Monday, February 1, 2010

Darn it, these binoculars aren't any better than the ones they have over at S&P

Last week S&P dropped its rating of Commercial Operations Group of Dubai Holding. Dubai Holding you may know is owned directly by Sheikh Mohammed, and the COG contains Dubai Properties and Jumeriah a very well known hotel group with properties all over the world. Dubai quickly retaliated quixotically by having Emirates NBD, the largest bank in Dubai, unsubscribe to the S&P service. That’ll teach ‘em. Personally I think the guys at S&P probably high fived themselves when Emirates NBD dropped them. These guys helped drive the world over the cliff in 2004-2007 by issuing AAA ratings on securities that have turned out to be anything but. To have Dubai keep itself in the headlines for an extra day by “dropping S&P” after having themselves been dropped is the kind of publicity they want.

In the coverage of the tit for tat though I think something has been lost. S&P did not lower its rating because it was concerned about the figures, it dropped it altogether because it did not believe it was even getting reliable figures upon which to judge the creditworthiness at all. A conspiracy theorist explanation for this would be that there is some secret set of books that Dubai Holding uses to manage its own affairs and another that it presents to the outside world. Such a theorist would suspect Dubai Holding of bad faith and trying to mislead S&P who felt the numbers they were being given were misleading and so decided to drop coverage. It’s a possible explanation but I think it is an enabling fiction. If it were true then it would mean that Dubai has a handle on what is going on in its own finances but is seeking to obfuscate them from the rest of the world. I think the real answer is that Dubai itself has no idea what it’s true financial state is.

I recognize that my evidence for this is as circumstantial as the conspiracy theorist argument for a dual set of books. Here is my evidence. There is the letter from Nabulsi to the FT claiming that Sheikh Mohammed is promptly informed of any changes to the financial status of his holdings and a denial that anything is held back. Methinks the gentleman doth protest too much. Then there is the pledge of Abu Dhabi to shore up Dubai, the commitment of $10 billion and then the surprise reversal putting Nakheel outside the ring in November. This makes me think that perhaps Abu Dhabi was not initially informed of how dire the circumstances were and knowing what the cost of not informing them would have been Sheikh Mohammed was himself probably not informed. The summary termination of Sheikh Mohammed's lieutenants, this could have been in response to the revelations that conditions were actually much worse at the DIFC etc. than the Sheikh had been made aware. Then there is the passage of the fraud law with heft prison terms but amnesty for those who pay the money back. This is the kind of thing you would do if you weren't really sure where the money had gone and thus you actually hoped it had been stolen rather than simply lost because then you would have a chance of getting it back.

My guess is that the figures available to the powers that be in Dubai are no more reliable than those which were presented to S&P. As a result the restructuring of Dubai Inc. is going to be massively more complicated than anyone would normally expect which is why there remains radio silence on issues such as the Dubai World standstill request. A conspiracy theory is often comforting because it means that someone actually is in control. I think the reality in Dubai Holding is the reality of the world at large, it is unmanaged chaos.


never-to-late said...

Ken nice to see you back… A conspiracy theory is often comforting because it means that someone actually is in control. I think the reality in Dubai Holding is the reality of the world at large, it is unmanaged chaos.

I think you nailed it there… I have been saying this for years now that Dubai has spiralled out of control. Utter mismanagement, no concrete laws, smaller minions in the government jobs make rules on the fly depending on his/her mood at the time, the colour of your skin, nationality, you name it.

While it is widely advertised that this a tax free haven, the exorbitant fees, charges and levies from various institutions are nothing but tax and often worse.

A customer of mine was telling me how bad the situation is in Dubai… so bad that the tax collectors of biblical times would appear to be lenient. I could go on…

It is a shame that Dubai chose to go down the wrong path. I hope the powers that be wake up and fix things or at least die trying…

Desert Scorpion said...

Spot on Ken.

I always say to people who like to over analyse or obfuscate their own understanding by asking them whats the benefit of doing that!

That is, if DH have a grip on all the issues then they would communicate and charter the good ship Dubai thru these problems.

If they have a clear understanding and sight on what has happened they would communicate a clear and transparent strategy of how they seek to overcome the problems.

Unfortunately I dont think this is the case at the moment.

Rupert Neil Bumfrey said...

A new member of the Bank Group!

Obviously this is in addition to woes at RTA.

The lesson may well be dramatically improved transparency and governance.

Anonymous said...

'' it's unmanaged chaos'' is a very appropriate way of identifying the core issue. Not unlike many other businesses or Government organisations in the GCC. So in my view, your observation is very true unless DH can proove otherwise.

Anonymous said...

and in other news, new oilfield in Dubai!

think they were sitting on this one? or one conspiracy too many?

GML said...

People think that Sheikh Mohammed's entities are all related in some kind of corporate structure, but I suspect that they are obscured behind a myriad of trusts, SPVs, nominees, foundations, etc, so trying to pick through it and come up with a single figure of "how much do we need, in what form and to which entities" is nigh on impossible without some complex re-organisation. I suspect they know precisely what each entity looks like, but that the problem is trying to explain it to someone else so that they would even consider lending. S&P have obviously given up trying to find out. Until they sort it out properly, they will just end up desperately running from one debt's due date to anothers.

Anonymous said...

S&P sure stuck a lottery here, using Dubai to claim "see we told you"

Maybe like the Nakheel issue the right hand is busy buying Mcgraw Hill shares NYSE: MHP while the left hand is trashing S&P, their subsidiary... there are wheels within wheels