Thursday, January 14, 2010

I'm a surrealist and I used to love the Dubai real estate section, now I just read the court reporters. You can't make this stuff up.

It has been rough sledding for the DIFC lately. First NASDAQ abandoned the DIFX project to the DFM. This reduced NASDAQ from a partner in the development of Dubai as a financial center to a passive and very minor shareholder in the DFM. Bourse Dubai still owns substantial stakes in the NASDAQ and the LSE but may be forced to sell them if it can’t roll its’ debt in February. Not much has changed functionally, NASDAQ did not contribute much aside from the brand and the management and though the exchange has launched derivatives they have not realized their potential but symbolically its’ a blow.

Then came the news that Dubai Ports World, the star listing of the DIFX would seek a dual listing in London. It had been a major triumph that the DIFX had been able to play host to the DPW IPO as a single listing. At the time, back in 2007 DPW was the largest IPO in the history of the Gulf States and was also the first privatization for Dubai which, had it been followed by others, might have alleviated or perhaps prevented altogether much of the suffering that is about to befall Dubai. The fact that DPW is also seeking a London listing is a sign of the desperation of Dubai to raise the equity value as well as a sign of the failure of the DIFC.

As tragic as these things are, readers of my blog will know that these issues are not what I consider to be the main issue of within the DIFC, but more on that in a moment.

The DIFC is not standing by, it's cutting fees to attract more business. It is actively engaged in the issues on which Dubai is most focused. It is the jurisdiction of choice for the special tribunal that will oversee any issues relating to the insolvency of Dubai World or any of its subsidiaries. This was an absolutely essential step because behind the uncertainty around the ability of Dubai Inc. to pay its’ creditors and the willingness of Abu Dhabi to support Dubai if it cannot lies the greater uncertainty of what happens in the event of Default. The default regime of the UAE proper is extremely uncertain. The default regime of the DIFC is untried but the legal principles involved will be more familiar to western creditors and more comforting for all involved.

Though I make light of it in a previous post I think it is important that Dubai is playing host to a conference of insolvency lawyers. I think it shows at the very least that the powers that be in Dubai “get it.” Their capacity to roll the debts they have against their more solid companies will depend largely on the faith that the creditors will have in their capacity to take control in the event of an insolvency. This is important because in contrast to 2005, in 2009 creditors are less concerned with the return _on_ their money than the return _of_ their money. If the Dubai Insolvency Conference can help to ease the fears of investors then the rough ride ahead will be a little bit smoother.

I do however think that with all this focus on what precisely the laws say and imply that Dubai and the Emirates generally are missing the forest for the trees. The main concern with the international community is less with the quality of the law than their equality before the law. Generally I think the best job to have on the staff of any Middle Eastern newspaper is the court reporter as long as you have a taste for the surreal. Just in the past week or so we have had the story of a UK woman who was sexually assaulted then then arrested for drinking and engaging in illegal sexual activity with her fiancée. The case of an Afghan grain merchant being tortured by a member of the Abu Dhabi royal family. The Emirati was released though all this accomplices (non-Emiratis) were jailed. There is also case of Mr. Hassan which I have documented elsewhere. Emiratis have to remember that the rest of the world can read the whole paper, not just the business section and what the rest of the paper says is that if you go to court against an Emirati in the Emirates you lose regardless of the facts. This creates quite a sense of unease among foreign investors.

This was why the DIFC was established in the first place. To give investors confidence that financial transactions they undertook inside the center would provide some legal certainty. Then you have the stunning example of the DFSA standing aside while the Abdullah brothers loot Damas of $160 million. One Abdullah brother resigns and then negotiates with another Abdullah brother the pledge of shares worth a fraction of the amount stolen cash. The DFSA stands by while this all happens. No investigation, no legal action, no filing, no reprimand. These actions by the Abdullah Brothers break DIFC law, make no mistake about it. A crime has been committed but nothing has been done. Nothing. Why? It would seem because the Abdullah Brothers are Emiratis and the shareholders are not. The DIFC and the DFSA are proving themselves to be paper tigers, and just an extension of business as usual in the Emirates. Is it any wonder that DPW trades as a discount with this as its only jurisdiction?

This is fine for people who know and take those risks. Abu Dhabi can still play that game. There is money to be made there and there are ways to do business in a place where the legal and regulatory deck is stacked against you: only deal with people you know and trust personally and take the time to find out who they are. For Dubai that ship has sailed. It’s all well and good for the Abdullah Brothers to steal $150 million or so that’s a lot of Ferraris and houses on the Rivera but its not the end of the world. Now Dubai is trying to convince the rest of the world that it can fairly adjudicate $80 billion in debt there if need be in order to convince them to roll that debt. $80 billion is enough to sink Dubai and a lot of money to bet on something as flimsy as the DFSA. Will the international financial system take the bait? Wait and see.

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