Banks' due diligence built on sand
The Dubai crisis raises fascinating and awkward questions about the wisdom of bankers - again - about sovereign guarantees as well as about the arcane finances and skyhigh dreams of the emirate.
To take the bankers first, where were these guys? Why should anyone trust a banker again?
Banking and finance are supposed to provide the oil that keeps industry, business and trade flowing freely to create jobs and prosperity. But instead we have elevated these greedy rent-seekers into minor gods, who do not even have the grace of the old Greek and Hindu gods to be humble and apologise when they mess things up for ordinary mortals.
So it is tempting to say they deserve everything they get in the case of an actual default in Dubai - except that they will make sure that they pass on the bill to the rest of us.
A tiny territory of 1.4 million people, of whom only 17 per cent are citizens of the United Arab Emirates, has managed to demonstrate troubling things about the way governments and the global economy works.
Sheikh Mohammed bin Rashid al-Maktoum, the ruler of Dubai, has been the ambitious force transforming what was a sleepy traditional fishing port into the most advanced of modern cities, even without the oil wealth that is concentrated in neighbouring Abu Dhabi.
Dubai spread its wings far and wide, not only with Emirates, a splendid modern airline, but Dubai Ports World, which bought P&O, the grand old lady of British shipping companies, along with its very modern ports. It is fast becoming a financial centre between London and Hong Kong.
But a ski resort in the desert, a refrigerated beach: Didn't anyone stop to think or simply to say 'No' to lending to such extravagance?
Eyebrows should also have surely been raised when Dubai ventured into buying Barneys department store in New York, a stake in the London Eye and a stake in a Las Vegas casino, signs of overextended ambitions.
The project over which Dubai World ran into trouble is appositely called the World, an archipelago of 300 man-made islands in the shape of the world.
The bankers got a direct warning, but it came late, when the prospectus for a US$2.5 billion Islamic bond at the end of October contained the clause saying: 'The Dubai government is under no obligation to extend support to any government-related entity.' Another clue came a few weeks ago when Mohammed responded with 'Shut up' to rumours of Dubai's shaky finances and the relationship between Dubai and Abu Dhabi.
Dubai will surely recover as countries throughout history have done even after sovereign defaults.
One important question is whether the embarrassment will lead Mohammed to draw clear lines in the sand between what belongs to him, what belongs to Dubai World and what belongs to the Dubai government; another is what happens to the fraternal relationships between Abu Dhabi, Dubai and the other emirates, which were clearly strained by the idea that big brother would bail out its ambitious sibling without sacrifice.
World stock markets have written off Dubai as a little local difficulty and started rising again. As for the bankers, when will they ever learn?
