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.