Saturday, November 28, 2009

Bye Bye Dubai - " DuBubble Done Bust"

(h/t Washington's Blog and Zero Hedge)

The Emirate of Dubai is in the news, in a way no one
saw coming.

On the eve of both the Thanksgiving holiday in the U.S.
and the Eid festival in the Islamic world, Dubai World,
the Emirate's principal investment arm, has asked
for a "standstill" on $ 59 billion of debt coming due
next month.

And of course, as usual when a major "bust" occurs,
you guessed it - "No one saw this coming".

In fact, the "Powers That Be" had been putting out the
opposite message right up until the last minute.
Deutsche Bank called Dubai "fundamentally sound"
in September. HSBC, Europe's biggest bank and Dubai
Worlds' largest Western creditor with $17 billion in
exposure, said its position was "manageable", even
though it was "concerned" about the 50% collapse
in residential real estate values since December of

And Dubai's ruler, Sheikh Mohammed Al-Rashid
Al-Makhtoum, told a western journalist to "shut up"
last month, when he tried to ask some inconvenient
questions about the Emirate's finances at a press

Well, to our financial geniuses, that settled it.
If the Big Man said there was "no problem",
well, that meant "No Problem". What part
of that don't you understand?

But to even the casual observer, it is now
apparent that Dubai was nothing but problems -
a slow-motion train wreck waiting to happen.

First of all, over-the-top excess as far as the eye
could see. A veritable Manhattan of the Middle
East in the business district, but full of futuristic
half-empty skyscrapers. Luxury hotels and resorts
everywhere - in the words of one journalist "A Las Vegas
on steroids" (minus the gambling), built for a tourist
boom that never materialized. High-end housing
developments built on palm-tree shaped artificial
islands in the Gulf, now half-built and three-quarters

There's really nothing like this anywhere in the West,
unless you're talking about the equally over-the-top
$8.5 billion CityCenter development about to open
in Las Vegas. And guess what - Dubai World owns
50% of that too, in partnership with MGM Grand.

With all due respect to Las Vegas, my take on
CityCenter is that this extravagant monstrosity
will come a cropper in similar fashion - but that's
another story.

However, in all fairness to the good Sheikh and
everyone else, the original development concept made
sense. Unlike the other Emirates that make up the
UAE, Dubai has no oil. And, with the exception of
Bahrain, there are no "Westernized" outposts of
trade, transshipment or finance anywhere in the Gulf.

So Sheikh Mohammed and his advisers saw an
opportunity. The original intent was to create a Middle
Eastern Hong Kong - a low-tax, expatriate-friendly
"free port", where trade and finance could be transacted.

And the first steps in this went well. Dubai World bought
the global port operations of P&O shipping - a world-respected
name. However, problems arose when the US Congress didn't
think that having a fundamentalist Muslim country control
six of the U.S.'s major container ports was a terribly good idea.
So, those were spun off - to Hutchison Whampoa Ltd, a
Chinese government-controlled enterprise.

Next, a world-class global airline - Emirates - was built from
scratch. And the first modern skyscrapers in Dubai proper
were built. The first expatriate professionals, mostly from the
UK and Europe, started to arrive and build a modern business

So far, so good. But now came the problems.

Caught up in the worldwide real estate "Asset Bubble",
the "professionals" began to shift the investment emphasis
to Real Estate development, completely convinced that
it could only go one way - up.

But, just as in physics, in finance there's a law of gravity
as well- if it can go up, it can go down as well.

And the results of all this border on the bizarre. The
world's tallest office building (2,063 ft) will most likely
never be finished and stand permanently vacant.
The Tiger Woods-designed golf course, which requires
four million gallons of fresh water a day, is likely to be
reclaimed by the desert. And the three-square mile
enclosed, air -conditioned shopping mall (with a
ski-hill with real snow)? Unbelievable.

Man's capacity to dream, build, and innovate is exceeded
only by his capacity to deceive himself.

And we're going to be following this exercise in self-deception
very closely, both in Dubai and Las Vegas.

Stay Tuned.

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