Wikipedia describes Dubai World as “an investment company that manages and supervises a portfolio of businesses and projects for the Dubai government across a wide range of industry segments”. Well said. Dubai World is new, existing only since 2006, but even in that short time it has become a major player in the global economy. It holds a variety of major businesses, including Nakheel, the real estate company that built the Palm development we all like to see from the air. When Dubai World sneezed in November 2009, the rest of the world felt it. Oil prices went down, and even the U.S. stock market was affected.
Dubai World is now in the middle of a mess. Rachel Ziembe, senior analyst at research from Roubini Global Economics, says that “Dubai World…is too big to fail but too big to guarantee”. Roubini Global Economics(RGE) is an impressive group. Nouriel Roubini, the founder, is one of the few economists who predicted the great recession we are experiencing now. Many refer to RGE’s website as one of the best news sources on economics. So Rachel Ziembe may know what she is saying. But some holdings at Dubai World need to be sold, and real estate and retail are possibilities.
Dubai World does not have a clear boundary between it and the rest of Dubai. Dubai World is still in the hands of the Sheikhs and their families who have ruled the area for over a hundred years.
I am most curious as to why the bankers loosened their standards when it came to lending to Dubai World. Eckhart Woertz, an economist at the Gulf Research Center in Dubai, said “lenders weren’t looking too hard into what entity was actually backing the debt”. The lending institutions believed all would go well, and seem to have been fooled by the aura of wealth lurking everywhere.
No one could figure out Dubai World, it is so complicated. And, Dubai World is ultimately owned by the Dubai government so it seemed safe. “Seemed” is the operative word. Most shocking of all, Chris Turner, a former director of risk and asset management at Istithmar World, says that “Western banks gave Dubai World at least $15 billion in 2006 and 2007 without looking at the numbers”. And, audited reports were not requested and not provided. Almost like being a “Friend of Angelo” at Countrywide! (Angelo Mozilo was the CEO of Countrywide mortgage, and his F.O.A. list had special privileges).
Chris Turner goes on to say, “being a risk officer there was like nailing jelly on a wall”. Moody’s reported a “limited availability of information” and yet the lenders kept lending. Lenders thought the debt was guaranteed by the Dubai government, and yet when times got tough, they found out it was not guaranteed at all. Lucky for all parties, wealthy Abu Dhabi came to the rescue, and the price Dubai has to pay is increased dependence in the future. Not unlike all the bailout situation in the U.S. where the bailee becomes more dependent on the one doing the bailout. Remember when you were a teenager and you had to ask your parents for a quick loan because you were out of cash? Made you feel sheepish and not so grown-up. Now you know how Dubai feels – trying to keep its dignity while receiving a handout from the next-door neighbor.
Because all the buying took place during the boom, assets were bought at top-of-the market prices. Now that cash is short, the assets must be sold at a discount. Buy high, sell low – not a good way to do business.
Both the European and U.S. stock markets took a hit when Dubai asked its financiers to “extend maturities” because presumably there are many companies and investors in Europe and the U.S. who are now left holding downgraded securities. This is yet another example of how interconnected the world economies are – when one goes down, there are ramifications on the other side of the globe.
But one entity’s downfall is another’s opportunity. Buyers are gathering, particularly private equity firms, looking to do deals in a down market. I predict in a few years we’ll be hearing about the next wave of investment opportunities in Dubai.
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