Dubai's Threat to Western Banks
By Staff News & Analysis - November 30, 2009

The news that the sovereign wealth fund of Dubai requested a postponement of billions of dollars of debt this week could pose a big problem for U.S. banks. The state-run investment company, Dubai World, owes about $60 billion. It rang up much of that in a building boom that included the world's tallest skyscraper and the Palm Islands in the Persian Gulf, settlements shaped like palm trees. According to CMA DataVision, which tracks credit markets, there's a 35.82% probability that Dubai will default on that debt. New York-based Citigroup (C, Fortune 500) has the most exposure to default risk at Dubai World, which a J.P. Morgan (JPM, Fortune 500) equity research note estimated at $1.9 billion. Citigroup declined to comment. While other major banks in the United States are believed to have little direct exposure, the ripple effect could be more crippling, according to Richard Bove, a bank analyst with Rochdale Securities. "There could be huge indirect exposure," he said. "One has to assume that U.S. banks will be hurt." J.P. Morgan declined to comment, while Goldman Sachs (GS, Fortune 500) and Bank of America (BAC, Fortune 500) were unavailable for immediate comment. Morgan Stanley (MS, Fortune 500) said a Dubai World default "would have no material impact on its earnings." Bove said the underlying problem is that there is a lot of uncertainty floating around. For example, there's little information available about counterparty derivatives, guarantees that transfer default risk from lenders to other financial institutions. And it's unknown how much of Dubai World's debt guarantee is held by U.S. banks. And while UK banks, such as Standard Chartered, HSBC (HBC), Royal Bank of Scotland (RBS) and Barclays (BCS) are much more exposed to Dubai World, with a total of more than $30 billion in default risk according to J.P. Morgan's note, U.S. banks have extensive dealings with UK institutions. Those include trading and guaranteeing debt, which could translate into losses for U.S. banks. There's also U.S. banks' interactions with their German counterparts. Dubai has loaned a lot of money to Eastern European nations, as has Germany. Any losses from defaults there could expose U.S. banks to some risk. – CNN Money

Dominant Social Theme: Western banks quick to spot a "good thing?"

Free-Market Analysis: We've been following the Dubai mess because we have written about Dubai numerous times from a promotional standpoint. It occurred to us fairly long ago, having made several trips to Dubai, that the weirdness associated with Dubai could not just be coincidence. We came to believe that Dubai, especially, was being promoted by the monetary elite as a kind of tempting alternative to the destruction aimed at Afghanistan, Iraq, Iran, etc. It was the other side, in other words, of the kind of Hegelian dialectic that we have discussed in the past in the Bell.

To that end, we have always wondered what kind of Western funding Dubai was attracting. After all, if our theory was right, then Dubai should be fairly well integrated into Western finance. (As a Hegelian goalpost it should be receiving significant Western support.) Now that figures are being revealed, we have been eagerly searching them out to see if our suspicions were correct. And …

… Yes many top Western banks are involved in Dubai for huge sums – a total exposure of European banks according to the article above of some US$30 billion. Of course, we don't believe that for a moment. Add in derivatives and corollary transactions and the figure is probably much, much higher.

We get at least occasional pushback from our readers for our view that the monetary elite is in an embattled position. Yet it seems to us that the Internet is complicating the elite's position as they struggle with a crisis they are obviously enmeshed with on a variety of levels. The result has been an unprecedented look "behind the curtain" at the way the world really works. It has allowed modest papers like this one to catalog the promotions of the elite and to track (in our humble opinion) the broader mechanism of monetary control.

No, this is not the 1930s when the Depression engendered massive populism. The combination of the Internet and the financial crisis has given rise to elegant classical liberal conversations in America and increasingly in the EU. Meanwhile, the monetary elite struggles to explain Climategate and to retain salient features of its central banking monopoly. And now Dubai, which in our opinion was supposed to offer the elite's vision of an Islamo-Western synthesis has gone upside down. Back in May we wrote the following:

The glory is fading. Dubai might have been on track to be an elegantly parched Paris, but the economic crisis has drained the region's prospects. We were surprised to see how fast Dubai shriveled over the past year. Dubai is still very much a British protectorate (you don't read much about that) and we figured the intervention might start there, if it were going to take place. Apparently it has. In fact, it seems Baron Peter Benjamin Mandelson himself has been called upon to sort out the situation. …

OK, it will be interesting to see what kind of resources Mandelson and his cohorts will offer Dubai's increasingly desperate financiers. Dubai, in our opinion, is still a main player in the Middle East. It is, in fact, the carrot. See, if you want to build, say, a global government you have to use both the carrot and the stick. We all know about the stick part (see Iraq, etc.). But the carrot in our opinion is Dubai. It is to Dubai that the next generation of Arabs were going to look – to a city of magnificence and opulence far in excess of anything even the West had to offer. The importance of Dubai, then, is that it was to serve as a great instructional tool for the teeming, Muslim world. In fact in our humble opinion, it is yet a lynchpin in a strategy aimed at impressing and then co-opting billions of the Muslim intelligentsia outside the Western ambit.

For us, Dubai remains a fascinating place with its man-made islands, sail-shaped architecture and single-industry cities, incorporating white-collar luxuries and condos. Yet Dubai, this critical epicenter of world planning, is falling apart and its financial ruin shows how fast the global economy is unraveling — and how unprepared the monetary elite is proving to be. It is, perhaps, a financial thermometer. Call it the Dubai Denominator. As goes Dubai, so goes the West?

To read the full article as originally posted at the Daily Bell, click here now.

We have no doubt that the world's "financial community" – that part effectively leveraged by the monetary elite, anyway – will do what it can to sort out these difficulties now that they are in the open. In fact on Sunday, the entity in which Dubai resides, the United Arab Emirates, opened the doors of its central bank to Dubai's struggling banks, effectively (so the reporting went) giving banks throughout the UAE something of a blank check. Western banks may founder, but Dubai's apparently will not. (Time will tell!)

The theory that some observers of the monetary elite operate under is that the kind of economic chaos that is taking place now is at least partially desired by those at the very top of the pyramid who are able to take advantage of financial distress. These powerful entities, so the logic goes, consolidate businesses and expand wealth and sociopolitical control during periods of maximum distress.

But from our point of view, decidedly an optimistic one, this sort monetary mechanism (grant it some credibility for the sake of argument) is today operating under different circumstances. In another era (a non Internet one) it would certainly be easy to whip up indignation against any one of a number of foes that supposedly had a hand in the ongoing misery. We can see from recent history who is to be blamed – and it is always the private sector, greedy banks, Wall Street tycoons, fat-cat politicians etc.

But something happened to this meme – to the degree that it exists – on the way to Oz. The Internet seems to have high-jacked it. Certainly, the EU (stumbling ahead to be sure) has not been able to consolidate much power based on the economic crisis (in fact, in many cases the crisis seems to be tearing it apart). The American Federal Reserve is reeling from attacks and could be seen to be as losing significant power. International regulation has moved along sluggishly. The crown jewel of the New World Order (grant a nascent one exists for the sake of argument) – climate control – is tarnishing.

Now for every positive, there is a negative. And certainly one could argue as Ed Griffin did yesterday in our interview (click here to read) that the monetary elite remains firmly and alertly in control. We would argue, however, that there is much that is qualitatively different about this financial crisis (as compared to say the 1930's Depression), and that it starts with the startling amount of information available on the ‘Net.

After Thoughts

Real ‘Net information is, at the moment, crowding out falsehoods, in our opinion – or at least competing for people's attention. Populist paper-money solutions such as the ones offered by Brownians are not gaining significant traction and generally statist solutions of all stripes have not made as much progress (at least thus far) as one might expect. This is an economic system in trouble worldwide, and while we would never be foolish enough to propose a timeline for the failure of a fiat money system generally, we would note that such systems always do fail sooner or later. And out of that failure some sort of private gold and silver standard can arise.

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