NEW ORLEANS IS HERE TO STAY. BET ON IT.

Ten days later, beginning at 3:40 A.M., Harrah's executives padlocked the temporary casino, stopped construction on the permanent building, and placed the project in Chapter 11, throwing 3,300 casino and construction workers out of work on Thanksgiving eve.

THE BANKRUPTCY CARD

It is a strange fact of this saga that in doing something politically suicidal in Louisiana--shutting down a project that the state and city were counting on to provide serious revenues--Harrah's finally made the kind of hard-headed decision that gave the New Orleans casino a prayer of making money. When Harrah's threw the project into bankruptcy in 1995, its total price tag was nearing $900 million. At the same time, Harrah's was lowering its revenue estimates to more realistic levels. Suddenly, the truth could no longer be avoided: The project was simply not viable. In mid-November, when Bankers Trust refused to release $157 million needed to complete the permanent casino unless Harrah's guaranteed the entire loan, Harrah's instead shut the project down.

Bankruptcy gave Harrah's, at long last, some leverage in its Louisiana dealings. After all, if it did not get a deal it could live with, it could always liquidate the project. Just a few months ago, it was widely rumored that the company was going to do precisely that--and Harrah's officials now say that they were fully prepared to liquidate.

The 11th-hour deal struck last month staves off the prospect of liquidation, while improving--though hardly guaranteeing--Harrah's chances. Bondholders will swap $248 million in debt and accept dramatically lower interest in exchange for half of the deal. The casino will gain the right to defer tens of millions in debt payments and fees during the project's critical first few years. Harrah's, meanwhile, will boost its total investment to more than $210 million. It will also guarantee the $100 million minimum payment to the state and $150 million in bank debt. It will own 40% of the casino. (Jazzville and Hemmeter's creditors will each get 4%.) The reorganization plan is supposed to go to a special session of the legislature in early 1998. Completion of the building is supposed to take another year and cost about $130 million.

And yet it's reasonable to wonder whether even these new terms are really preferable to liquidation. During the time the casino has been in bankruptcy, Harrah's became a political whipping boy in Louisiana. That's unlikely to change anytime soon. Harrah's executives, for their part, now seem consumed with self-pity. Although, as Wynn points out, "they always had the right to say no," the Harrah's brass firmly believe that the company was exploited by greedy politicians. "I don't think we're victims," says Reed. "I know we are." The attitude of both sides hardly bodes well for the future.

In fact, it's likely that the decision by Harrah's to stay in Louisiana has less to do with how much it has to gain than how much it has to lose. Leaving a bloody mess behind in Louisiana would make it considerably more difficult for the company to win support in other jurisdictions where it would like to build gambling halls. And if Harrah's had failed to revive the project, it would have found itself tied up in Louisiana courts for years, facing hundred-million-dollar lawsuits from, among others, the city, the state, junk-bond holders, and the Jazzville partners, led by Wendell Gauthier, who's known for having his way with juries in Orleans Parish.

Publicly, Harrah's executives claim the reorganization gives the project a chance not just to survive, but to thrive. They say that a well-marketed land casino in a good location hasn't really been tested yet. They point to millions in fees that they expect to extract from the project once it's up and running. And though they've set first-year revenue projections at $368 million, they claim the casino can pay its bills with revenues as low as $275 million. Yet they're expecting only a tiny profit even in the casino's third year. Asked what Harrah's would do if a similar project were brought to it now, a company consultant replied, "We wouldn't even consider it. That's the bottom line."

The truth is, even that modest success Harrah's is now predicting is far from a sure thing. Not only was the temporary casino a flop, but in addition all three riverboat operations in downtown New Orleans have failed. "We're scratching our heads here trying to figure out what the upside is for Harrah's," says Bear Stearns gaming analyst Jason Ader. "I think they are at risk of making a bad deal twice."

Oh, and one other problem still looms. On the Mississippi Gulf Coast, just two hours from New Orleans, Mirage has begun construction on its new 1,780-room beachfront casino resort, called Beau Rivage. The project is scheduled for completion late next year. And then, chuckles Steve Wynn, "New Orleans is going to become a feeder market for Biloxi."

REPORTER ASSOCIATES Patty de Llosa and Eileen P. Gunn