An Atlantic City casino project backed by Morgan Stanley ( MS) has not been able to attract sufficient financing, creating another headache for the firm at a time when it is fighting to secure its future.

Widespread reports have said the New Jersey project will cost at least $2 billion. However, a source close to Morgan Stanley says that number is too high, though this person wouldn't say by how much.

For now, Morgan Stanley is the project's only financial backer to be publicly announced. The casino will be operated by a newly created company called Revel Entertainment.

Morgan Stanley spokesman Mark Lake says the firm's exposure to the project is not material and adds the company is in discussions with various possible partners to provide debt or equity backing for the still-unnamed casino. He declined to be more specific.

An executive close to Morgan Stanley acknowledges that the casino will be "over-equitized day one," which will result in lower returns than the bank had originally projected.

Given all the problems Morgan Stanley is facing, the casino is comparatively minor. But because Morgan, like many firms, essentially cannot access the long-term debt markets, additional stress to an already strained balance sheet is the last thing it wants.

Brad Hintz, analyst with Sanford Bernstein, says banks are not providing construction loans at the moment, so he expects Morgan Stanley to have to finance the project, which is about halfway completed, by itself.

"It is a cash call on the holding company, and let's face it: They've got a trillion-dollar balance sheet," he says. "There's usually a lot of liquidity in a trillion-dollar balance sheet, but $2 billion dollar bridge loans are not favorable things."

A spokesman for Revel Entertainment wouldn't say whether the casino has obtained financing. Last month, Revel CEO Kevin DeSanctis tried to address the matter in an interview with a New Jersey newspaper.

"We started putting piles in the ground in early 2007," DeSanctis told the Courier-Post, based in Cherry Hill. "The financial market collapsed in August 2007. We didn't expect it to last more than one or two quarters, but it's taken significantly more time. It's not a matter of will we get the money for the project, but how much will it cost. We were far along when the credit market problem hit. We were in a place where it's hard to stop."

Eric Green, portfolio manager at Penn Capital Management, believes Morgan Stanley was preparing to issue debt securities to finance the deal this summer, when the death of three executives at Revel and another at contractor Tishman Construction in a plane crash put those plans on hold.

"They could have raised some money," Green says.

Since the government takeover of Fannie Mae ( FNM), Freddie Mac ( FRE) and AIG ( AIG), however, and the bankruptcy of Lehman Brothers, financing of all kinds is challenged to say the least.

The executive close to Morgan Stanley says it is possible to stop construction of the casino, but declined to comment on whether that is being considered. He says he is optimistic about the project because no comparable casinos are being built right now.

Revel is planning to construct a facility that has two hotel towers with around 1,900 rooms each, 150,000 square feet of casino space and 500,000 square feet for dining, retail stores and entertainment.

Penn Capital's Green believes that if the project can be completed, it will be in a good position to succeed. "The Revel is going to be a beautiful property, and it'll be very competitive with anything in the city and will definitely be successful there," he says.

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