Dubai World in Trouble? Here We Go Again

As everyone in the United States was thinking about early morning door busters and the ecstatic bliss of Thanksgiving Day leftovers for days, there was another story shaping up. It had been brought to the fore Wednesday afternoon but on Thursday, when the American marketplace was closed and as most of us were convening with old friends and long estranged family members, as seen on CNBC, there was a story shaping up in the European and Asian markets about Dubai.

Dubai is small; about one and a half million people; and despite Dubai's proximity to the Persian Gulf and being a member of the United Arab Emirates, the Dubai of today only get about 6% of their revenues from oil production. Dubai has become a cosmopolitan city with real estate and financial services accounting for a great deal of their revenues. Apparently Dubai didn't learn anything from the American meltdown in 2007-2008 and the government's principal holding company, Dubai World, has run into some problems.

Dubai World, not unlike Fannie Mae and Freddie Mac in the United States, is a government owned company. Unlike Fannie Mae and Feddie Mac, Dubai World manages much more than just home mortgages. Dubai World has it's hands in the pot of a variety of financial projects for Dubai. These include the Dubai Ports, Dubai Drydocks, Dubai Multi Commodities Center, and other leisure groups and residential real estate holdings. To put it into perspective, it would be as though one holding company, say Fannie Mae, held the reins for Disney, Marriott, GE, Verizon, Citibank, and all the commercial ports into the country as well as the real estate holdings. Now to put it further into context, imagine if Barack Obama were heir to the throne; like Paris Hilton, and he had created this fund. Three years ago. So in 2006 Paris Hilton runs Disney, GE, and Citibank, controls tariffs on imports and exports as well as on real estate and then decides she doesn't want to pay back money that's been borrowed and spent. You could imagine how that could be a problem. That's kind of what happened in Dubai with Dubai World.

Sheik Mohammed bin Rashad al-Maktoum, the same guy who ratified this holding company; a company whom the Dubai government is 100% owner of, is balking at whether or not Dubai the state will stand behind the debt of Dubai World the holding company. Which the Sheik put into play. This is INSANELY ironic but also cuts to the core of shareholder obligation.

Dubais government is simply a shareholder in Dubai World. So there is limited liability for their stake in it. If you are a stock holder in a company and the company goes bankrupt the worst that can happen to you as a shareholder is that the value of your stock will go to zero. Creditors of the bankrupt company can't come marching up to your door and demand you pay the company's debts. So it is for Dubai and Dubai World.

Dubai World has asked for a suspension on $59 billion (converted to US) dollars in debt for a six month period, everyone's stake in this situation is heightened as the world's markets reel.

Sources:
CNBC (Television)
http://network.nationalpost.com/np/blogs/tradingdesk/archive/2009/11/27/dubai-world-s-debt-not-sovereign.aspx