I’m curious to get reader views on this one, since even the normally jaundiced Reuters noted in its coverage that the 11th hour bailout was “the least expected of all options Dubai had on the table.” Abu Dhabi had made it sound as if it would help, but that it also was going to extract a pound of flesh from Dubai. Even Saudi prince Al-Walid made noised that Western banks knew what they were getting into, that is, that Dubai World was not a sovereign credit.
But as Bloomberg summarized:
Abu Dhabi’s government provided $10 billion for Dubai’s financial support fund to help repay obligations, including the $4.1 billion needed for Nakheel PJSC’s Islamic bond maturing today.
So why did Dubai World get a lifeline?
I can only surmise, cynically, that far more was at stake than Dubai World. That credit was dispensable. But the Islamic bond market (sukuk) was not. The market is only about seven years old and none of these deals has been tested in a bankruptcy. If the process was disorderly or looked skewed against international investors, it would have had much broader impact.
Part of the statement today strongly suggests that the powers that be did not want to risk the deal proceeding to court with the rules that had been in place. From Reuters:
Dubai has announced a bankruptcy law that it said could be used in case Dubai World and creditors failed to reach an agreement on debt maturing in the future.
“Dubai will announce a comprehensive reorganization law, a framework that is based upon internationally accepted standards for transparency and creditor protection,” Sheikh Ahmed said.
“This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations.”
The US had an analogous situation with the first major default of a company that had a lot of credit default swaps written on it, the parts maker Delphi. The CDS contracts provided that the CDS holder needed to present a bond to the protection writer and would then get 100 cents on the dollar (up of course to the amount of protection purchased). The problem was that far more CDS had been written than there were Delphi bonds, by a factor of about 8, if memory serves me right.
ISDA did not want the market to fail its first major test. So a protocol was invented, contrary to the terms of the CDS contracts, to allow for cash settlement of the CDS (ie, a protection buyer did not have to present a bond to get his CDS payment).
Now with the benefit of hindsight, it would have been better for the CDS market to have suffered then, who knows, we might have been spared synthetic CDOs and the AIG rescue. But the Delphi case also illustrates that those who insist on the sanctity of contracts are more than a bit naive. Contracts are modified all the time…provided the stakes are high enough. Clearly, saving millions of individuals from foreclosure doesn’t rates, since none of them individually has any clout.
29 comments
Comments are closed.
Yves,
There must of course have been tons of local, regional plus global politics involved. Compensation for the bailout can also be political, in which case we can only speculate about the content of the deals made, of course.
Funny that they would draft bankrupcty laws now, after the event. This of course means that the creditors did a very sloppy due diligence at the time, but that we already knew..
Yves,
I cannot hazard a guess to answer your question except to wave my hand and say that Abu Dhabi felt that its own self interest warranted the intervention.
I can reasonably comment on a couple of things, however.
First, to the extent that the U.S. legal system would become involved in dealing with a Dubai World bankruptcy, there was a lot to be worried about. Many people think that it’s America’s substantive laws that cause foreigners problems, but it is really the procedural laws that cause all the heartache. Outside of the U.S., I’m not sure that any country has the same level of intrusiveness during discovery (the process of collecting facts) that the U.S. has, even the UK. To my knowledge, most countries allow no discovery whatsoever: you come to court with the facts you have, not with the facts you might discover.
Second, the “sanctity of contract” is a crock for exactly the reasons you express. Sales people routinely enter into contracts believing that the other side will never live up to their end, believing that the other side will come back and talk the price down later. The sales people figure that it isn’t their problem because they won’t be there when the problem comes up (sorry for paraphrasing what they told me, my memory is growing dim).
At least that’s my view based on my experience, which includes being both a litigator and the general counsel of a public company (both of which I am thankful to no longer be).
Cheers.
Another “simple” case of systemic risk, too big to fail and too much interconnectedness ?
It looks like the sukuk is just like our homegrown toxic paper holding America hostage. TPTB will do anything they can to prevent real price discovery and the market’s true revelation of what these things are worth. Thus they refuse to write it all down the way reality has been demanding.
Economic reality desperately wants to deflate, and is putting tremendous pressure on the Tower of Babel of phony debt. Once the great unwind begins there can be no stopping it. They’ve long since squandered any opportunity to let enough steam out of the system. Now it has to blow.
Or to use a different metaphor, the bulging dam keeps springing leaks, and they’re desperately trying to plug every leak, since it’s too late to let some water through (and even if they still could they wouldn’t psychologically be able to).
So the end result, after Abu Dhabi’s tough talk, is for them to try to plug this leak. The Islamic bonds already look dubious. I read somewhere that two have already defaulted elsewhere, one in Kuwait.
So if investors give up on the whole concept, that’s one less tool for raising more money to service existing debt.
Although the task is impossible, the system needs to try to hold the line everywhere. Once a breach is made, the whole line will get rolled up.
Nice term, Tower of Babel, an icon of Dubai’s grand erection. They never finished the first one in Babylon; they may not finish this one. Building so much stuff on sand did seem rather foolish. I hope the price of oil stays up.
The bizarre bazzar of rug merchants seemed about to unravel. I suppose Government Sachs, Benny, and Timmy may have stepped in. Well, now that the crisis has been called off we just can get right back to the recovery.
Hi Yves,
there were rumours last Thursday of this bailout. It makes absolutely no sense whatsoever, especially after having strong-armed the market and gotten its credit quasi-junked by the market.
I heard that there were quite a lot fo bids for the NAKH sukuks last week at 50 cents, and these were solely local names on the bid. What better way to make a fast killing AND help distressed western creditors at the same time. Surprised? I think this kind of behavior could be the order of the day in the future.
Regards
Tom
ummm, they clearly have no laws regarding preference…you can’t pay off half the debt and tell the other half you need to restructure.
i would agree with Tom.. there was some aggressive bidding for the Nakheel 2009 bonds last week from Abu Dhabi Banks..
just say they ended up buying 500mm (I am guessing they bought at leas double that) …that just saved the Govt over 250mmm ..
this market is treacherous..
I always thought that Abu Dhabi would come to the rescue at the last minute. Too much at stake for them and these new Muslim (never been tested in bankruptcy bonds). A friend of mine who lives in Abu Dhabi frequently visited Dubai and even over a year ago talked about how empty the building/homes are in Dubai. The excuse was that many are wealthy Europeans own these facilities claiming they only spend a few months a yr in Dubai.
The bottom line is that Dubai is way too close to Abu Dhabi and push come to shove Abu Dhabi will be there to help. Besides, many of the princes are young in Abu Dhabi and they have some hefty growth ambitions of their own to diversify their own economy so if their credit risk is at stake, offering 10B illion is pennies on the dollar in regards to their long term costs. Give, credit due, Abu Dhabi has controlled its growth rate while Dhabi was pedal to the metal which can get you in trouble.
The UAE has some werid rules. First, if you don’t have a job they’ll kick you out so this means the cost of hiring someone is very high because there’s not much of a labor pool locally. Everyone that moves to the UAE wants to make a quick buck and then get out. This is bubble inspired behavior.
I am personally ready to invest in Dubai, and I’ll pay cash… yes, that’s C-A-S-H, small bills. I’m looking for these items:
1. A 100 story 5-star hotel built on a sinking man-made island,
2. A large empty mall in the middle of the desert,
3. A man-made ski slope burning 5 Giga Watts per hour of electricity,
4. Half million slave laborers from India and Bangladesh tricked into coming to Dubai, and held against their will in subhuman conditions by gangs of Arabic morons wearing white bedsheets and passing for slightly higher than the scum that they are.
I’m willing to pay 20 bucks each, or 70 bucks for all 4 items. As I said, I’m paying cash. The plan is to demolish the monstrosities mentioned in items 1, 2, and 3, and repatriate the people in item 4, so they can be with their families for the New Year.
If there’s any stupid sand moron ready for this deal, drop me a line.
Don’t forget, I’ll pay cash!
Vinny
Vinny,
I believe this post whould be placed in Craigslist under heading ‘Distressed Sovereign Assets’ or perhaps ‘Global Financial Crisis Detrius’…
Just be careful if you are asked to meet off the coast of East Africa to ‘arrange the delivery’.
More seriously, less racism in future please. You are the same as them in the eyes of God.
Yes, definitely, meeting on a fishing boat off the coast of Somalia would be out of the question.
I’m not really racist, just that I’m turned off by the arrogance of the “Emirati”, knowing how badly they treat those poor foreign workers. It is amazing how they figured out that building a blatant slave society would somehow be ok in the 21st century. I guess God had an issue with that, like He had with America of the past 30 years producing countless billionaires, while millions are homeless and without access to health care.
Vinny
Interesting also, the investment connections that Tiger Woods and others have with this appalling labor situation. Nobody wants to talk about it….
I agree with you, the social compact is broken. Credit has a purpose, but betrayal is often met with betrayal. The corporate golem seems to think that debt service can be maintained while tangible and moral underpinnings of the middle class are removed. This is foolish. Deflation runs beyond mere wages, to benefits, government takings and the cost of living. Debt that cannot be repaid, will not be.
The corporate golem has too many hands in too many pockets. We are like a cow in a river of pirahnas. Each fish takes but a small bite.
When the storm passes, the transactional volumes in the rich economies simply have to be 30-50% lower for some decades. It is simply paying the tab for front-loading transactional value through a suicidal interest rate and leverage culture.
Well Vinny G., I’d up the bid to $75, but I don’t think the whole stinking pile is worth that much. Wouldn’t mind letting people go home though.
On another note, for those interested in Tiger’s nameplate in Dubai, I would suggest checking out Macro Man’s article linked above and following his link. The maniac scrolling of images of singular castles (Islamic/California nouveau rich bastardizations) built on mounds of sand is somewhat indicative of the whole Dubai miasma. There also is something markedly incongruent with such architecture afloat rolling hills of green, but then I don’t suppose that will offend too many potential buyers who will want to partake of a T.W. certified golf course or not have to look at their neighbor’s fleet of vintage trash cars parked in the driveway.
On yet another note, my understanding Dubai, unlike its more well endowed cousin, Abu Dubai, was lacking in ‘black gold’ and therefore was required to pursue the path of more creative, dare I say ‘innovative’, wealth generation through (its) would-be ambition of becoming one of the financial capitals of the world. Investments-gone-wild vis-à-vis Goldman Sachs and other fiscal Almighties, complete with accompanying bail-out. Wonder what Dubai will adjust its executive compensation levels (upward of course) in light of such dexterous judgment and most wondrous insight?
Has anybody, in fact, been ‘bailed out”? Is no return expected for the $10 billion? And if expected, will it rank below other claims?
Sanctity of contract is a shibboleth and applies only to the poor and weak.
It has no meaning to the rich and well connected.
I’m looking forward to the day that a new Huey Long or William Jennings Bryan will convince the poor and middle class to voluntarily default en masse on their mortgages, student loans, and credit cards.
Hi Yves,
Work on the prop desk at a Dubai-based SWF. In the interest of not getting fired quite yet, I can try to answer some of your questions via e-mail if you want. In a nutshell, the color I’m hearing is that the collateral damage was getting expensive, and AD blinked. But as with most things in the region, there is very little transparency.
Hi, very late to see your note, but please ping me at yves@nakedcapitalism.com Thanks!
Yves, there are intimations at a Zero Hedge post that a global heavy hitter like Barclays or Rothschild was making hay while the cows all swirled around in a panic over this the past few weeks.. Any thoughts ? the Delphi playout sounds like it deserves a full post by you as to its possible application to ridding ourselves of the Mambo King Citibank or Citigroup or Dick Parsons Rough Riders or whatever new moniker they come up with now that they have shed the shackles of the TARP sea monster. thanks and please bring us more big cats in the antidote du jour. Cheers.
UAE 800 billion in reserves. A western sheikdown?
Bernanke cut them a check. Why not? Dubai is a ‘Key Man’, if the dominoes start falling, there is no stopping.
There is probably some UAE oil under the table, as a quid pro quo. UAE comes out looking good and not a cent out of pocket. The gains in the S&P from the ‘end of the crisis!’ will cover any Federal Reserve up front $$$ costs.
Keep in mind the current situation in Dubai is the tip of the iceberg. It will take months before the level of toxic debt can be ascertained.
For me the killer was the story of Delphi bonds and 8X CDOs. I have to believe that the US taxpayer got stuck on that one. Surely the ISDA is not in business to cover derivative losses. Links to this episode would be appreciated.
I’ve been wondering how it is possible for a truly Islamic investment in a productive asset to default, since as I understand the principles (as opposed to the practice) of Islamic finance, then risks and rewards are shared equitably between investors and users of investment.
So the risk in genuinely Islamic finance is liquidity risk, rather than credit risk.
I think you are missing the point about sanctity of contract. It’s not that contracts can’t ever be amended once made; it’s that amendments should be made by mutual agreement between the parties. Of course, many standardised financial contracts do contain provision for such amendments to be made by majority voting or by the fiat of a (presumably independent) third party terms but all parties agree to those provisions to start with so noone can complain.
Having an external agent such as government or the courts come in and amend contracts against one or more parties’ will (even if by refusing to enforce a contract) is what is at issue when people talk about “sanctity of contract”. To a rather lesser extent, there is a similar issue when the terms are changed through legislation – e.g. changes to the bankruptcy laws which might excessively benefit one side.
Dubai market crashed because the Burj Dubai reached it’s completion. How else would they pay for the construction of that building, and all the other projects Dubai world was taking care of?