by Calculated Risk on 12/01/2009 12:07:00 AM

Ok, one more post on Dubai before all the U.S. economic news this week ...

A couple of articles from the NY Times: Dubai Crisis Tests Laws of Islamic Financing

Shariah-compliant investments prohibit lenders from earning interest, and effectively place lenders and borrowers into a form of partnership. Yet there are no consistent rules about who gets repaid first if a company defaults on such debt, said Zaher Barakat, a professor of Islamic finance at Cass Business School in London.

And Andrew Ross Sorkin describes a recent trip to Dubai: A Financial Mirage in the Desert

One discussion was led by a British banker from Barclays who had moved to the region to create an entire Shariah-compliance team. He shared tips about various ways to create “structured products” that would pass muster with Muslim investors. (To me, the investments looked like bonds, walked like bonds and talked like bonds — but he never called them that.) Some of the bonds that Dubai World is in jeopardy of defaulting on, by the way, are Shariah-compliant sukuk. Just don’t call them bonds.

Oh great, more "structured products".

by Calculated Risk on 11/30/2009 08:58:00 PM

From The Times: Fear of creditor wipe-out as Dubai jettisons conglomerate

Dubai World, the state-owned conglomerate, was effectively abandoned to its fate by the Emirate's Government yesterday despite previous assumptions that Dubai would stand behind the company. That has raised the likelihood that lenders to Dubai World, which has liabilities of $60 billion, could lose billions of dollars.

Dubai World will be restructured and some of its assets ... are likely to be sold to pay down debt.

However, there is uncertainty over the robustness of creditor protection under Dubai law and lenders are understood to be concerned that they will get little or none of their money back.

Analysts at RBC Capital Markets said: “The bottom line is that creditors have almost no legal legs to stand on to maximise recovery values.”

This reminds me of a post by Rachel Ziemba in early 2008: Petrodollars: How to Spend It

Click on graph for larger image.

Rachel Ziemba writes:

2007 was the first year that spending growth outstripped revenues [growth] in the GCC and many other oil exporters. 2008 budget plans imply even higher current (especially wages and subsidies) and capital expenditures. Even countries that have traditionally saved more (Kuwait) are ramping up spending especially on capital projects and in some cases transfers to the population or pension funds. ... With megaprojects in the works in a variety of sectors including energy and other infrastructure, capital spending will likely continue to rise.

Further Ziemba argued - based on spending growth - that "many GCC countries might have very small current account surpluses" within 5 year, if oil prices hold steady.

And guess what? Oil prices fell - and spending continued to increase. And JA reminded me of this story earlier this month from Bloomberg: Qatar Bonds Gain After $28 Billion of Orders for Sale (ht JA)

Qatar’s bonds rose after the largest-ever sale of debt by an emerging-market government received $28 billion of orders, four times the amount issued.
...
“This is the largest debt deal from an emerging-market sovereign to date,” said Fabianna Del Canto, syndicate manager at Barclays Capital, a lead arranger for the sale, in London. “Qatar has firmly established itself as the premier borrower in the region.”
...
Qatar, the world’s biggest exporter of liquefied natural gas, will use the bond proceeds to provide “contingency funding” for state-owned companies, pay for infrastructure projects, and invest in the international oil and gas industry, according to the bond sale prospectus obtained by Bloomberg News.

Interesting. From lenders to borrowers ...

by Calculated Risk on 11/30/2009 06:01:00 PM

One year ago today, my friend and co-blogger Doris “Tanta” Dungey passed away.

This has been a very difficult couple of weeks for her family - Tanta's birthday was Nov 15th and she would have been 48. Cathy, Tanta's sister, asked me to pass along the gratitude of her family for all of your touching comments.

I first "met" Tanta in the comments to my posts in early 2005. She was clearly very knowledgeable about the mortgage industry - and extremely funny - and we shared concerns about the housing bubble and the eventual credit collapse. Tanta was a frequent participant in the comments all through 2005 and into 2006 - and then she disappeared for several months.

When Tanta eventually resurfaced, she revealed she had been seriously ill, and was no longer able to work (she was a mortgage banker). I approached her about writing for this blog, and at first she was hesitant - her health was her primary concern - but in December 2006 she finally agreed.

Tanta became well known for her brilliant posts (see the obituaries below), and she was also very witty and full of life. To understand the impact she had on readers, check out the comments to my post last year: Sad News: Tanta Passes Away

Sadly Tanta’s health declined in the summer of 2008, and she passed away last November. She left us many great posts and wonderful memories. Tanta was about getting the story right – and also having fun. I know this is a sad anniversary, but I think it is also a moment to once again celebrate her life.

Tanta Vive!

Click on photo for larger image in a new window. Here is more: In Memoriam: Doris "Tanta" Dungey Tanta playing guitar in 2002 (photo credit: family) From David Streitfeld in the NY Times: Doris Dungey, Prescient Finance Blogger, Dies at 47

For some reader remembrances, emails from Tanta and more, see Remembering Tanta Dance, Tanta, dance! (Photo credit: family) From Patricia Sullivan in the WaPo: Doris J. Dungey; Blogger Chronicled Mortgage Crisis

by Calculated Risk on 11/30/2009 03:55:00 PM

From CNBC: Dubai World to Restructure About $26 Billion of Debt

Dubai World said it would try to restructure about $26 billion of debt, far less than the nearly $60 billion in total liabilities that the Dubai government's investment arm had as of August.
...
"Creditors need to take part of the responsibility for their decision to lend to the companies," said Abdulrahman al-Saleh, director general of Dubai's Department of Finance.

Hmmm ... that statement could apply to mortgage lenders in the U.S. too.

by Calculated Risk on 11/30/2009 01:20:00 PM

Click on graph for larger image in new window.

Unfortunately the data for this index only goes back to 2002.

Note: Any reading below 100 shows contraction for this index. The index is a year-over-year index, so the headline index might be slow to recognize a pickup in business, but the underlying details suggests ongoing weakness.

From the National Restaurant Association (NRA): Restaurant Industry Outlook Improved Somewhat In October as Restaurant Performance Index Posted First Gain in Three Months

[T]he National Restaurant Association’s ... Restaurant Performance Index (RPI) ... stood at 98.0 in October, up 0.5 percent from its September level. However, the RPI still remained below 100 for the 24th consecutive month, which signifies contraction in the index of key industry indicators.

“Although restaurant operators continue to report soft same-store sales and customer traffic levels, they are somewhat more optimistic about improving conditions in the months ahead,” said Hudson Riehle, senior vice president of the Research and Knowledge Group for the Association. “Restaurant operators reported a positive six-month economic outlook for the fourth consecutive month, and the proportion planning for capital expenditures rose five percentage points.”
...
The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 96.5 in October – up 0.4 percent from September and its first improvement in three months. However, October still represented the 26th consecutive month below 100, which signifies contraction in the current situation indicators.

Restaurant operators reported negative same-store sales for the 17th consecutive month in October, with the overall results similar to the September performance. ...

Customer traffic also remained soft in October, with operators reporting net negative traffic for the 26th consecutive month. ...

Although sales and traffic levels remained soft, operators reported a modest uptick in capital spending activity.
emphasis added

by Calculated Risk on 11/30/2009 11:20:00 AM

From the U.S. Treasury: Obama Administration Kicks Off Mortgage Modification Conversion Drive

The U.S. Department of the Treasury and Department of Housing and Urban Development (HUD) today kick off a nationwide campaign to help borrowers who are currently in the trial phase of their modified mortgages under the Obama Administration's Home Affordable Modification Program (HAMP) convert to permanent modifications. ... Roughly 375,000 of the borrowers who have begun trial modifications since the start of the program are scheduled to convert to permanent modifications by the end of the year. Through the efforts being announced today, Treasury and HUD will implement new outreach tools and borrower resources to help convert as many trial modifications as possible to permanent ones.

"We are encouraged by the pace at which trial modifications are now being made to provide immediate savings to struggling homeowners," said the new Chief of Treasury's Homeownership Preservation Office (HPO), Phyllis Caldwell. "We now must refocus our efforts on the conversion phase to ensure that borrowers and servicers know what their responsibilities are in converting trial modifications to permanent ones." In her new role, Caldwell will lead HPO's conversion drive efforts.

The new push includes "operational metrics to hold servicers accountable for their performance, which will soon be reported publicly" and "Servicers failing to meet performance obligations ... will be subject to consequences which could include monetary penalties and sanctions".

With 375,000 borrowers eligible for permanent modifications by the end of the year, we would expect a minimum of 190,000 permanent modifictions through December - and a 50% conversion rate would be considered very poor. Many of these permanent modifications will probably fail over time too.

by Calculated Risk on 11/30/2009 09:46:00 AM

From MarketWatch: CNov. Chicago PMI rises to 56.1%, a 15-month high

The business activity index rose to 56.1% in November from 54.2% in October. ... The employment index rose to 41.9% from 38.3% ...

Readings above 50% indicate expansion, and below 50% indicate contraction, so this suggests business activity is increasing, but employment is still declining.

This index is for both manufacturing and service activity in the Chicago region. In general the Chicago area is considered representative of the mix of manufacturing and non-manufacturing business activity in the nation.

The national ISM manufacturing index will be released tomorrow, and the ISM non-manufacturing index on Thursday.

by Calculated Risk on 11/30/2009 08:39:00 AM

From The Times: Investors face huge losses as Dubai abandons debt company

The Government of Dubai said today that it will not stand behind its wholly-owned subsidiary Dubai World, prompting fears that the company’s creditors could lose billions of dollars.

Today's comment, from Abdulrahman al-Saleh, the director general of Dubai’s Department of Finance, effectively confirms that country does not have enough money to repay Dubai World’s $60 billion of liabilities. ...

From the Financial Times: Dubai official confirms no guarantee

From MarketWatch: Dubai World debt not backed by government:official

by Calculated Risk on 11/29/2009 10:55:00 PM

From the WSJ: Worries Grow Over Gulf Rift

The central bank said it "stands behind" U.A.E. banks and would make available funds to local institutions, including local subsidiaries of foreign banks.

But the statement pointedly didn't mention Dubai, disappointing many market observers.

And from the NY Times: Crisis Puts Focus on Dubai’s Complex Relationship With Abu Dhabi

Despite the announcement by the emirates’ central bank on Sunday that it would make more money available to local and foreign banks in Dubai, analysts say such imprecise promises — the bank did not say how much, or that it would back all the debt of Dubai or Dubai World — may not be enough to placate investors.

Many have been left wondering, again, if the Emirate’s debts are worse than most of the world suspects. Analysts estimate Dubai’s total debt at around $80 billion, but some here say it could well be closer to $120 billion, or more.

But looking at the stock markets, investors don't seem to be worried ...

In Asia, the Hang Seng is up over 3%, and Nikkei is up over 2%.

In the U.S, the S&P futures are up about 6 points (Dow futures up 50). Some sources:

Bloomberg Futures.

CNBC Futures

Best to all.

by Calculated Risk on 11/29/2009 07:13:00 PM

For some reason The Times has been removed from news stands in Dubai ...

From The Times: Central Bank of the United Arab Emirates takes hard line as Dubai counts soaring cost

... The rulers of Abu Dhabi are expected to make a statement before the markets open on whether they will bail out Dubai and which businesses and projects will be rescued.
...
Senior analysts in the region expect that projects regarded as folly will not be backed but operations and investments with a strong business model will be.
...
Today will mark the first key test of whether Dubai will default on its estimated $88 billion debt pile, when interest payments of about $138 million on a $2 billion bond issue by Jebel Ali Free Zone Authority, a unit of Dubai World, become due.

I think many people consider most of Dubai "folly".