Supplemental reading for Chabros case

Boomtown of Dubai feels effects of global crisis

By Robert F. Worth Published: Sunday, October 5, 2008

The palm-shaped islands off Dubai are being built and developed by Nakheel Properties

a division of state-owned Dubai World. ((iStock))

DUBAI, United Arab Emirates — On the surface, this glittering Arabian boomtown seems immune to the financial crisis plaguing the global economy.

The skyline still bristles with cranes — an estimated 20 percent of the world's total — and the papers are full of ads promoting spectacular new building projects. On Sept. 24, tourists from around the world flocked to the opening of Atlantis, a gargantuan, pink, $1.5 billion resort hotel built on an artificial, palm-shaped island. There was no shortage of people willing to pay as much as $25,000 a night for a room, to gaze at the sharks and rays in a vast glass-lined aquarium in the lobby and to dine at marquee restaurants like Nobu and Brasserie Rostang.

But as recession looms in the West, cracks are appearing in the oil-fueled boom that has made Dubai, with its futuristic skyscrapers on the turquoise waters of the Gulf, a global byword for unfettered growth.

Banks are reining in lending, casting a pall over corporate finance and building plans. Oil prices have been dropping. Stock markets across the region have been falling since June. After insisting for days that the oil-rich Gulf region was fully "insulated" from financial troubles abroad, the Emirates' Central Bank made about $13.6 billion available on Sept. 22 to ease credit problems, in an echo of bailout measures in the United States. Already, some bankers are saying it is not enough.

Some of Dubai's more extravagant building projects — the ever-bigger malls, islands and indoor ski slopes — are likely to be dropped if they do not already have financing lined up, bankers say. The credit crisis could also reduce demand from buyers, who will have a harder time getting mortgages.

The shrinkage will be more severe if the financial crisis worsens in the West. Property prices and rents, which have remained steady until now, are widely expected to start dropping soon.

At the same time, investor confidence has been harmed by a long string of high-level corporate scandals, jeopardizing Dubai's long-term ambition of becoming a regional financial capital. "Plenty of people are worried," said Gilbert Bazi, 25, a real estate broker from Lebanon who moved here a year ago. "They are waiting to see if what happened in the United States will happen here."

When he first arrived, Bazi said, making money was almost absurdly easy. "Iranians, Russians, Europeans — everybody was buying," he said. "I didn't have to call people; they were calling me."

Now, Bazi stalks the lobbies of hotels, trying to find clients. "The market is sleeping," he said.

In fairness, Dubai still looks rosy when set against the financial turmoil elsewhere. Although it lacks the oil wealth of its sister emirate Abu Dhabi, Dubai has huge budget and current account surpluses, and the government of the Emirates federation is able and willing — like its Gulf neighbors — to inject an almost unlimited amount of money into the system to ease credit problems.

The governments of Saudi Arabia and Qatar have reaped so much profit from oil and gas in recent years that they are more worried about how to spend it than about managing any downturn. But the Gulf's governments face real economic challenges, albeit ones that are profoundly different from those in the West.

Until recently, credit in Dubai was growing by 49 percent a year, according to the Emirates' Central Bank — a rate almost double that of bank deposits' growth. That unnerved some bankers here, who felt it could lead to a collapse.

"In the U.S., the challenge is about keeping the banks going," said Marios Maratheftis, chief economist for Standard Chartered Bank. "Here, the economy has been overheated, a correction is needed, and it's about making sure the slowdown happens in a smooth, orderly manner."

If that sounds like an easy problem to have, consider the manic vicissitudes of Dubai's real estate market. Speculators often got bank loans to put down 10 percent on a property that had not yet been built, only to flip it for a huge profit to another buyer, who would do the same thing, and on and on. That was easy to do when housing prices here were surging so fast that some properties multiplied tenfold in value in just a few years.

But the Dubai authorities began getting nervous about this and imposed new regulations this summer to limit speculation. Many analysts say the slowdown in Dubai's economy, assuming it does not worsen to a slump, will make the city's growth more sustainable and healthy by reducing its dependence on loans and speculation.

Similarly, the authorities hope that recent arrests in corporate scandals will root out the culture of corruption that plagues so many Arab countries. Some of those arrested have been Emiratis with connections to the ruling family, in a gesture clearly intended to send the message that no one is exempt.

As Dubai's frenzied growth slows, whether there is a hard or soft landing will depend in great part on the banks, the link between the region's declining stock markets and its still-thriving property sector."Banks will have to start lending to end-users," said Robert McKinnon, a real estate analyst and head of equity research at Al Mal Capital here, referring to people who actually plan on occupying properties as opposed to trading them for profit. "There are some questions about how the banks will handle that transition."

At worst, if the global economy worsened and some Dubai banks failed, there would be a firm crutch to lean on. In the early 1980s, after several Dubai banks stumbled, the government rescued them and relaunched them as the Emirates Bank International. In the early 1990s, two more banks were rescued. At that time, of course, Dubai was far smaller. The repercussions of such a government bailout today would be far more damaging to Dubai's image as the epicenter of Gulf development.

The government cushion appears to be part of the reason most local people do not seem anxious right now.

"We don't worry about it," said Hassan al-Hassani, 26, a civil engineer and an Emirati citizen, who was drinking coffee late Wednesday night with relatives and friends at a faux-Bedouin-style tent, set up among Dubai's hypermodern skyscrapers in honor of the Muslim holy month of Ramadan. "Maybe it's good for things to calm down."

A few yards away, guests admired a miniature model of a new residential and commercial Dubai development called the City of Arabia, which includes what will be — if it is really built — the biggest mall in the world.

"Sometimes we wonder, will people really come to live in these places?" Hassani asked. But he quickly brushed off the thought with a smile, reminding his listener that native Emiratis — unlike the foreigners, who make up a majority of Dubai's 1.3 million residents — have a different perspective.

"Remember, 30 years ago almost nobody had phones here," he said. "There was maybe one tall building. My family only had one car."

Financial Crisis: Dubai Bubble Burst

By 

Global Research, November 30, 2009

 27 November 2009

You know about Dubai’s  . But do you know the background to – and fallout from – the crisis?

A Brief History

Historically, Dubai had an oil-based economy.

But because Dubai’s oil reserves were declining, the government – led by Sheikh Muhammed Al Maktoum – decided to diversify into other areas, especially tourism and commerce. That’s why Dubai built the  , a series of  , and the  .

But the global property bubble is bursting.

As I   last December:

Housing bubbles are now bursting in  ,  ,  ,  , the  , , and  . And the bubble in commercial real estate is also bursting world-wide. But Dubai got hit the hardest.

As Bloomberg  :

Dubai suffered the world’s steepest property slump in the global recession, with home prices dropping 50 percent from their 2008 peak, according to Deutsche Bank AG.

As the CBC  , things went South quickly in Dubai:

Hundreds of billions of dollars worth of building projects were delayed or cancelled. Thousands of jobs disappeared.

Dubai, playground of the über-extravagant, suddenly found itself facing the very real possibility that its biggest state-owned company, Dubai World, could go into bankruptcy. It warned it was having trouble making debt payments on $59 billion US — money borrowed to pay for all the excess.

The 2007-08 Financial Crisis In Review

By 

Before the Beginning

Like all previous cycles of booms and busts, the seeds of the   were sown during unusual times. In 2001, the U.S. economy experienced a mild, short-lived  . Although the economy nicely withstood terrorist attacks, the bust of the    , and accounting scandals, the fear of recession really preoccupied everybody's minds. 

To keep recession away, the   lowered the   11 times – from 6.5% in May 2000 to 1.75% in December 2001 – creating a flood of   in the economy. Cheap money, once out of the bottle, always looks to be taken for a ride. It found easy prey in restless bankers – and even more restless borrowers who had  . These subprime borrowers wanted to realize their life's dream of acquiring a home. For them, holding the hands of a willing banker was a new ray of hope. More home loans, more home buyers, more appreciation in home prices. It wasn't long before things started to move just as the cheap money wanted them to.

This environment of easy credit and the upward spiral of home prices made investments in higher yielding subprime mortgages look like a new rush for gold. The Fed continued slashing interest rates, emboldened, perhaps, by continued low inflation despite lower interest rates. In June 2003, the Fed lowered interest rates to 1%, the lowest rate in 45 years. The whole financial market started resembling a candy shop where everything was selling at a huge discount and without any  . "Lick your candy now and pay for it later" – the entire subprime mortgage market seemed to encourage those with a sweet tooth for have-it-now investments. Unfortunately, no one was there to warn about the tummy aches that would follow. (For more reading on the subprime mortgage market, see our   special feature.)

But the bankers thought that it just wasn't enough to lend the candies lying on their shelves. They decided to repackage candy loans into   (CDOs) and pass on the debt to another candy shop. Hurrah! Soon a big secondary market for originating and distributing subprime loans developed. To make things merrier, in October 2004, the   (SEC) relaxed the net capital requirement for five investment banks – Goldman Sachs (NYSE: ), Merrill Lynch (NYSE: ), Lehman Brothers, Bear Stearns and Morgan Stanley (NYSE: ) – which freed them to   up to 30-times or even 40-times their initial investment. Everybody was on a sugar high, feeling as if the cavities were never going to come.

The Beginning of the EndBut, every good item has a bad side, and several of these factors started to emerge alongside one another. The trouble started when the interest rates started rising and home ownership reached a saturation point. From June 30, 2004, onward, the Fed started raising rates so much that by June 2006, the Federal funds rate had reached 5.25% (which remained unchanged until August 2007).

Declines BeginThere were early signs of distress: by 2004, U.S. homeownership had peaked at 70%; no one was interested in buying or eating more candy. Then, during the last quarter of 2005, home prices started to fall, which led to a 40% decline in the U.S. Home Construction Index during 2006. Not only were new homes being affected, but many subprime borrowers now could not withstand the higher interest rates and they started defaulting on their loans.

This caused 2007 to start with bad news from multiple sources. Every month, one subprime lender or another was filing for bankruptcy. During February and March 2007, more than 25 subprime lenders filed for bankruptcy, which was enough to start the tide. In April, well-known New Century Financial also filed for bankruptcy.

Investments and the PublicProblems in the subprime market began hitting the news, raising more people's curiosity. Horror stories started to leak out.

According to 2007 news reports, financial firms and   owned more than $1 trillion in securities backed by these now-failing subprime mortgages – enough to start a global financial tsunami if more subprime borrowers started defaulting. By June, Bear Stearns stopped redemptions in two of its hedge funds and Merrill Lynch seized $800 million in assets from two Bear Stearns hedge funds. But even this large move was only a small affair in comparison to what was to happen in the months ahead.

August 2007: The Landslide BeginsIt became apparent in August 2007 that the financial market could not solve the subprime crisis on its own and the problems spread beyond the UnitedState's borders. The   froze completely, largely due to prevailing fear of the unknown amidst banks. Northern Rock, a British bank, had to approach the   for emergency funding due to a liquidity problem. By that time,   and governments around the world had started coming together to prevent further financial catastrophe.

Multidimensional Problems The subprime crisis's unique issues called for both conventional and unconventional methods, which were employed by governments worldwide. In a unanimous move, central banks of several countries resorted to coordinated action to provide liquidity support to financial institutions. The idea was to put the interbank market back on its feet.The Fed started slashing the discount rate as well as the funds rate, but bad news continued to pour in from all sides. Lehman Brothers filed for bankruptcy, Indymac bank collapsed, Bear Stearns was acquired by JP Morgan Chase (NYSE: ), Merrill Lynch was sold to Bank of America, and Fannie Mae and Freddie Mac were put under the control of the U.S. federal government.

By October 2008, the Federal funds rate and the discount rate were reduced to 1% and 1.75%, respectively. Central banks in England, China, Canada, Sweden, Switzerland and the   (ECB) also resorted to rate cuts to aid the world economy. But rate cuts and liquidity support in itself were not enough to stop such a widespread financial meltdown.

The U.S. government then came out with National Economic Stabilization Act of 2008, which created a corpus of $700 billion to purchase distressed assets, especially mortgage-backed securities. Different governments came out with their own versions of bailout packages, government guarantees and outright nationalization.

Crisis of Confidence After AllThe financial crisis of 2007-08 has taught us that the confidence of the financial market, once shattered, can't be quickly restored. In an interconnected world, a seeming liquidity crisis can very quickly turn into a solvency crisis for financial institutions, a balance of payment crisis for sovereign countries and a full-blown crisis of confidence for the entire world. But the silver lining is that, after every crisis in the past, markets have come out strong to forge new beginnings.

To read more about other recessions and crises, see  .

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Dollar slides to 2009 low versus euro

Published: May 22, 2009 5:21 p.m. ET

 By DEBORAH LEVINE

NEW YORK (MarketWatch) — The dollar fell to the lowest level versus the euro since December on Friday, as traders looked for alternatives to the U.S. dollar amid waning fears about the global economy's prospects.

The euro rose to $1.3996 on Friday, after passing the key $1.40 mark to touch $1.4049 earlier. That was up from $1.3904 in late North American trading Thursday.

The dollar index   a measure of the greenback against its major counterparts, fell to the lowest level since December. It traded at 80.045 from 80.554 late Thursday.

The index has lost about 3.6% this week, the worst performance since March. The euro has gained about 3% versus the U.S. currency and the British pound is up more than 4%.

"We've turned to a more dollar-bearish environment," said  , head of global fixed income at RiverSource Investments, who helps oversee $4.6 billion. "As markets start to loosen up again and risk appetite comes back into vogue — in high-yield debt, emerging markets and equities — that safe-haven demand for the dollar has dissipated."

Trading volume across most markets was light ahead of a three-day weekend in the U.S. and U.K.

"In the near-term, the stars are aligned against the U.S. dollar," said foreign exchange strategists at Brown Brothers Harriman in a note.

"If the news stream is good, we are told investors are less risk averse and do not need the dollar's security. If the news stream is poor, we are told the U.S. is in horrific shape and the budget deficit and Fed's balance sheet will swell even more" to the detriment of the dollar.

"It is difficult to see what will break this psychology in the coming weeks," they added.

The British pound also rose to its highest level since November versus the U.S. currency, shaking off a Standard & Poor's report Thursday saying the ratings agency might downgrade the U.K.'s AAA credit rating. The pound traded at $1.5925 from $1.5848 late Thursday.

The dollar inched up against the Japanese yen, at 94.77 yen compared with 94.34 yen Thursday. Japanese officials said they wouldn't intervene in the currency market to keep down the recently sizzling Japanese unit. 

Several analysts' notes earlier also acknowledged reports about concern that the U.S. will maintain its AAA credit rating, after the U.K.'s top-tier rating was given a negative outlook by Standard & Poor's on Thursday.

"I don't think institutional investors are all that concerned over what S&P may do in the future," said Christopher Sullivan, chief investment officer at United Nations Federal Credit Union.

"We would have to see a continuing onslaught of real deterioration in the U.S. financial situation for its rating to come under threat," he said. "The dollar's issues are mostly related to quantitative easing and how inflationary that might be. Also, risk aversion has lessened considerably" in recent months.

Minutes of Fed policy makers' last meeting released Wednesday indicated a possibility that the Fed would buy more Treasury or mortgage-related debt. Those kinds of programs to keep borrowing costs low for consumers, companies and home buyers are considered quantitative easing and negative for the currency.

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