Thursday, July 22, 2010

In the Emirates, as in life, if you mess with the bull, you get the horns. Maybe moreso.

In this post I put forth a theory as to why Dr. Omar and Bisher Barazi are in so much trouble. Check here for the previous article.

Sometime in late 2006 or early 2007 I sat in a conference room in the DIFC, the one with the imperial view of the massive construction site which composed the vast majority of the Gate District at the time. I was at a meeting with the representatives of the other investment banks and the then CFO of the DIFC Bisher Barazi. Bisher had a voice both nasal and high pitched, kind of like beaker on the Muppets but with a severe head cold. When he became excited he seemed to be out of breath and on the verge of sneezing at the same time. At this particular meeting he was certainly excited.

We were discussing the proposed IPO of Dubai Ports World. It was being proposed that DPW execute a dual listing on the DIFX in Dubai and the LSE in London and we were hoping to convince them to do a DIFX only listing. This was going to be the biggest thing to happen in the DIFC and would prove to Sheikh Mohammed that the guys who were running the Center had not merely snookered a bunch of foreigners into renting expensive real estate but had actually created a functioning financial center. Nothing makes people nervous like scrutiny and, as we now know, the guys who ran the DIFC were not used to scrutiny. So there we were in our meeting with a nervous, and therefore excited, Bisher Barazi.

Bisher had good reason to be nervous. The international banking community had been drinking the DIFC cool-aid for over a year but so far we had little to show for it. My firm in particular, Deutsche Bank, was massively committed. We had moved aggressively into the center and has helped build much of the legal and technical infrastructure that enabled the DIFX to launch on time in September 2006. We intended to use our first mover advantage to establish a dominant position in the center. If you wanted to trade, clear or settle on the DIFX odds were that somewhere along the line you were going to have to pay us. We stood to benefit massively if the DIFC worked out and the DIFX became a major exchange. That said, at the time there was precious little business going on and we in the region were starting to have a hard time explaining to our Lords and Masters in London why we were devoting so much time and effort to the project.

I had seen this before when I worked on an exchange start up in the US. The exchange had an 80% cost advantage over its rivals and still took 18 months to gain market traction against entrenched rivals so I wasn’t too worried. The difference however was that we owned equity in that exchange and made a substantial windfall on its IPO and subsequent trade sale. The DIFC had steadfastly refused to grant us equity in the DIFX which would have helped us justify the efforts we were putting forth. This being the Arab world, with its’ penchant for retaining control, we were continually told no dice. I had confidence that it would work out eventually but it was getting hard for me to keep co-opting the folks back in London and the other DB support centers to continue to pour resources into the project.

So as nervous as Bisher was, it was pretty frustrating to have him pace back and forth and harangue us in his high pitched squeaky voice about all the work that was going to have to get done in order for the DPW IPO to come to the DIFX and for it to come off without a hitch. We need a retail offering, we need DMA access to Europe, we need... we need... as he got more excited he spent more and more time looking at me and his tone switched from “we need to..” to “you need to..” “You need to connect us to Saudi, you need to provide connections to the exchange for UAE brokers, you need to...” I had already been thinking of all the things I was going to have to do to muster the resources within DB to do all these things. I would have to call in favors, I would have to fly to Amsterdam to rally the troops in GTB, I’d have to go through multiple New Product Approval procedures and I would have to go all over the firm making presentations about the bright future of DB in the MENA region. I had practically emptied my account and would now have to blow my own personal credit bubble at the DB favour bank.

Then all at once it hit me that it was entirely possible that all this would be for nothing and I would be holding the bag. So I interrupted the lecture, pointed accusingly at Bisher and said, “Listen here, I don’t work for the DIFC. I’d like nothing more than to build out this infrastructure but you have denied us the opportunity to take equity in the DIFX or any other upside in the success of the DIFC. Nonetheless you continue to demand millions of dollars in infrastructure investment and millions more in free consulting. You have to understand that I work for the shareholders of Deutsche Bank not the DIFC stakeholders and it’s going to be the DB shareholders who decide whether this gets done, not you.” (I really did say that, I was a great believer in the cult of the shareholders)

I’ll admit, I felt pretty clever. I thought that this might open the door a crack and make them cough up some equity in the DIFX so we could really see some upside when the rest of the world joined us in drinking the DIFC cool-ade. Not for the last time in the region did it turn out that I thought myself a good deal cleverer than I was, for Bisher Barazi had a plan.

Unbeknownst to me, DIFCI and my management at Deutsche Bank had been in negotiations for DIFCI to become a massive shareholder of Deutsche Bank. By June of 2007 they had acquired 2.2% of the company and became our fifth largest shareholder. And let me tell you, as far as the DIFX was concerned, Bisher’s plan worked like a charm. No more wisecracking from Ken Monahan about how the DB shareholders would decide the fate of the DIFC, the DIFC was the shareholder. It was worse than that. I had to give Bisher my cell phone number. And whenever it rang no matter the time zone or circumstances in which I found myself I would have to answer it. For the next six months at random I would get phone calls from Bisher demanding status updates, did I do this, did I do that, was it really possible that we would deliver on time and in full? Did I understand how important this was? Where was I? What was I doing? Why was I doing whatever I was doing instead of working on this? Mercifully he did not call all that often but when he did, it was not awesome.

And wherever I was at whatever time and however sober I had to reassure Bisher in as soothing a voice as I could muster that indeed at this very hour an army of people in London, Amsterdam, Dubai, Hong Kong and Bangalore were working night and day to ensure that we delivered on time and in full. And we did. We executed, with a single listing on the DIFX, the largest IPO in the history of the GCC with a simultaneous retail offer in the UAE and an international book build. We created a link to Euroclear so that international investors could buy the shares in their existing accounts and we connected clients in dozens of countries to the DIFX all over DB infrastructure. Yep, as far as the DP World IPO went, the DB investment was a stroke of genius.

Yep, a stroke of genius except for one small detail. DIFCI completed its’ purchase of DB shares in June of 2007, the all time high for the stock. At the time of the announcement the stake was worth $1.8 billion. Then fate took a hand and the financial crisis got underway decimating the values of financial institutions the world over, even companies like DB which took no government money. Today DIFCI’s $1.8 billion investment is worth $720 million and $1.1 billion has been sacrificed to the trading gods. So while from the tactical perspective it was a stroke of genius, from a strategic investment perspective it was a complete fiasco. Add to this the $2 billion loss that Bourse Dubai took on its NASDAQ and LSE shares, a transaction on which the DIFC advised, and it doesn’t look like the guys doing the investing in financial services firms did Dubai any favors. I’ll bet they wish they just let us invest in the DIFX like we asked.

This brings us back to the present, there’s nothing like losing a cool 3 billion of Sheikh Mohammed’s money, or rather money Sheikh Mohammed has borrowed, to put you in the crosshairs of the UAE and the DIFC legal systems. Perhaps Sheikh Mohammed cannot imagine that so much money could disappear without some kind of malfeasance. After all it did take outright theft in order for $165 million to vanish from Damas, surely $3 billion can’t vanish without some fancy footwork by some light fingered subordinates. From my perspective $3 billion did get lost but it got lost the old fashioned way, bad decision making, not fraud.

But there’s a difference between robbing a bunch of international investors and legitimately losing a bunch of Sheikh Mohammed’s money. If you’re an international shareholder you’re forced to rely on the law which is why you get nothing but laughter and forgetting from the Brothers Abdullah. Sheikh Mohammed IS the law so no matter how legitimate your poor decision making if you lose his money you are in serious trouble. No laughter. No forgetting. He doesn't have to rely on the DFSA, he can just throw you in jail until you pay him what he thinks you owe. Don't like it? Too bad. You mess with the bull you get the horns. This is no longer about $544,000 in back pay for Bisher Barazi, it is about Sheikh Mohammed getting some payback. Bisher Barazi had better call up that guy with the submarines and leave town because he is going to get a lot more than $122,000 in emotional damage from Sheikh Mohammed.


Laocowboy2 said...

Most interesting - and now I understand the travel ban. The disputed bonuses are just small change.

Anonymous said...

Thanks Ken for the insight..

Laocowboy2 said...

Following comment came from a Dubai lawyer in circa 1978 when I first lived in the UAE - "There are no laws, only lawyers, and no rules only rulers". Nice to see that nothing essential has changed (although there are a lot more zeros on the "transactions" these days).