This page has been archived and commenting is disabled.
Dubai is Just a Bit Misunderstood, That's All
We are likely to see quite a lot of mileage out of this particular bit of clip art. True, we have managed to relegate the "Dubai crash" to the dustbin of over hyped crises, but Dubai does not seem particularly disposed to accept that as her ultimate destiny. The Nakheel bond is but a pair of weeks from default and creditors show no sign whatsoever of entertaining any sort of negotiated restructure, much less the suggestion of a moratorium to which creditors could only be heard to cackle loudly. We are certain all will, however, work out for the best. ("Nothing to see here. Please disperse.") Ah, would that it were so easy:
Fears are growing among western banks that Dubai Holding, the personal investment vehicle of the emirate’s ruler, Sheikh Mohammed bin Rashid al-Maktoum, will be the next state-owned Dubai company to default.
The conglomerate went on a debt-fuelled spending spree in the past decade, borrowing $12 billion (£7.3 billion) to fund ambitious projects in Dubai and to create a private equity arm that bought stakes in Tussauds and the budget hotel chain Travelodge.
Details of the main lenders to Dubai Holding are not public but bankers in Dubai say the group borrowed from international banks, including Royal Bank of Scotland and HSBC, as well as local lenders.
One official close to the company conceded the firm was “a bloody mess” and its boss, Mohammed Gergawi, a close confidant of Maktoum, had been “in denial” about the problems it faced. “It’s true that we were a very large holding company with very few checks and balances on what we did and how we operated,” he said.1
Read: True, the absence of even a semblance of fiscal restraint has completely devastated the Sheikh's private slush fund but...
The once-sprawling conglomerate has been split into four divisions: property, leisure and hotels, investments and free zones — tax-free business parks in Dubai.2
...we have divided the rotting meat into four separate hulks so that's all settled then.
Forgive us for being such recovery deniers, but would it be imprudent of us to point out that the collapse of Bear Stearns destroyed barely a third of the capital at issue in Dubai? And if the Sheikh himself cannot curb his blood lust for $12 billion in debt to fund his personal market economy dalliances (Travelodge? Seriously?)... well... what exactly are we to surmise about the fixed-income empire he has built around himself? Still, we're certain that this won't remotely jitter the steely nerves of Nakheel's creditors, or cause them to adopt more aggressive positions vis-à-vis restructuring negotiations.
- 1. Davey, Jenny "Banks Face Fresh Dubai Debt Fears," Times Online, December 6, 2009.
- 2. Ibid.
»
- 8769 reads
- Printer-friendly version
- Send to friend
- advertisements -
http://www.timesonline.co.uk/tol/news/world/middle_east/article6945283.ece
Nice article putbuyer. I love this part: "The debts became overwhelming in a city where non-payment is a criminal offence."
So the government over there considers not paying debts to be jail worthy? Such irony.
I was struck by this as well. Some things never change, eh?
Hope regime death knell
Truth threatens journalism
Familiar story
It looks like a double standard - Nakheel obligations seem to be in the Jebel Ali Free Zone, i.e. outside of UAE, whereas the loans given to hapless westerners are out of Dubai, hence non performance under contract can land you in jail. It is incredible to think you can go to jail for failing to keep up payment on a loan you made for a deposit on a property that has not been built. What has happened with the Palm Jebel Ali is that people who have made deposits could have them refunded if the developers are not in a position to build the properties, but they are arguing that they are ready to go AS SOON AS THE ISLAND HAS BEEN BUILT, which is the reponsibility of of another company.
It's such an insane situation - many people, some who live thousands of miles away, putting their life savings in to pay the deposit on a property that will be built on a man-made island in the sea.
Anyway, as for the general Dubai picture,
"Experienced analysts no longer trust the Government’s statistics, claiming they do not fully reflect the amount Dubai owes its foreign creditors. EFG Hermes, a regional investment bank, thinks Dubai could owe as much as $150 billion (£91 billion), twice the size of the economy and two and half times its officially declared debt."
I suspect the really nasty stuff is in Dubai Holding, but I doubt much of it will ever see the light of day. Nakheel may well turn out to have been the shot across the bows...
I heard someone put Dubai into perspective by saying that while they're looking to restructure their $60B of debt, that pales in comparison to the $2T already written down by global banks thus far in the recession. That's not to say $60B isn't a lot of money, but not enough cause capital markets capitulate as they did in September/October 2008... but definitely keep Lesilie Neilsen on standby (O.J. too, for that matter).
http://www.youtube.com/watch?v=zhyCL-ELRxg
http://www.youtube.com/watch?v=4ozk7fnKilU
http://www.youtube.com/watch?v=-MWSGbh-bi4&NR=1
OT, or maybe not. Venezuela CDSs keep going up, 3x Dubai CDS. How about one piece on Chavez and the oil fields down South?
http://www.cmavision.com/market-data
Begining to look like the FDIC,
CARACAS (Dow Jones)--Venezuela escalated its intervention in the banking sector Friday, with government officials shutting down three small banks following the closure of four others earlier this week. The failure of the three banks coupled with that of the other four, which comprised about 6% of banking system deposits, confirmed fears that at least some smaller banks are in trouble, facing either regulatory or solvency issues, or both. On Wednesday, Chavez had said the government had a group of banks on its "radar" and threatened to nationalize the entire banking system were a crisis to erupt. A number of depositors at smaller banks lined up to withdraw money Thursday, and overnight interbank lending rates spiked.
http://online.wsj.com/article/BT-CO-20091204-713873.html
Border with Colombia to go hot. FYI.
bugs_,
...you are correct, U.S Military to install "Full Spectrum" Military Base in Columbia, including nukes.
http://www.independent.co.uk/news/world/americas/us-builds-up-its-bases-in-oilrich-south-america-1825398.html
http://upsidedownworld.org/main/content/view/2198/68/
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=103x498840
Isn't this how we created Sadam and Osama? Make oil friends, train them, give them cool toys, watch them turn on you after they get pissed at you cheating them?
Cool.
I like having them on the same side of the globe south of me this time.
I a Dub....
great stuff from Clusterstock this AM
http://www.businessinsider.com/clusterstock
e.g.
"we have divided the rotting meat into four separate hulks"
We have divided the hulk into one piece of rotting meat, and 3 pieces of fresh meat.
Mix the rotting meat with some bones, brains, and entrails. Run them through the grinder and we'll have some very sell-able ground chuck.
--The Butcher
Travelodge - clean, cheap. I stayed in one last year and was amazed - I've stayed in hotels costing 5 times as much that had MUCH smaller rooms and no more facilities. The only thing it didn't have was breakfast, which could be had in an adjoining Little Chef.
Consider - things are tough and will get tougher. A good, inexpensive hotel will benefit, to the cost of much more expensive hotels.
Go long Travelodge!
DavidC
Um, maybe so, but there is this little problem of brand identity, the word "TraveLodge" being synonymous with "broken-down worn-out embarrassment from the 1970s, with saggy beds and stained carpets" in the minds of many of us (with good reason). Allow 5 to 10 years to overcome an image problem of that magnitude, even with some really good design consultants doing the image makeover.
At a time when all hotels (cheap and not-so-cheap) are showing signs of desperation, TraveLodge would not be high on my list of smart investments. It would not be on my list at all.
I'm a big fan of Travelodge too. They charge me only 5 bucks extra to let my old bird dog sleep in the room with me when it's too cold to keep him in the truck kennel. And the wife sleeps there for free.
Guess you have to move around in the West to appreciate this sort of accomodation.
And the wife sleeps there for free
In the truck kennel, right?
http://www.timesonline.co.uk/tol/news/world/middle_east/article6945325.ece
Excellent piece, Marla...thank you!
If a debt default occurs and every financial firm denies it, did it really happen? These are things I am asking myself this morning.
If you owe me many billions, and you can only pay in dribs and drabs, and, in officially declaring the default, I don't trust that my counterparty (CDS) can actually pay anything once I hit invoke the default (or worse, I believe invoking the default will crash the system, and other assets of mine elsewhere in the system will be screwed worse because of it), I can see how we might just sort of do what the banks are doing and extend and pretend, hoping something gets better, later.
Wow!
We are all bankers now!!
Dubai: Like US investments banks. But even greedier, stupid, and more embedded into the government.
Someone posted this over at Mish's. Just incredible. Thanks Timmy, we are so glad you are looking out for us:
$10 an hour with 2 kids? IRS pouncesIt all started a year ago, when Porcaro, a 32-year-old mom with two boys, was summoned to the Seattle office of the Internal Revenue Service (IRS). She had been flagged for an audit.
She couldn't believe it. She made $18,992 the previous year cutting hair at Supercuts. A few hundred of that she spent to have her taxes prepared by H&R Block.
"I asked the IRS lady straight upfront — 'I don't have anything, why are you auditing me?' " Porcaro recalled. "I said, 'Why me, when I don't own a home, a business, a car?' "
The answer stunned both Porcaro and the private tax specialist her dad had gotten to help her.
"They showed us a spreadsheet of incomes in the Seattle area," says Dante Driver, an accountant at Seattle's G.A. Michael and Co. "The auditor said, 'You made eighteen thousand, and our data show a family of three needs at least thirty-six thousand to get by in Seattle."
"They thought she must have unreported income. That she was hiding something. Basically they were auditing her for not making enough money."
http://seattletimes.nwsource.com/html/dannywestneat/2010435946_danny06.html
Years ago, before computers, the IRS spent a lot of time processing tax returns.
With the help of the people and e-filing now the IRS can spend the bulk of it's time on collections and enforcement so the people can be safe and secure in their homeland. praise be.
e-file is the very greatest thing.
Filing a paper return is very bad especially if you use a white color pencil as the scanner has a tough time reading it.
again, e-file great paper bad.
Hey, is this a great country or what?
great link, MsCreant ! thank you for sharing it.
Isn't it dandy that the IRS has their own court system, and no, you will not be provided counsel if you are indigent, and no, you will not be able to appeal its decisions if you file under their 'small tax case' provisions. Meanwhile financial institutions don't even have clear rules on how to account for income or losses from originating or trading in securities like credit default swaps-- but that doesn't stop them from making or losing billions on them without being pestered by audits. No, we'll save audits for political retaliation and harassing the 'little people'.
- Heretic
Kuwait pulls a Goldman, putting a large investment into Citi with the standard "we're in it for the long run" and then bails out of Citi common stock to the tune of 4.1 billion as reported by just about everybody today.
From Karl Denninger: "
Then there's this - remember the Citibank "capital injection" in 2007 - from the UAE?
They gotta be pissed. Oh yeah, it was "renegotiated" - to something like $31 a share. I'm sure Abu Dhabi is pleased as punch that they're going to pay $31 for something that sells for $4 everywhere else. There's screwed, and then there's really, really screwed. I'm sure the Arabs are feeling quite the latter, given the wonderful exposures that Citi made so clear to them in 2007, just a few short months before it all came out in public and their stock price cratered!
Would you care to take odds on whether Citibank's "investment" in Dubai, made just days after it was bailed out, will be repaid?
An interesting tidbit to add to the Dubai discussion.
Looks like the House of Saud is really stuck with those C shares.........
Geithner and company have lots of C shares...
I imagine that there is no correlation between Geithner not selling the US shares, particularly in light of the Kuwaiti's dumping actions, and the fact that the House of Saud is now one of the U.S. stock market history's largest bagholders.
This is quite the daisy chain going on here with Citi !! Amusing to see the fuckers becoming the fuckees.
Thanx, DH.
Can't wait to see what all the people who got screwed over in Hong Kong come up with for the people who took all the good stuff from lehman before failing it.
Jail time is cost for not paying debts in Dubai
I suppose if you are one of the little people you get jail but the sheiks just get backstopped by Benny.
"The notion that these people in jail are poor lambs being preyed upon is rubbish," said Louis A. Scotto, general manager of Emirates Bank. "We are not the bad guys here."
<Rimshot>
Ha ha! Thankyooooou. I'll be here all week. Try the veal.
Tres Sheik Daaahling. I love the entertainment here.
Instead of the veal, I'd like to try your "peasant under glass."
<Rimshot>
Oh I missread the menu, so sorry daaahling. I'd like to try your "peasant under class."
Try them and convict them of my own default, that is...
<Rimshot>
does this mean kuwait is selling 4.1b of C stock now, and if so, shouldnt this be kinda bad for said stock,and perhaps banks in general? Or, will C and the other banks somehow go up on this news?
This article pokes at the surface but never truly addresses the situation in Dubai.
The real question is what legal recourses are available to these banks when Dubai defaults (which it will). Under the laws of the United States, the path is clear. The bank can work with the creditor to restructure a transaction or, if all else fails, acceleration of principal, sue for performance, or cause a restructuring of the balance sheet or liquidation of the company's assets through a bankruptcy filing.
The Nakheel "bond" is different. It is not a bond at all, but rather a sharia-compliant sakk. Whereas a loan or a bond is a promise to pay a stated rate of interest and defined amount of principal at certain points of time, sukuk are structured as ownership of a share of the underlying asset with specific redemption dates.
This is a key distinction as in a western debt instrument, the first dollar of enterprise value decline is borne by the equityholders and the value of the debt is not impaired until all of the equity has been wiped out. If a sakk is structured to be ownership of assets with a defined preferential payment schedule, and the underlying asset has lost 50% of its value, then the sakk could well be deemed worth only 50% of its face value since in form it is evidence of ownership of assets.
The above presupposes that the sakk holders have standing in court, which may not be the case. First, in order to bring a case against a government institution or corporation, one must first get permission from the government. In the case of Dubai, the court of jurisdiction is separate from the United Arab Emirates Federal Judiciary Authority and controlled by Sheikh Mohammed bin Rashid al-Maktoum. Given the ruler's interest in seeing equity value preserved, I see little likelihood that standing is granted.
The real reason the Dubai issue spooked the market was not the size or impact of a default on $80 billion of debt. Instead, the reaction was over a fear that market participants would view the resolution of this default as precedent for all other sharia participations. An $80 billion loss can be digested; an $800 billion loss would be problematic.
Excellent analysis and observation.
That is interesting. Another case of massively mispriced risk. If one sows moral hazard, what does one expect to reap?
The issue, Sheikh or Banker, is always who is left holding the sakk.
If I knew Sheikh Mohammed bin Rashid al-Maktoum was in charge like this, I would not invest in that country, at all, even if he was my best friend. What were people thinking?
I keep wondering, did they set investors up, in case folks left them holding a few sakks/sachs? Or is this just fly-dubai-the-seat-of-the-pants?
"Fly-dubai-the-seat-of-the-pants"
Prices can't go down (repeat twice).
Prices can't go down, Prices can't go down...
http://www.cartoonstock.com/newscartoons/cartoonists/tzu/lowres/tzun112l...
Outstanding summary and descriptions, thank you. I had no idea what the differences were.
My simpleton's view (well, I do work in international financial stuff for a living) is that the resolution of this default will have an enormous effect on any future investment in the middle east. If the "bondholders" (such as it is) get screwed, I don't see any future debt or equity investment in the middle east using this structure - except, perhaps, by sovereign wealth funds of countries willing to use military force to recover their financial security assets. I.e. China and Russia. (Perhaps the US, if GS or JPM, etc., should be viewed as sovereign wealth funds of the US...)
Thanks very much for your comment. Informed, detailed, reasoned. Top notch.
Still, I have to respectfully disagree. This is a potential last round problem. Simple as that.
"Sharia-compliant sakk" is simply another word for bond. Period. Clever dodges to inconvenient religious prohibitions aside, it is treated like debt, it is priced like debt, it is negotiated like debt, it was sold like debt. I have no doubt that any number of clever legal theories will emerge purporting to justify a very un-debt treatment of these obligations now that they appear to be straining the sovereign. The test here is not "are the holders of this instrument to be treated like creditors?" The test here is "is the sovereign going to fuck the holders." Period.
A year ago I would have commented that the issue here is that Dubai's legal system is immature, capricious, arbitrary and highly weighted against foreigners. I would have argued that anyone who assumed sovereign credit risk in such an environment (of questionable legal foundation) was asking for trouble. Particularly as a foreigner. Makes no difference at all what the nuances of the instrument are. A sovereign who permits investors to take a bath like this (we all know what the investors here treated this investment as: debt. Period) was going to find a way to do it regardless of the specific technicality used to effectuate the actual screwage.
Today I wouldn't dare make the argument that even strong and venerable legal institutions were good investor protection where the sovereign is 1) Involved. 2) Under stress. If you really think that legal structures and nuanced arguments about instruments and institutions make a lick of difference I suggest you spend some time with Chrysler's senior creditors. When the sovereign doesn't want to pay, they don't pay.
Wow! Set and match! Whats good for the US is good for Dubai. The games had already begun. Got it.
I can't wait to see the myriad of problems this will cause in the CDS market. Just look at Japan. They can't seem to sort out their CDS mess and determine who owes what to whom. Of course, that's what you get when you use OTC derivatives.
The best solution to the CDS debacle would be to put them through a central clearing house, set a date for the voiding of the swaps, and give all counterparties a chance to adjust by deleveraging in an orderly manner. We just can't afford to have giant undercapitalized financial institutions trading on huge margin because they think they actually have insurance.
Don't just blow this puny $60billion debt off. No one I have read has any idea of the derivative mess that is to follow. Even if it's only $50 billion leveraged the average of 30 times it becomes a tidy sum. This thing could grow legs and eat the British Empire, for starters.
Sadly I am dyslexic and really struggle with math. The intelligence factor is not an issue here.
#154636,
This got out of control, I apologize.
"This thing could grow legs and eat the British Empire, for starters."
I admit I'm being anal and I should just shut up. Still, I cannot stop myself...
How about we have it grow teeth and eat the Empire?
Alternate, if we like legs, maybe it could run away with the Empire.
Your point however is not lost on me in the mixed metaphor. It is an incestuously interwoven tapesty, threads of RNA cascading and corrupting DNA structures as one strand stands as a building block for multiple others, sending false signals, twisting, and perverting functions in ways that were never intended.
What I am trying to say is that I agree with you but the multiplier effect does not get at the problem on its own. Otherwise, these derrivatives would unwind easily and it wouldn't be a big deal. So many things are listed as collateral for so many other things.
$60,000,000,000 little absences that travel out through the pixelated virtual system not just multiplying, but feedback looping and vortexing and creating eddys, tides, and black holes.
Derrivatives could rip a hole in time space continuum itself, punching a tunnel through n-d space, allowing a stream of anti-matter-non-derived-soliditives to come crashing through reality!
I'm sooo scarrrrrred.
Ben and Tim know what's best for us. Best to mark to market, extend and pretend. (Now is it Ben that extends and Tim who pretends, or the other way around?).
Pleasant cutting wit
A smorgasboard metaphor
No more physics please
One thing we are looking carefully at (though its difficult to find information on this point) is whether the European banks that took on Dubai risk (debt?) insured against default in order to pull these assets out of the 100% Basel I capitalization hit and increase their leverage (as is typical practice to circumvent Basel I). If so, who wrote these CDS contracts? Will the definition of default include intervention by the sovereign? What kind of counterparty credit risk to (for example) HSBC have on these CDS contracts? When, if these CDS contracts are noncollectable, must these banks change the Basel I capitalization category and therefore raise more capital? Assuming (on no information in particular) that Bank X has $4 billion in Dubai "debt" that it has bought default protection on to knock down into the 50% capitalization tier, if that protection suddenly looks worthless (perhaps a CDS writer has been specializing in writing lots of Dubai protection and can't possibly cover it all?) it looks to us like the bank needs to raise $2 billion in new capital to avoid becoming "under capitalized." (We wrote an AIG piece on this issue last week.)
Of course, and I want to emphasize this, this is total guesswork... but somehow we'd not be entirely surprised.
Thank you for your work on this important matter.
I see we have some news on the Dubai mess this morning.
When analyzing the Dubai situation, keep in mind that it starts with a political problem that is complicated by a religious context and then the financial mess.
1) Abu Dhabi vs Dubai is a political tug of war that Abu Dhabi will win
2) Abu Dhabi is sunni muslim and Dubai, while not Shiite, has heavy Iranian influence due to the huge Iranian investment in its real estate sector. Abu Dhabi is conservative while Dubai is Russian prostitute heaven.
3) The financial mess in Dubai and the whole region is due to unsophisticated investors (the Arabs) falling in love with western bankers who clearly acted like it was vegas.
There's a not so secret, secret, in the middle east - take a 2nd or 3rd rate blonde-blue eyed western banker and send him to Dubai where the Arabs shower him with the Jamie-Dimon expat status -Porsche Cayenne or 7series, Emirates Hill Villa, million dollar base salary + carry.
Dubai will survive because it is still the best location in the middle east to do business, but Abu Dhabi will call the shots.
Here is an interesting piece on Dubai.
http://www.rickackerman.com/wp-content/uploads/2009/12/Dubai-Wipeout.htm
The author just touches on the issue of slavery. Slavery is just a symptom of the bigger issue of a medieval judicial system and culture. The Sheik will simply treat all creditors as he does problem slaves or political opponents: make them disappear.
The US is going to be faced with 2 options: take this bad debt onto the Fed's balance sheet, or send in an aircraft carrier. I think we all know what President Pantywaist will do, of course after first bowing to the Sheik.
http://secretdubai.blogspot.com/2009/11/from-vision-to-nightmare.html