Saturday, December 12, 2009

The good news: we know where your DIFCI bond principal went. The bad news: your bonds can go from $0.60 to zero faster than it can go from zero to 60







Bewildered owners of the DIFCI Sukuk who are wondering what has become of their principal now that their bonds have been cut half might want to have a look in Dr. Omar bin Sulaiman’s driveway. A few years ago the former governor of the DIFC gave an interview to Bloomberg about his car collection. At the time he was about to take delivery of his second Ferrari, an F430. It would join a Bently and a souped up Porsche Cayenne in there. At the time he was 33 years old and the Governor of the DIFC a financial free zone in Dubai (more on this later) which was rapidly becoming the financial center of the Gulf. Everything was going great. Dr. Omar in the interview remarked that “Dubai’s only problem now is traffic.”

Well, as it turned out Dubai had a fair number of other problems in addition to the traffic. Among them excess leverage, questionable investments, both of which were exacerbated by the effects of the global financial crisis which tightened credit and depressed asset prices most notably of Dubai real estate. Something which hasn’t gotten as much press is the nature of the management of these enterprises. Sheikh Mohammed summarily dismissed several of his top lieutenants in early November Dr. Omar among them.

Before the debt standstill request became one of the biggest stories in the world there was a lot of speculation as to why this might have been.

There is a theory that Sheikh Mohammed learned that the lieutenants had paid themselves extremely well and may have engaged in substantial self dealing while allowing their businesses to deteriorate. Dr. O is rumoured to have paid himself 200 million AED ($50million) for 2008. If so, who knows what else is in his garage now? The Dubai companies are all privately held so no one can know if this is true. My guess is that if it is an error it is one of magnitude rather than direction. Self dealing and extravagant compensation may have seemed reasonable when things were going well but when things went over the cliff seemed excessive.

This sort of self dealing was not uncommon in the US during the nineteenth century. Andrew Carnegie and Jay Gould often felt there was a blurry line between their personal fortunes and those of their companies. This sort of thing was only effectively attacked during crisis of the Great Depression (if then.) Dubai is having that crisis now. Another helpful analogy is to think of Chicago. Mayor Daley is kind of an Emir there having inherited the Chicago Machine from his father. Daley is widely thought of as honestly pursuing the betterment of Chicago but is surrounded by a group of businessmen who seem to make a lot of money off the city. So it may be with Sheikh Mohammed and his lieutenants.

Another theory is that the various lieutenants did not keep Sheikh Mohammed informed of the deterioration in their businesses and asset quality and therefore Sheikh Mohammed may not have fully disclosed the state of affairs to Abu Dhabi when negotiating for the Dubai Financial Support Fund. When Abu Dhabi discovered this they drew a line in the sand between Dubai and it’s government related entities and cut those entities loose. Given the nature of the gulf the reasons for the sackings are far more likely political than economic but the outside world will probably never know.

Even if you get fired from one of these jobs you can make plenty of hay when the sun was shining as Dr. Omar certainly has. As he says in the article, “If God has blessed you with wealth, enjoy it.” But why stop there? Especially when there are so many people in the world who will lend you money that you can pay yourself with and thus enjoy their wealth as well? For as long as it lasts anyway.

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