What's a Handshake Among Sheiks?

aka Dubai or Not to Buy

Only a few years ago, the world marveled at Dubai’s economic miracle. Now, we’re faced with another case of hype gone bad. The video below, made in 2006, chronicles Dubai’s spectacular growth. The tone is a far cry from last week, when Dubai talked about bond defaults and joined the slums of subprime.

In all honesty, I don’t know much about the United Arab Emirates or the seven members. But I recognize a nation-state with serious money problems, when its government starts censoring the financial press. Here’s what The Wall Street Journal reported on Sunday:

The Sunday London Times newspaper was removed by authorities from shelves in the United Arab Emirates on Sunday amid intensive reporting of Dubai’s debt problems, an executive at the paper said.

The National Media Council ordered the paper blocked by distributors without providing a reason, an executive at the paper in Dubai told Zawya Dow Jones.

The Sunday Times edition available in the U.A.E. on Nov. 29 featured a double-page spread graphic illustrating Dubai’s ruler Sheik Mohammed bin Rashid Al Maktoum sinking in a sea of debt. The Times wasn’t given a reason for the block, or a timeframe when it will be lifted, the executive said.

A government official in Abu Dhabi, the capital of the U.A.E., said that the picture of Sheik Mohammed, which accompanied a story entitled: The sinking of Dubai’s dream, was “offensive.”

Hey, censorship ranks right up there in my “offensive” category. But that’s not the point. It’s all about credit. Banks are worried about a multiplier effect from defaults, as the world watches Abu Dhabi and wonders if it will support a fellow member of the United Arab Emirates.

How did we get here?

That’s the question that bugs me. Abu Dhabi has the wherewithal to bail Dubai out of its $59 billion mess. The West knows it. The seven members of the United Arab Emirates know it. But no one is 100 percent certain what Abu Dhabi will do. Today’s article in The New York Times is especially troubling.

At the opening of the Dubai Airshow recently, the crown prince of Abu Dhabi, Sheik Mohammed bin Zayed al-Nahyan, placed his hand over the hand of Dubai’s ruler, Sheik Mohammed bin Rashid al-Maktoum. That was widely viewed among people here as a sign that Abu Dhabi, by far the largest and richest member state of the United Arab Emirates, would take care of Dubai.

Since when have $59 billion guarantees been replaced by sheiks holding hands?

What were the bankers thinking? Sometimes, it’s difficult to understand what drives the political and economic decisions of other countries. But I can’t help but wonder why bankers relaxed their credit requirements—specifically their need for clear guarantees.

We could use a financial League of Nations. Or better yet, a leverage non-proliferation treaty. The G7, G20, and World Bank aren’t set up to regulate the capital markets. And with banks running around the world—all marching to separate but interwoven financial drumbeats—how long will it be before there’s another financial collapse the size of Lehman? And here’s the real question:

Will US taxpayers bail out foreign financial institutions to defend themselves?


Norb Vonnegut

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