Dubai's Fantasy Island Gamble in the Persian Gulf Comes to an Ugly End

What’s the difference between the United States and Dubai? The US is a playground for the wealthy just like Dubai, but at least America hasn’t declared bankruptcy ”“ yet.

Yesterday Dubai World, which is the investment arm of the Dubai emirate, asked its creditors to accept a six month freeze on interest due on its debt. That’s an admission Dubai is out of cash to make payments on its debt, and that it is de facto defaulting on this debt. It just isn’t using that word because it doesn’t want to trigger lots of nasty court claims from its creditors grabbing on to any collateral they can.

Dubai may not be able to avoid sovereign bankruptcy because not all of its creditors may agree on a debt payment moratorium. It only takes one aggressive lender to file a court claim and begin a mad rush to attach Dubai World’s assets, including its world-famous man-made Palm Islands. Still, that lender has a high likelihood of winding up with sand; most of the hotels and condominiums expected to be built on these islands are half-complete and already in a moratorium of their own because there is no money to finish them.

Therein lies problem number one. Dubai massively over-built office towers, hotels, apartments, condominiums, and retail complexes, all of them for the world’s nouveau riche who were expected to flock to this desert shopping paradise. Dubai offered the world exclusive shopping privileges at stores like Cartier, Bulgari, Bentley autos, and Versace because that is all it had to offer. Dubai ran out of oil a while ago, and beyond that it has sand and a dreadful desert climate that forces people to live their lives at night if they wish to leave their apartment.

Dubai gambled that it could turn itself into the Beverly Hills of the Persian Gulf now that it has no oil. It lost its gamble. The people who could afford a $10,000 purse have taken a big beating in the financial crisis and recession, and they are embracing a more moderate and discreet spending lifestyle. Dubai not only has half-finished buildings, it has many completed buildings uninhabited, like Miami and Las Vegas and other overbuilt desert mirages.

The second problem is how Dubai went about building its modern Garden of Earthly Delights. It did it with the poorest people in the world, Muslims from India, Pakistan and The Philippines desperate for work and lured by false promises of fantastic pay. The trade in workers used to build Dubai was as scandalous as the sex trade, with poor people expecting good money and a chance to prosper, only to find their employer had trapped them in a tenement one hour from Dubai out in the desert, with wage deductions so large that the worker will never have an opportunity to work back the ”œloan” the employer claimed to incur to bring the worker out to Dubai in the first place. At its peak two years ago, Dubai was estimated to have a population of millions, of which 18% were true Emirati citizens, the rest being unable to live in Dubai or afford any of the luxury goods in the stores they built. The city had taken on a bizarre Southeast Asian feel because of its immigrant population, to the point that tourists complained the only food you could buy in Dubai was curry.

The third problem might be called Dubai’s moral hazard. There are seven emirates that comprise the United Arab Emirates located in the former Trucial States along the southern coast of the Persian gulf. Not all of these have oil, and only the capital city ”“ Abu Dhabi, which is an hour northwest of Dubai by car ”“ has any significant reserves. Abu Dhabi, Sharjah and the other Emirates look like traditional Arab towns of the area, and have none of the high-rise glitz of Dubai or its money losing novelties like a ski resort. They have all looked at Dubai’s adventure in skyscraper over-abundance as at best a lesson in poor taste, and at worst a profligacy of sinful proportions.

Despite this, the emir of Abu Dhabi has always bailed out his fellow-emir in Dubai, with billions of dollars of loans and guaranties. Dubai has incurred about $80 billion in debt to build its fantasy along the desert shore, of which $59 billion was taken down by Dubai World. Around two-thirds of all this debt was bought by local interests, and the rest by foreigners. The foreigners always thought ”“ and were told this in Dubai ”“ that Abu Dhabi would make sure this debt was repaid, because it always had. Until today, when Abu Dhabi has said ”œenough is enough.”

This is a momentous decision that has shocked and disturbed the global investing community. Is Abu Dhabi teaching Dubai a lesson? Does Abu Dhabi have its own cash problems? Has Peak Oil reached the emirates faster than anyone outside appreciates? Whatever the reasons, in refusing to back Dubai for a penny more, Abu Dhabi has taken its own calculated gamble that reneging on United Arab Emirates debt by one of its members will not hurt the others in the long term. In the short term, Abu Dhabi must have known that the collapse in UAE debt ratings, plus a sharp increase in prices for credit default swaps used to protect against a UAE bankruptcy, would be inevitable.

Stock markets, bond markets, credit default swap markets, currency exchanges, and even gold and oil have all taken a beating in the past two days as investors realize the world doesn’t work the way they thought. There still are unexpected default risks out there even in unlikely places, and the deflation rippling through property markets worldwide has not abated. Those who lent to Dubai ”“ including some of the biggest banks in the world, who are already severely stressed by bad debts ”“ are going to lose billions of dollars even if Dubai merely postpones interest payments for six months as requested. Many investors now expect much worse than that, though.

So here we have a country that used to have oil which has now run out of the same. It has turned to massive amounts of debt to sustain not only its existing lifestyle, but to build a fantasy land of McMansions, luxury malls, trophy office buildings and theme parks for the wealthy. It has nothing anyone wants to buy and consequently stocks the shelves of its stores with goods from other countries it buys on debt. It has done all this using impoverished labor that works under a modern form of indentured servitude, in which the typical worker incurs excessive debts of their own that can never truly be paid off by their earnings. It creates an enormous income disparity between its privileged few and the huddled masses kept out of sight.

Sound familiar? When do you think global investors will start connecting these dots and ask: exactly what is backing the debt of the United States that has flooded the markets in the past nine years under Bush and Obama? At least Dubai had a presumed rich uncle in Abu Dhabi that would come to the rescue, even though now everyone realizes that was a very costly mistaken assumption. In the case of the US, the United States was the rich uncle everybody else looked to in order to solve global problems. Now that rich uncle has gone crazy in its own orgy of gambling, whoring, and over-indebtedness.

Except there is no one ”“ absolutely no one ”“ who can come to the United States’ rescue. And if you want to believe that the US would never, ever ask for a little extra time to pay back its debt, or ask for it to be restructured in some way, or debase its currency with inflation in order to throw its debt burden on to those who have financed it, that is your affair. Just remember there are millions of individuals, funds, corporations, and governments around the world who have bought US Treasuries. It only takes a few to wonder long and hard enough about just how safe and secure these Treasuries are to cause a stampede out of them, at which point the US is exposed like Dubai as a naked supplicant in the global market, begging for alms and a little forgiveness for past sins.

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Numerian is a devoted author and poster on The Agonist, specializing in business, finance, the global economy, and politics. In real life he goes by the non-nom de plume of Garrett Glass and hides out in Oak Park, IL, where he spends time writing novels on early Christianity (and an occasional tract on God and religion). You can follow his writing career on his website,

51 CommentsLeave a comment

  • …an individuals only real protection is cash and better, gold, for the long term back-up. If I understand your scenario, if everything goes shit, then fiat currency (ours) becomes worthless. So, not too much cash, and a lot of gold.
    Somehow, I don’t see the U.S. allowing that scenario to go down. I think they would do anything to stop it, anything.
    What say you?

    “We’re all of us children in a vast kindergarten trying to spell God’s name with the wrong alphabet blocks.” ~ Edwin Arlington Robinson

  • Bernanke is much more willing to see the dollar slide on the exchange markets than push interest rates above zero percent and risk a slide back into recession. This despite the fact that central banks everywhere else are protesting US monetary liberality.

    In a financial world where growth in the monetary aggregates translates into upward pressure on labor costs and prices in general, Bernanke could not easily ignore an inflationary firestorm and possible hyperinflation. He would be forced eventually to raise interest rates in response to general inflation, and gold’s market price would benefit from inflation fears. This is the world that Weimar Germany faced in the 1920’s.

    Our world is more like 1930s Germany, where deflation is pressuring the general price level, and certainly wages as well. Deflation is rampaging through property markets everywhere, it is pushing salaries, wages and bonuses down (with a few exceptions), it is the scourge of the retail industry and large parts of the food industry.

    To combat this, which the Fed sees and fears, interest rates are at zero percent and quantitative easing is the order of the day – the buying of debt by the Fed to inject liquidity into the economy. The Treasury at the same time is borrowing record amounts as if the US were in some dire war (well it is, against deflation). All this reflation is feeding into inflation, but not the price and wages type. It is asset inflation we are seeing – gold, silver, oil, copper, equities, high yield debt. We are getting a replay of the housing bubble and the tech bubble, only each replay gets narrower and narrower in terms of the assets which participate. Hot money is chasing after housing – there are plenty of speculators buying 50 houses at a time in auction – but the effect is muted because of the large deflationary overhang in inventory. There is no such overhang in gold and copper and oil so their prices are able to go up, in gold’s case in bubble fashion.

    This is going to play itself out until these bubbles burst, probably when a brutal reminder of deflation hits the newspapers. Perhaps that happened this morning with the Dubai World announcement. But working through how it plays out, notice that with each new default, dollars get destroyed. The dollars people were expecting in interest and principal from Dubai are suddenly not going to show up – they turn into pieces of paper floating around the court system as eternally unrequited claims. As these dollars are destroyed, dollars become scarce and therefore more valuable. Hence the statement cash is king.

    This is the great paradox of the deflationary environment we are in. People need dollars but there are fewer and fewer going around. Their price goes up, very evident on the foreign exchange market, and evident domestically in that asset values eventually fall to reflect the growing scarcity of the dollar. It is the reverse process of what we have become used to in the 20th century of steady dollar depreciation due to inflation, but it is much more familiar to students of the 19th century economy when deflationary bouts ran like clockwork through the system.

    Gold usually does not do well in this environment. Its price goes down just like everything else, because its price needs to reflect the new scarcity of dollars.

    What gets confusing about this current environment is that we have growing deflation, but still little bubbles where asset inflation reigns such as gold. In some cases like the price of oil at $80/bbl, asset inflation feeds into parts of the general pricing structure, so airlines can still raise their prices, even though other areas like labor cannot. But this eventually bubbles out, and then the true nature of a deflationary environment will be visible to all and the confusion will clear up.

  • would be on its debt that is NOT denominated in dollars.

    When we can no longer finance our debt in dollar terms, that will be an important moment of decision. Because non-dollar denominated borrowing cannot be paid by debasing our own currency.

    As painful as it would be, because our national debt is denominated in our own currenct, we could “pay our debts” through rampant inflation, making the dollar worth, say, 10% of its present value.

    Not saying there would be painful consequences to that approach. But that is not an option that Dubai has, because I don’t believe it even has its own currency. (The Dirham is a UAE currency – Dubai is part of the United Arab Emirates, but does not control it.)

    Odd that one of the hottest countries in the world would, financially at least, look a lot like Iceland.

  • It was easy to predict a bad ending for this experiment when you saw how much overbuilding there was, how much debt was behind it, and how the whole model depended on the world’s wealthiest people to keep it going. That’s because Emiratis are among the world’s wealthiest people and they extrapolate from their personal experience of endlessly increasing wealth to create a business model dependent on that situation continuing.

    Which it didn’t.

  • …that Dubai was a disaster waiting to happen, even in the heady pre-crash days. I mean, seriously, any reasonably-sane person on the outside looking into Dubai would think “what a colossal waste”. Where did the Emiratis think all the tenants and buyers of their massively-overbuilt office and condo projects would come from? Who the fuck would want to live there anyway? 120F heat, high humidity, sand. That’s all they got. Building the world’s tallest hotel might bring a few gawkers but with rates starting at $500 or so a night there’s no way they’d ever have more than token occupancy.

    The best day of a trip to Dubai would be the day you get to leave.

  • Dubai is well-known for being a world hub of money-laundering and construction is notorious among fraud investigators as a way to make money do tricks.

    Of course, NY investment banks aren’t much better.

  • No more gated community for the anxious super rich seeking a safe enclave. The whole story is remarkable but at least Dubai tried to shift out of the exclusive dependence on oil. It failed and the Dubai sky scrapers may end up like Jim and Tammy Bakker’s Heritage USA project. This was to be the residential retreat for the untra religious but it ended up a virtual ghost town sold for pennies on the dollar. Thanks for the lesson Dubai offers to us.

    Other articles on Dubai crisis.

  • Hopefully this will end F1 racing there. I agree with Ian thanks Numerian, another one bites the dust and can we in the US be far behind? I give us until mid 2011 not sure why.

  • Would it be wildly inappropriate of me to quote Syriana?

    Twenty years ago you had the highest Gross National Product in the world, now you’re tied with Albania. Your second largest export is secondhand goods, closely followed by dates which you’re losing five cents a pound on… You know what the business community thinks of you? They think that a hundred years ago you were living in tents out here in the desert chopping each other’s heads off and that’s where you’ll be in another hundred years…

    The unfortunate xenophobia of the quote aside, it sort of makes you wonder if we’re getting a sneak peak of the futures of any number of other oil exporting nations as peak oil takes effect and their ruling families flee with what’s left of their wealth, except with reason to believe 100 years was too generous.

  • that I’d want to be among the wealthy in the current situation. They may be at the top of the mountain, but it seems like that mountain resembles Mount St. Helens.

    They seem like a scab on a festering wound.

    People talk about Greece, Iceland, Ireland, Ukraine, etc. as the next dominos to fall, but the one being pushed by Dubai is England.

  • CIA factbook says that Dubai’s GDP per capita (PPP) is $44,600 (2008 est.) and country comparison to the world: 12.

    For Albania GDP per capita (PPP) is $6,000 (2008 est.) and
    country comparison to the world: 132. Black market is assumed to be 50% of the economy in Albania, add it if you want.

    –Sell Texas to China!

  • These ‘I saw it coming’ statements make me worried. Since when the audience here have been wiser than it was during the last stock market bottom? So I took a quick look around and found that this is much smaller thing what the news claims. ECB alone can print €400 billion new money in a day.

    Nobody noticed that this bullshit credit event was timed on Thanksgiving, thus they can max out their shorts.

    Dubai is a tourist resort for Europeans.

    –Sell Texas to China!

  • related: Gold Will Collapse Like Oil Did in 2008: Charts

    Commodities plunge on Dubai crisis but end off lows
    Sat Nov 28, 2009 9:15am GMT
    By Barani Krishnan and Veronica Brown

    NEW YORK/LONDON (Reuters) – Commodities plunged on Friday as investors recoiled from risk and piled into dollars amid fears of a Dubai debt default, which served as a reminder of the turmoil created by the global financial crisis.

    The crisis flared after Dubai, a part of the United Arab Emirates federation, asked to delay payment on billions of dollars of debt issued by conglomerate Dubai World and its main property unit Nakheel.

    U.S. markets reopened from Thursday’s Thanksgiving holiday to see a broad-based sell-off extending from Asian and European trading. Oil, gold, base metal and agricultural futures all felt the backdraft as investors lightened exposure to assets perceived as risky.

    The dollar rose against a basket of currencies, putting further pressure on demand for commodities priced in the U.S. unit.

    “This is just bad news and a reminder we’re not out of the woods yet,” said Mike Wittner, crude oil analyst for Societe Generale in London.

    Still, key commodities recovered to close off the day’s lows. The Reuters-Jefferies CRB, an index that tracks 19 futures markets, fell 4 percent to a two-week low before recovering half of those losses later.

    Some took that as meaning that the rally in raw materials markets, which has shown renewed vigor over the last two months, was not about to end yet.

    “The very short-term volatility … on the downside in key commodities is simply due to the fact that the market has attracted a lot of short-term players, both speculative and otherwise,” said Ashok Shah, chief investment officer at London and Capital.

    Gold pulled back above $1,170 per ounce from a one-week low of $1,136.80 in bullion trading. U.S. gold futures’ benchmark December contract settled down $12.80 at $1,174.20 after falling to $1,130.10.

    Gold has hit record highs in 10 out of 19 trading sessions in November, and expectations are high that the precious metal will soon take out psychological resistance at $1,200.

    But with gold prices having moved up almost 12 percent this month alone, some analysts believe a deeper correction may be due before the overall uptrend resumes.

    “Dubai has been the catalyst for an event that was overdue both in gold and forex,” said Simon Weeks, director of precious metals trading at London’s Bank of Nova Scotia. He was referring to the reversal called by some traders to the buy-gold/sell-dollar strategy.

    U.S. crude plummeted as much as 7 percent to a six-week low of $72.39 a barrel. But by 1830 GMT, the market was down just 2.6 percent to $76.02.

    Analysts said the price swing highlights the vulnerability of the oil rally, where prices had risen from a January low of around $33 to above $70 by early May and a year high of $82 by October — despite outsized inventories in U.S. crude.

    Copper actually settled up in U.K. trade after touching two-week lows. But it finished New York business firmly lower as players wondered whether the Dubai crisis had greater implications.

    Copper on the London Metal Exchange ended up $34 at $6,855 a tonne. U.S. copper’s benchmark March contract ended down 7.15 cents, or 2.2 percent, at $3.1255 a lb.

    “Throughout the crisis, governments have looked to prop up some assets. Abu Dhabi’s apparent reluctance to bail out its neighbor may mark a watershed,” RBC Capital Markets said.

    Frank Cholly, who watches copper for Chicago broker Lind-Waldock, also expressed concern over the metal’s direction: “Real question now is will Dubai be the catalyst for a sustained sell-off or can the market absorb the news?”

  • Eating gold

    The wealthy in Abu Dhabi have another way to enjoy gold: eating it. An article by Bradley Hope in the National says the Emirates Palace hotel served up five kilograms, or about 11 pounds, of edible gold to its dining guests in 2008. “That amounts to 5,000 one-gram bottles of gold leaf flakes from a German distributor, which each go for about $100,” the article states. The edible-gold budget for the Emirates Palace, which prides itself on its gold theme, could be as high as $500,000 a year.

    The gold, in flake, powder or sheet form, is served up in everything from a rose champagne ($2,995 for a three-liter bottle) to chocolate cake and cappuccinos. The article says the Russians are especially avid consumers of gold, and like to eat it with their caviar and oysters.

  • “The Washington DC Bureau of Talk Radio News Service (Ellen Ratner, Lovisa Frost, Jay Tamboli, S. Dawn Casey, and Adrian Frost) have “high tea” at the Burj al Arab in Dubai, United Arab Emirates. The tea was three hours long and had seven courses. Jay’s selection, a cappuccino, had 18k goldleaf shavings on the cream.”


  • This is interesting and looks like an unspoken corner of this story. Here’s a link to a Truthdig post by Robert Fisk;

    Curiouser and curiouser….

    NUMERIAN? Anything here in this story?

    “We’re all of us children in a vast kindergarten trying to spell God’s name with the wrong alphabet blocks.” ~ Edwin Arlington Robinson

  • The workers are almost entirely from the Indian subcontinent. You can walk for hours in Dubai and not come across an Emirati. They inhabit the malls, their clubs, their private palaces, and rarely venture out into the Dubai that tourists see, which consists of shop after shop run by Indians or Pakistanis. The only other time you see an Emirati is when they are being pulled out of dozens of automobile accidents that happen every day, always a few of them fatal.

    Just to balance things out, not every Emirati is wealthy or drives a Masserati. The Emiratis who man customs and immigration and police are usually very polite and accommodating to tourists. Also, when you travel to the other cities outside of Dubai you get a completely different picture of an Arabian culture, not an Indian/Pakistani culture.

    There are some very big Indian construction, architectural, and engineering firms that have been operating in Dubai for years and build the skyscrapers, roads, subway, airport, etc. These companies have been caught up in the downdraft of the recession last year. Some have folded. Some owe money to Dubai partners who are Emiratis. Others are owed money by the government. Foreign workers who flooded into Dubai are being sent home. The wealthy ones, like the Brits and Germans, abandon all their furniture and even their car, which they leave at the airport, and fly home forever. They won’t be able to get their visa renewed without employment, and they can’t personally afford to pay for the luxury apartment or home, the Mercedes-Benz, or all the benefits they enjoyed while staying in a foreign enclave. Just abandoning everything is against the law so these people are clearly expecting never to come back.

    How this plays out in the complex Dubai-Abu Dhabi tango is difficult to divine. Not only is it illegal in other emirates for foreigners to own property, hiring foreign companies for construction projects without majority local ownership is frowned upon. There is a lot of resentment and anger at Dubai for flouting the laws and conventions, and for turning Dubai into a bonanza for Indian and Pakistani companies, some of which are major companies, but many of which are fly-by-night operations. The Gulf states have had centuries of close trading relationships with merchants from the subcontinent, but you didn’t turn your country over to them entirely and let your own population fall to less than 1 in 5 out of a sea of immigrants.

    So yes, something is up involving the whole question of Indians and foreign interests in Dubai. Since this action by Dubai seems mostly to be initiated by the Dubai government, and not the Abu Dhabi government, there may also be a reaction within the Dubai royal family, since the entire management of Dubai World was dismissed a week ago (a telling event, in retrospect). The Dubai emir may be doing a Donald Trump – a cramdown of the bond holders, forcing them to accept less generous terms on Dubai debt. Trump has survived many of these episodes without having to go into bankruptcy, though over time his “brand” and his fortune have probably weakened considerably as a consequence. You do pay a price, in the long run, for stiffing your bondholders.

  • Gold in flake or sheet form is said to be easily digestible. I work with gold leaf from time to time and the stuff melts on your fingers if you are careless enough to let it touch your skin. Your body temperature is way too hot for extremely thin gold to be able to hold its consistency. I wonder if it even reaches your stomach when you eat it.

    I liked the part in the story about the Russian bodyguards having a gun battle in the corridors of the Dubai Burj skyscraper a few months ago. You may be dealing with billionaires, but some of them are the lowest form of riffraff. These people would not be given a corridor of rooms to play in at any of the top hotels in London or Paris.

  • …I thought this might be a complicating factor. I live in Southeast Asia (for many years) and things are rarely as they first appear; so this isn’t shocking; but a bit of an unexpected twist. How this plays out may/should be fascinating, no?

    “We’re all of us children in a vast kindergarten trying to spell God’s name with the wrong alphabet blocks.” ~ Edwin Arlington Robinson

  • Large losses feared at HSBC and RBS as City watchdog seeks urgent assurances

    The Guardian, By Jill Treanor, Phillip Inman & Julia Finch, November 27

    City regulators are urgently seeking assurances that Britain’s major banks are protected from the deepening debt crisis in Dubai amid fears that a possible default by the region’s major property developer will cause another major jolt to the already fragile financial system.

    The Financial Services Authority is understood to have demanded that the firms it regulates are open about their exposure to the troubled Dubai entities and along with the tripartite authorities – which also include the Bank of England and the Treasury – the FSA is continuing to monitor the situation closely.

    It is believed the banks argue that their exposure is exaggerated and the authorities have reached an initial assessment that the situation is manageable.

    But analysts said UK banks had greater exposure than their rivals owing to Britain’s traditional links to the Middle East, with London-based institutions such as HSBC and Standard Chartered heavily focused on lending to emerging markets during the Dubai property boom.

    They sicken of the calm, who knew the storm.

  • But not only do they hold a lot of the debt, which isn’t overwhelmingly huge, but England does have a lot of their economy tied up in international finance, so any spillover into other solvency issues will pile up on their door. Most of their banks are effectively nationalized, so it hits the currency directly.
    The effect obviously spreads in a lot of directions, which is why it reverberated as much as it has and London is the heart of the network. Next week will show.

  • Secret bank rescue loans are revealed

    MPs critical of deal that preceded Lloyds-HBOS merger

    By Kelly Macnamara and David Perry

    Published: 25/11/2009

    The Bank of England yesterday revealed it lent Royal Bank of Scotland and HBOS £62billion at the height of the financial crisis.

    In its submission to the Treasury select committee the bank said it stepped in as a lender of last resort, weeks after the collapse of Lehman Brothers, to buy time until the UK Government could take action. The bank kept the loans secret until yesterday, when it judged there were no consequences for the financial system.

    Bank deputy governor Paul Tucker told MPs the emergency liquidity assistance for RBS and HBOS was necessary to buy time. He said: “This was tough stuff, this was absolutely a classic lender of last resort operation.”

    RBS is 84%-owned by the state after last year’s bailout and the bank’s participation in a taxpayer-backed insurance scheme for toxic loans.

    HBOS was rescued from nationalisation by Lloyds TSB, but the government took a 43% stake in the group as it pumped in cash amid soaring bad debts.

    While support for RBS peaked at £36.6billion on October 17, HBOS borrowed £25.4billion on November 13 when then chairman Dennis Stevenson was appealing to the bank’s shareholders to back the Lloyds deal.

    Liberal Democrat Treasury spokesman Vince Cable said the loan to HBOS was concerning as it was made at the same time that the government was convincing Lloyds to rescue the bank.

    Caithness, Sutherland and Easter Ross MP John Thurso, a member of the Treasury committee, said Lloyds’ merger talks with HBOS started on September 17 last year and the emergency Bank of England funding for HBOS was on October 1.

    “If Lloyds knew about the funding they should have walked away from the deal, and if they did not they and their shareholders have been taken for a ride by the chancellor. Either way, the deal should not have happened and the only sensible course of action is to split HBOS and Lloyds now.”

    He said that, without the Lloyds deal, the government would have had to nationalise HBOS and Scotland would have another high-street bank in operation now, albeit state-owned.

    Aberdeen North Labour MP Frank Doran said that at the time the government faced the real possibility of the financial system going into meltdown — bank hole-in-the-wall machines being turned off and pay and pension payments ceasing. In the event the banking system was saved — to the benefit of Lloyds shareholders and everyone else.

    SNP Treasury spokesman Stewart Hosie MP has called for much more openness about what went on when the merger was pushed through. He questioned what HBOS and Lloyds shareholders, or even senior management, know about it.


  • An unnamed Abu Dhabi official has said that Abu Dhabi will look at assisting Dubai “on a case-by-case basis.” Abu Dhabi needs some questions answered, as does the market.

    One fact that seems to stand out is that the Palm Islands subsidiary Nakheel has run out of cash to pay interest due next month on an Islamic bond. This bond earlier in the week was trading at a 10% premium to par, so confident was the local market that it was going to be repaid on time. Now it is trading at a 50% discount.

    The second fact we may conclude is that Dubai was not able to get, or maybe chose not to ask for, a commitment from Abu Dhabi to make this payment for them. Technically, each of the seven emirates is sovereign and not responsible for the debts of the other. The central bank for the UAE, located in Abu Dhabi, cannot legally compel one of the other emirates to do something it doesn’t want to do.

    Probably for decades, people who have lent to the UAE have had an internal conversation something like this:

    Bank manager: If we lend to Dubai is Abu Dhabi, which has $600 billion in reserves, guaranteeing that we will get our money back?

    Bank lawyer: Technically, no, there is no legal guaranty.

    Bank manager: But for years and years Abu Dhabi has supported Dubai with loans and guaranties. Isn’t this an implicit guaranty?

    Bank lawyer: It is only an indication of past behavior. It does not tell you with certainty that in times of trouble Abu Dhabi will step up and pay us back.

    Bank manager: Well, it seems to me that consistent past behavior tells us that Abu Dhabi is guaranteeing the debt of Dubai. We ought to approve this loan.

    Bank lawyer: If you wish. You are basing the loan on a business judgment about the implicit guaranty, but legally there is no guaranty.

    At which point the bank would approve the loan, and eventually the loan would get amalgamated for the bank’s internal reporting and credit control purposes into total UAE debt, as if there were a legal guaranty.

    One of the big implications of this Dubai default is that assumptions creditors have made for decades about certain, maybe many, borrowers need to be revisited. For example, the US has already taken over the affairs of Fannie Mae and Freddie Mac, but otherwise at this point without an explicit guaranty by the US government, their debt would be trashed – no capital or cash to support it, and no absolute assurance of a guaranty from the federal government.

    It is a well known fact that in times of trouble people run for cover to protect themselves. Someone who issued a legal guaranty looks for any way to weasel out of paying on it, just like insurance companies look for any way to weasel out of paying claims. It’s a survival technique. Then there are the unscrupulous borrowers who simply refuse to pay, and tell their creditors “Meet me in court!” Donald Trump is one of these people who try to use the legal system to drag concessions out of their creditors who get exhausted going through years of court procedures and delays.

    Dubai tells us that without an immediate recovery in the property markets, we are going to see more of this, and even at the sovereign level. These are the spillover issues you have mentioned, which are spreading now in a lot of directions.

    This may not be the tipping point for a market correction, but it knocks out a few of the supports for the people arguing we are in a V-shaped, rapid recovery back to the good times.

  • Maybe they know the answer. These central banks can do whatever they want with any amount of taxpayer money, and do it in secret, if they think it is going to avoid some disastrous consequences that they can only guess might occur.

  • Paul Reynolds, head of Rothschild’s advisory operations in the Middle East, was this week asked to work for the Dubai government’s chief restructuring officer alongside Aidan Birkett of Deloitte, who was appointed on Wednesday.
    The team is tasked with assessing the group’s assets, which is likely to result in a large scale sell-off of assets as varied as the QE2 cruise liner; Turnberry, the golf course that hosted this year’s Open Championship; and a raft of properties.
    A spokesman for the Dubai department of finance confirmed that all options and asset sales would be considered, except for the DP World subsidiary that bought P&O, the British ports company. “I’m sure all of the assets of Dubai World will be reviewed,” he said. “The QE2 is one of them. It’s part of the restructuring process, though it’s too early to say whether there’s any sale in mind.”
    The neighbouring emirate of Abu Dhabi is seen as one of the main buyers of Dubai’s assets. Last year when rumours about Dubai’s debt problems first started, sources said Abu Dhabi had offered to buy Emirates but Dubai had so far refused to part with its flagship carrier.
    Abu Dhabi is also said to be interested in Emaar, the property company that owns the Burj Dubai skyscraper, the Dubai Mall shopping centre, and Dubal, Dubai’s aluminium company.
    However, the assets in Dubai World are more likely to be sold first. The group’s biggest problem area is thought to be Nakheel, its property arm that owns the Palms, the ambitious man-made islands. Nakheel also has two hotel chains, one of which owns the Turnberry Hotel.
    Dubai World’s venture capital arm, Istithmar, owns stakes in global assets including Barneys, the New York department store; Cirque du Soleil, the South African entrepreneur Sol Kerzner’s hotel chain; and Standard Chartered bank. The company has also bought into MGM Mirage, the Las Vegas gambling operation – even though gambling is banned in Dubai – and Troon Golf.
    London properties include Adelphi on the Strand and the Grand Buildings in Trafalgar Square.
    Rothschild was one of five banks working in recent months to help Dubai World meet its debt obligations. Deutsche Bank was the other lead adviser and they were supported by Citibank, JP Morgan and the Dubai Islamic Bank. When the standstill decision was taken on Wednesday, all the banks were stood down as the mandate had changed.

  • Deutsche Bank, Citibank, and JP Morgan Chase have been working on the Dubai World debt problem for months? Were they told all along that Abu Dhabi wasn’t going to continue footing the bill? That would have been very useful information.

    It must also be useful to see financial data on the true condition of Dubai World. It must be out of cash along with Nakheel if the company is thinking of selling trophy assets all around the world. I wonder if it is willing to sell these properties at distressed prices, because for some of them that is what it takes. Who is going to spend a few hundred million dollars to buy the QE2, now sitting in dry dock in Dubai port, used as a hotel and entertainment center?

    Similar questions come to mind for the Barneys clothing store in NY, or the Mirage casino in Las Vegas.

    These are the ripple effects people talk about when bankruptcies like this occur. Prices get depressed for similar properties all around the world.

  • “We’re all of us children in a vast kindergarten trying to spell God’s name with the wrong alphabet blocks.” ~ Edwin Arlington Robinson

  • Dubai World refused to sell assets this year at what it considered firesale prices. The consequence was that the cash situation at the Dubai investment arm worsened until the company has run out of money to pay interest on its debt and must seek a debt restructuring.

    A source quoted in a Reuters report said asset sales should be “commercially fair” at prices that are not depressed by “immediate economic pressure.”

    This is a wonderfully judicious way of describing the situation many global banks are in, because they refused to sell their mortgage-backed securities and credit default options and swaps at what they considered ridiculously low prices brought about by the market crisis. The banks didn’t even want to mark to market these assets at those prices, so they got the international accounting standards boards to waive the accounting requirements for mark to market pricing. Now they can use whatever price they think reflects “long term value.”

    Dubai World does not publish financial information and so did not have this same concern. It could carry those assets at whatever long term value it desired. But unlike the banks, which have received trillions of dollars of government cash support, including in the US the sale of these bad assets to the Fed at values near par, Dubai World has run out of government funds to tap. It must deal with its assets at today’s prices, not at the prices management desires in the long term, which are usually at par value. The long term for Dubai World is here and now, and it has announced it has hired Rothschild investment bank to dispose of these assets to raise enough cash to survive. In the meantime, the company has asked its bond holders to wait at least six months for interest payments to give Dubai World time to dispose of these properties.

    Could a similar situation befall any of the large global banks? Not exactly. Banks will always have access to central bank lines of credit for liquidity purposes, so it is unlikely a major bank would be unable to meet interest payments due on its debt. There should not, therefore, be a liquidity crisis at a major bank. But there could well be a solvency crisis – real doubts as to whether the bank is bankrupt if it were forced to mark all its assets and liabilities to current prices. Some banks were very close to this threshold this past winter, before the accounting standards were altered to hide market losses.

    A lot of these asset prices have recovered since the winter – some of them have come back nearly to par. Today’s prices, however, reflect the fact that these assets are truly being held for the long term. Like Dubai World, bank management can value these assets at whatever imaginary, favorable price they wish. The difference is, banks have been given years now to achieve those prices, with the help of central bankers providing them liquidity until the assets mature.

    This was the solution the Japanese government followed for nearly ten years when dealing with its crippled banks in the 1990s. The result of that policy was the “ten lost years” when the market entertained serious doubts as to which banks were insolvent, the banks didn’t lend, and the economy therefore stagnated.

    A similar situation has already developed in the US. Some big banks like Citigroup and Bank of America and Wells Fargo appear unable to pay back the loans they received from the federal government during the crisis. They are like the Japanese banks a decade ago – the so-called “zombie banks” of the walking dead, existing only on government life support. These American banks can price their long term assets at par, but their actions show that they are still shoring up capital any way they can. They are not making new loans, their stock prices remain exceptionally low, and the market therefore is not fooled by the new accounting gimmickry.

    We are clearly in the age of the zombie banks of global finance. More may be added to the list if the economy does not continue what is believed to be a V-shaped recovery, back to immediate health ala 2007.

  • Abu Dhabi-based regulator tries to reassure foreign investors ahead of markets reopening by offering extra liquidity

    * Nick Mathiason
    *, Sunday 29 November 2009 15.15 GMT

    Construction Slows In Dubai As Lending Dries Up

    The furious pace of construction in Dubai has created a property bubble. Photograph: Gareth Cattermole/Getty Images

    The Central Bank of the United Arab Emirates has declared that it will “stand behind” Dubai’s disastrous finances.

    The UAE central bank said it would guarantee the loans made by both local Arab banks and crucially, western institutions on reasonably generous terms.

    Dubai World, the state-owned conglomerate, has debts of $59bn (£36bn), with close to $25bn owed in bonds and direct bank loans. The central bank will make available to banks “a special additional liquidity facility linked to the current accounts” at the central bank that can be drawn on at a cost of 50 basis points above the three-month Emirates inter-bank offered rate, the Abu Dhabi-based regulator said in an emailed statement today.

    The move ought to avert a calamitous slide in Dubai’s financial markets, which will reopen for the first time since Dubai World announced that it wanted a six-month standstill agreement on a $4bn bond repayment made on behalf of its property subsidiary, Nakheel.

    Mohammed Yasin, chief executive of Shuaa Securities, said: “What the central bank is doing here is pre-empting some of the worries that some of the foreign institutions, like what happened a year ago … may try to transfer cash out.

    “I would think foreign institutions will be the initial source of worry … so the central bank is trying to first of all give those people the piece of mind that they are on top of things, and secondly, to give the very strong message that the funds are there, and they are going to support the banks.”

  • Their reporting mentions that a liquidity facility will be made available to UAE banks this morning (business opens there on Sunday) to avoid a run on the banking system. They don’t say anything about a guaranty on loans made by local Arab banks to Dubai World.

    The liquidity facility can be interpreted to mean that if you as a western bank have a deposit with a UAE bank, the central bank guaranties that you will receive principal and interest on the deposit as legally stipulated. This would be one way to interpret the “guaranty” – it is only a back-up to UAE banks, many of whom have lent to Dubai World. Should these Dubai loans go sour or be renegotiated, the UAE central bank guaranty promises only that the UAE bank in question will not go bankrupt.

    It does not say that the UAE central bank is guaranteeing the loans of Dubai World. The UAE banks may still experience losses on these loans, but if they are life threatening the central bank will provide liquidity.

    You might consider it a back-up line of credit for UAE banks exposed to problems with Dubai World.

  • i meant to continue looking and got side tracked trying to figure out what the hell the difference is between an hijab and an nun’s habit. yes i am mediacted lol

    edited: oops

  • This may not be the tipping point for a market correction, but it knocks out a few of the supports for the people arguing we are in a V-shaped, rapid recovery back to the good times.

    …, Dubai could just be another domino in the chain. Black Friday retail sales are up .5%. Last year BF was up 3%…, but the Holiday Season ending tally was down 5.5%. What will the ending tally be this year? If last year is any indication we better hang on for a wild ride on Monday. With the dominos of employment, housing, commercial real estate, and now retail, lined up and ready to fall…, do you suppose Goldman Sachs execs are home enjoying Thanksgiving left overs…, or are they in the office strategizing on how to capitalize on a market correction they can help engineer? Or will they be betting on a “Christmas Miracle” that the consumer pulls us through in the next month?

  • The type of financial instruments available to Islamic banks are different than western banks due to Islamic law… Was Dubai World et al running banks from the ‘abode of war’ i.e. outside the abode of Islam, in their structure?

  • The construction firm responsible for the Burj Dubai, now the tallest building in the world, discovered as they put up the final stories that their walkie-talkies between the ground crew and the crew at the top floor no longer could communicate. The distance was out of the range of the equipment.

  • • Plea to halt interest payments expected to be turned down
    • Sources warn of a long process to reach restructuring

    The Guardian, By Elena Moya, December 3

    Creditors of Dubai World are expected to reject a standstill agreement proposed by the company, threatening to drag out negotiations over $26bn (£15bn) worth of the conglomerate’s debt.

    Advisers involved in the talks tonight said that the process could take months as more than 100 accountants, lawyers, bankers and other professionals descended on Dubai from London. “There won’t be a standstill agreement,” one said.

    By rejecting the company’s proposal to put interest payments on hold, creditors automatically trigger a default, leading to inevitable further wrangling.

    h/t Market-Ticker: Heh, I Thought Dubai Was a Non-Event?

    “Refusal to stand-still means there’s an immediate default, which means the CDS go boom.”

    They sicken of the calm, who knew the storm.

  • BBC, December 14

    Dubai’s government has announced it has been given a $10bn (£6.13bn) handout from United Arab Emirates neighbour Abu Dhabi to help it pay off its debts.

    It will use $4.1bn (£2.5bn) of the money to bail out the government-owned investment company Dubai World.

    The company’s property development operation Nakheel needed the money to pay investors in an Islamic bond due to mature on Monday.

    Yves Smith ruminates: So Why Did Abu Dhabi Run to the Rescue of Dubai?

    They sicken of the calm, who knew the storm.

  • A month’s worth of rainfall was dumped on Dubai in just 16 hours yesterday causing chaos as storms battered the UAE.

    Dubai Met Office said heavy rains had lashed the emirate as a result of cold air flowing south from Saudi Arabia combined with high sea temperatures and moist air being carried across the Gulf by the jet stream.

    Between midnight and 4pm yesterday, 24.6mm of rain fell in Dubai.

    The average monthly rainfall is 15.1mm.

    Heavy showers also struck Fujairah, Ras Al Khamiah, Ajman and Sharjah.

    Roads were submerged in water and closed in Abu Dhabi.

    A Met Office spokesman said: “We’re expecting the weather to become more settled as the week goes on.

    The rain should be clear by Monday (today) afternoon. We’ve had some substantial rainfall and as we’re still quite early in December, we could get more – it’s not over yet.”

    Dubai Municipality said more than 300 workers were battling to pump the roads of water. “We are working round the clock to see that water stagnation does not take place,” said Abdul Majeed Sifai, director of the sewage network department.

    He said there was more than 100 complaints about water lying on the roads.

    Traffic came to a standstill on the Dubai to Sharjah road.

  • Reuters, December 16

    Abu Dhabi’s $10 billion financial aid to fellow United Arab Emirates member Dubai to meet debt obligations was in the form of bonds, on similar terms to a $10 billion bond issue to the UAE central bank in February.

    The February bond issue is for a five years and pays a coupon of four percent per annum.

    “The loan is based on the same terms as the first tranche of the $20 billion bond,” a source close to Dubai’s government, who did not wish to be identified, told Reuters.

    Abu Dhabi gave Dubai the surprise lifeline on Monday — the same day a $4.1 billion Islamic bond issued by Dubai property developer Nakheel came due — helping it stave off a default and cheering markets.

    They sicken of the calm, who knew the storm.

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