2-0

A bit more like it.

لا تدع زوج ابنتك يقود سيارة عائلتك

AlBilad's take on the AlGosaibi/Maan Al Sanea issue.

Interestingly, the article gives the name of the former CEO of The International Banking Corporation but not the name of the son in law.   Much of the article is a walk through of main points from the Ernst & Young article.

Awal Bank – Hibis Europe 2009 Investigative Report

This post presents the findings of the Hibis Europe entitled "Report to the Public Prosecutor Bahrain Review of Awal Bank" dated 6 August 2009 (the "Report").

The Hibis Report is contained in the 5 February 2010 filing by Ahmad Hamad AlGosaibi & Brother's counsel and is available at the Supreme Court of New York's website (http://iapps.courts.state.ny.us/webcivil/FCASMain). All the electronic filings in this case can be accessed through that website using the Case Index Number 601650/2009 MASHREQBANK PSC vs. AL GOSAIBI, AHMED HAMAD.   The Report is Exhibit 11 in Document #83.  If you initially have difficulties at the SCNY website, keep trying.  The site appears to be somewhat temperamental.

 

As I noted in my post about the Ernst and Young Report on The International Banking Corporation, I have no independent way to verify that this is indeed a true and correct copy of the Report except for the sworn testimony of the counsel of Ahmad Hamad AlGosaibi. This caveat should not be read as implying any lack of faith in his certification, but merely as a factual statement of the limitations of my knowledge.

 

As before I will quote from the report and make some comments based on the assumption that this is the Hibis Report and that its conclusions are accurate. 

A bit of housekeeping.  Paragraphs and pages in the Report filed with the SCNY do not bear numbers. I have numbered the pages starting from the "INTRODUCTION SECTION". On that basis the Report comprises 47 pages.  In some cases I have redacted the names of staff at AB.   You should also be aware that the Report also includes some excerpts of interviews Hibis conducted with senior managers of Awal Bank.  You might want to read the report itself to see those as I have not transcribed them here.  And it's good practice to take a look at the original sources and not solely rely on tafsir.

 

The report begins with a summary and then a more detailed discussion of eight cases.

1. Page 1 and Page 3 : "Awal Bank is managed on a day to day basis by Maan Al Sanea, who is based in AlKhobar in Saudi Arabia. Al Sanea operates with an autocratic and dictatorial management style suppressing any form of entrepreneurial spirit. Maan Al Sanea makes the decisions relating to any and all transactions that take place at Awal Bank; for example the Chief Executive Officer can only authorize payments of under BDH 12,000." 
2. Page 3 "Many of Awal's transactions with third parties involve entities owned by the AlGosaibi family, such as The International Banking Corporation [TIBC], AlGosaibi Trading Services [ATS} and AlGosaibi Money Exchange [ALGME]." 
3. Page 3: Summary of Findings. "In June 2009 Hibis Europe Limited [Hibis] was retained by the Central Bank of Bahrain [CBB] to conduct a review of the Awal Banking operation. Following the review Hibis prepared eight Evidence Case Files outlining the various criminal and regulatory breaches. The supporting evidence has been obtained as a result of reviewing bank records, recovering data from the bank records and interviews with bank employees. There are many other transactions at the bank that we have not yet reviewed." 
4. Page 3: "Evidence Case Files. For the purposes of this summary file, each identified criminal offense and regulatory breach has been catalogued and exhibited separately in a series of Evidence Case Files- Volumes 1 to 8."  
5. AA: These include: Evidence Case File 1 Fraudulent Land Deals; ECF 2 Foreign Exchange Transactions with ALGME; ECF 3 Redacted (However, the case diagram on page 26 remains. It is labeled "Money Laundering"); ECF 4 Fraudulent Foreign Exchange Deal with SAAD Group, ECF 5 Unsupported Foreign Exchange Deal, ECF 6 (Unlabeled, but detailed later in the report as breach of trust in accepting a deposit); ECF 7 Letters of Credit and ECF 8 Regulatory Issues. 
6. Page 4 "Hibis has identified approximately US$2 billion of suspicious and fraudulent transactions involving criminal offenses and regulatory breaches." 
7. Page 4 "Hibis would like to point out that all the evidence that we have gathered indicates that the Chairman of Awal Bank, Maan Al Sanea, is the central figure in the conspiracy and the main beneficiary of the frauds. Al Sanea's management style has allowed him to control all of the transactions at the bank and use the senior management of the bank to assist him in these frauds." 
8. Page 4: "The common theme that Hibis has seen for most of the frauds discovered and investigated to date is that AlGosaibi assets have been used to the benefit of Maan Al Sanea. Examples of this include land in the name of AlGosaibi being used as collateral to create a profit for Maan Al Sanea through fictitious land deal and the profit for these deals being transferred from ALGME to Awal Bank when the bank is losing money. It is the opinion of Hibis that Maan AlSanea has either disadvantaged the AlGosaibi family for his own personal benefit or used their resources to benefit Awal Bank." 
9. Page 4: "As a result of the preliminary 20 day review completed by Hibis it is our opinion and proven beyond reasonable doubt that senior management of Awal Bank have colluded and conspired together to commit criminal acts and significant breaches of banking regulations and CBB Law." 
10. Page 5: "New Finding. At the time of preparing the Evidence Case Files evidence allegations were made that on the 26^th and 27^th May 2009 all the Commercial Loan files were removed from Awal Bank and sent to the Chairman's office. At this time, Awal Bank was in serious financial trouble and it appears the Chairman wanted the documentation removed from the bank and although senior management were advised against it they allowed the complete files to be removed." 
11. Page 6: "Hibis believes the removal of these files was a breach of CBB law and was done with the objective of removing evidence of a fraud." 
12. Page 6: "In 2007 and 2008 Awal Bank made about 50 commercial loans to entities in Saudi Arabia. All the loans were arranged by the Chairman, Maan Al Sanea, and no one at Awal Bank was involved in meeting or communicating with the alleged "borrowers". Hibis has not investigated these loans but are very suspicious of who the real beneficiaries are. At the end of 2008 these commercial loans were paid up or converted in to the land deals that a reported in Evidence Case File 1." 
13. Page 12: Evidence Case File 1. "The investments in land shown on the Awal balance sheet (AA: US$1.5 billion) are the result of 8 unusual transactions which were recorded from 2008-2009. Seven of the transactions are supported instructions from Maan Al Sanea or his representative from the Saad Group." 
14. Page 13: "Hibis believes that Maan Al Sanea does not in fact own the properties that are described in Awal bank's documentation and that the fair value of the properties is far less that what is on the Awal balance sheet and the figures have been grossly inflated." "Hibis believes that the USD$200 million of reported profits represents False Accounting on behalf of Awal Bank". "Hibis believes that Maan Al Sanea is not entitled to USD$ 461 million nor the USD$ 543 million of cash and assets transferred to him as a result of these land deals." 
15. Pages 15 -16: Evidence Case File 2 "Awal anticipated substantial losses for the year end of 2008, engaged in the transfer of profits from ALGME to Awal through the use of fraudulent FX transactions. Identified sixty transactions entered on the records of Awal Bank that were entered after the event. All positions closed during 2008 and 2009 resulted in Awal making a profit and ALGME being disadvantaged". 
16. Page 20: "To conduct 60 foreign exchange transactions where one party always wins and the other party always loses is not possible and is against the laws of probability. The backdated foreign exchange transactions have been used to justify the transfer of profits from ALGME to Awal." 
17. Pages 22- 26 Evidence Case File 3. Redacted but from Page 26 apparently involving an allegation of money laundering. 
18. Page 27: Evidence Case File 4. "The purpose of preparing this Evidence Case File 4 – Foreign Exchange Deal with SAAD Group is to illustrate is to describe how false accounting was used to treat three deposits totaling USD$44 million on 21^st and 23^rd April 2009 from Singularis Holdings as a Foreign Exchange profit in May 2009." 
19. Page 30: Evidence Case File 5: "The purpose of preparing this Evidence Case File 5 – Unsupported FX deals between Awal & ALGME is to outline an allegation made by an employee of Awal Bank [name redacted by AA] who is employed as an FX Trader with Awal. [Name redacted] alleges that Awal Bank entered in to an unsupported Foreign Exchange Deal for GBP 60 million. This allegation is supported by his colleague [name redacted by AA]. "
20. Page 40: Evidence Case File 6. "The pending liquidity crisis was identified and known to Awal and the CBB aat the time that the first deposit was taken from [name redacted for filing]. While the investigation has not identified evidence of intent to defraud [name redacted for filing] by knowingly entering into a transaction that the bank might be able to honour, the issue of a Breach of Trust arises, given the extent of the liquidity crisis known within Awal Bank from May 12^th 2009 onwards." AA: This ECF relates to two US$1 million deposits taken by Awal – one on 14^th May and the other on 21^st May 2009. 
21. Page 41: Evidence Case File 7 – Letters of Credit. "To date Hibis has not discovered fraud in the Letters of Credit transactions. The evidence is that the Letter of Credit transactions have been structured to the disadvantage of AlGosaibi Trading Services [ATS] and to the advantage of Awal Bank." 
22. Page 44: "The preliminary analysis of these transactions conducted by Hibis estimates that Awal has obtained an unjustified benefit of more than USD$20 million during 2007, 2008, and 2009. Further analysis has yet to be done to establish if fraud has taken place."   AA:  This refers to Point #21.
23. Page 45: Evidence Case File 8 – Regulatory Breaches. "Within the limited time allotted to this Phase 1 review "Quick Wins" Hibis Europe Limited [Hibis] have established the following: Misleading the CBB about cash flow on the 14^th May 2009; The Excom approved land deals after the transaction had been completed by the Chairman, Maan Al Sanea; Shredding of Awal documentation by [name redacted by AA], Chief Financial Officer on the 25^th June 2009; the role of Awal Bank's Chief Internal Auditor in [personal pronoun redacted] employment at TIBC."
    

Comments:

Here are some personal reactions to the Report which are based upon the assumption that it is Hibis' report and accurately reflects the situation at Awal Bank.

1. This Report differs from that issued by Ernst and Young in that it alleges criminal activity and fraud. (Note  that word "alleges".  An allegation is a charge not a conviction or judicial proof).  
2. I was surprised to read that the CEO of the bank had such a modest payment approval limit, i.e. BD 12,000.  
3. Assuming the accuracy of this Report and the E&Y Report, I'm also wondering what the reaction of external auditors including CBB examiners was to what appear in both the case of Awal Bank and TIBC to be a high level of related party transactions. Or were the relations of these parties so cleverly disguised so that they were hidden? If these allegations are true, then a rather sophisticated mechanism would have been required to respond to auditor confirmations to avoid creating suspicion. But in that case how were E&Y and Hibis able to penetrate the veil in rather short time? One would expect external auditors to spend more than 21 days in an institution during the entire year. And for CBB examiners to spend at least that time. 
4. Was it that when the cash ran out that it became a case of staff speaking up?

The International Banking Corporation – Ernst and Young 2009 Investigative Report

Thanks to a reader of this blog I was shown how to obtain access to the 5 February filing by Ahmad Hamad AlGosaibi and Brothers ("AHAB") in the Supreme Court of New York relating to the case MASHREQBANK PSC vs. AL GOSAIBI, AHMED HAMAD Case # 601650/2009.

Among the many interesting exhibits to the filing (there will be at least two more posts on TIBC from this material) was what is purported to be the Ernst and Young Report on TIBC commissioned by the Central Bank of Bahrain (the "Report") in 2009.  After receipt of the Report, the CBB placed TIBC under Administration, replacing its existing management and assuming full control of the Bank.  

Let's start with an explanation for my use of the word "purported". The Report was not submitted to the Court by its author but by the defendant's (AHAB) counsel. That counsel has sworn under oath that the copy attached to the filing is "true and correct". By using the word "purported" I am not implying that counsel is misinformed or is misinforming the Court. However, I am acknowledging that I have no knowledge independent of his word that this is the E&Y Report.

The E&Y Report is contained in the 5 February 2010 filing by AHAB's counsel and is available at the Supreme Court of New York's website (http://iapps.courts.state.ny.us/webcivil/FCASMain). All the electronic filings in this case can be accessed through that website using the Case Index #601650/2009.   The Report is Exhibit 10 in Document #83.  If you initially have difficulties, keep trying.  The site appears to be temperamental.

I'll quote directly from the Report and then follow-up with some observations of my own based on the Report being an accurate reflection of the facts.   I have redacted certain names from the description below.  If you want them, you can read the Report.  In a situation like this involving multiple parties who may be accused of wrongdoing, it's also difficult to sort out whose story to believe.   And we are too far away from the facts here to sort this out.

INTRODUCTORY COMMENTS

On the chance that a reader is not familiar with this case and the larger legal issue involved. Mashreqbank has sued AHAB for failure to honor a US$150 million / SAR563.4 million FX transaction. AHAB's counterclaim is that it has been the victim of a massive fraud perpetrated by Mr. Maan AlSanea. As I read the Court filings by AHAB's counsel, they are also claiming that Mashreqbank should have been aware that the transactions were improper.

NET ASSET POSITION

The first place to start is at the end of the Report where E&Y summarizes its findings on the assets and liabilities of TIBC. This is on Page 80 in Sections 3.7.1 and 3.7.2. Using TIBC's 31 May 2009 unaudited and unreviewed financials it estimates (note that word) the potential value of assets and liabilities not linked to AHAB, AHAB's Money Exchange, Awal Bank, or of other entities allegedly under the control of Mr. Maan AlSanea. The latter are captioned "Unlinked Assets" and "Unlinked Liabilities" in the tables below. All amounts are in millions of US Dollars.

ASSETS

	All Assets	Unlinked Assets
Due from Banks and Other Financial Institutions	US$ 544.145	US$190.000
Investment Securities	US$ 461.274	US$ 9.000
Loans and Advances	US$2,154.843	-
Due from Related Parties	US$ 583.817	-
Due from Customers	US$ 25.859	-
Other Assets	US$ 45.144	US$ 5.00
TOTAL ASSETS	US$3,815.082	US$204.000

 

LIABILITIES

	All Liabilities	Unlinked Liabilities
Due to Banks and Other Financial Institutions	US$2,065.591	US$1,900.000
Due to Customers	US$ 41.475	-
Other Liabilities	US$ 57.022	US$ 57.022
Term Loans	US$ 200.000	US$ 200.000
TOTAL LIABILITIES	US$2,364.068	US$2,157.022

E&Y comments: "We have estimated he potential shortfall within TIBC to be in excess of US$2 billion."
 

OTHER FINDINGS

These are presented in the order in which they appear in the Report. Paragraph numbers as in the Report.

1. Paragraph 10:1: "Management alleged that Mr. AlSanea directed the day to day management of TIBC and we could find no evidence that Mr. Al Sanea was appointed as a delegated officer through a power of attorney to act on behalf of Ahmad Hamad AlGosaibi & Brothers Partnership." 
2. Paragraph 10:2: "We found no evidence of any formal business links between the Saad Group and TIBC, although transactions were of a related party nature". 
3. Paragraph 10:3: "We could find no evidence, nor could TIBC management provide documentary proof of Mr. Al Sanea's appointment to the Excom, no could we find any delegation of authority issued to him by the AlGosaibi family to act on their behalf as representative of the Excom or any other decision making forum." 
4. Paragraph 10.4: "We found evidence suggesting that the CEO had significant business interests outside of TIBC and was remunerated through a compensation based upon the amount of credit he was able to secure for TIBC, the Ahmad Hamad AlGosaibi & Brothers Co Partnership and Saad entities." 
5. Paragraph 10:5: "We found evidence that the final Swift authorization for the release of payments was controlled and managed by persons or a company other than TIBC. In addition we found that the SWIFT transfer authorizations were effected by individuals not employed by TIBC and from a premises outside of Bahrain. It was also confirmed by our Technology Security Risk Services that the application was accessed through the utilization of "PcAnywhere" software."  AA: See Point 23 re Paragraph 86.  
6. Paragraph 11: "TIBC at first alleged that all loan documents were created and provided by or via the Exchange ("Ahmad Hamad AlGosaibi and Brothers Co. Partnership – Finance, Development & Investment") for verification and administration at TIBC. It was however established hereafter that the Exchange and/or the Saad Group provided only the CR's, identities and passports from which the loan applications were created. We found no prior correspondence relating to the loan values and other requirements". 
7. Paragraph 12: "The signatures contained in the loan files of the executive chairman are questionable, and additional investigation in this regard will be required". 
8. Paragraph 13: "We obtained documents allegedly removed from the TIBC premises by an employee out of fear of the CBB investigation, and that these documents included official information regarding the signing of the Bank reference letters and e-mail correspondence". 
9. Paragraph 14: "We were unable to verify the existence of the borrowers listed with TIBC through telephonic interviews and physical verification. In the spirit of co-operation Deloitte provided us with a draft of their "drive by" visits to the addresses listed with the Exchange related to the loan clients, which indicated that the premises were not occupied by the borrowers or used for trade purposes". 
10. Paragraph 15: "We could verify or authenticate the deeds of property provided as collateral by alleged prospective borrowers. It is alleged that these documents were inspected by [COO/CRO] and [TIBC External Auditors] at some time, but this could not be verified as fact, and further thereto it is our assumption that these deeds were not authenticated by these entities through the First Notary Public Department". (AA: I have removed the names of the two parties and replaced with generic descriptions of their roles) 
11.  Paragraph 16: "TIBC were well aware of their cash flow problems by October 2008, but that they failed to call on matured loans, and that they instead affected additional loans and roll overs to the detriment of the Bank." 
12. Paragraph 17: "Loan applications were created on behalf of some AlGosaibi family members, and we could find no evidence that they have applied for loans or signed application forms." 
13. Paragraph 18: "We could find no evidence of any application for loans being made by any customer directly through TIBC or indirectly through the Exchange. From evidence it would seem that even the client applications were created at TIBC in most instances and that these were created by [name removed of TIBC Officer]." 
14. Paragraph 19: "The evidence contained herein could be indicative that internal collusion to commit an offense had taken place in the loan book process, and that [TIBC Officer name removed], [TIBC Officer name removed], [TIBC Officer name removed] and [TIBC Officer name removed] must reasonably have known that the loans created for this transfer of excess capital to the Exchange were irregular in that no application was made to them by any client for those amounts paid and the funds were not received by the clients intended." 
15. Paragraph 21: "We could find no evidence to confirm the existence of the Saudi Investment portfolio valued at circa $400 million as at 31 May 2009." 
16. Paragraph 22: "TIBC last obtained a confirmation of the existence of the equity investments as at 31 December 2007 as part of the year end audit process. We noted that the correspondence was sent by [name of officer at a Saudi Bank and name of bank removed by AA] and in this regard found that it is similar to the signature used on the loan documentation reviewed by Ernst and Young. We also note that the confirmation was sent "with [AA: presumably without} any responsibility on the part of [acronym of Saudi Bank removed] or its officers." However, it is alleged that [acronym of Saudi Bank removed] are the appointed custodians. We were told by [TIBC officer name] that no confirmation was sent to [name of External Auditors of TIBC] for the 31 December 2008 audit."
17. Paragraphs 24 through 26 deal with alleged deficiencies in reconciliations of nostro accounts. Paragraph 24 (nostro records did not accurately reflect all transactions). Paragraph 25 (a Saad entity reconciled TIBC's account at Citibank). Paragraph 26 (certain accounts were not reconciled though there were not copies of bank statements or balance confirmations). 
18. Paragraphs 27 through 33 deal with failed trades. 
19. Paragraphs 34 -35 deal with access to electronic records. E&Y alleges "resistance from TIBC's IT vendor to provide technical assistance" and "significant stalling from TIBC management" (Paragraph 34). 
20. At this point we are at page 10 in an 88 page report. 
21. Paragraph 53 deals with Board meetings. It's divided into six subsections. 53.6 reads "[CEO – name removed by AA] stated that he had no interaction with any of the directors since the inception of the Bank, except for Mr. AlSanea, and to his knowledge none of the AlGosaibi family ever attended a Board meeting in person in Bahrain". 
22. Paragraph 59: "It is alleged by [name of CEO removed] that major decisions and his day to day actions were directed by Mr. Al Sanea and that this had been ongoing since the inception of the Bank through the use of memoranda addressed to either Mr. Al Sanea directly or to the Excom. 
23. Paragraph 86: "We were informed by [name of CEO removed] that to his understanding all SWIFT approvals were made from the SAAD Group Offices." 
24. Paragraphs 110 through 119 detail Service Level Agreements between TIBC and the Exchange. Paragraph 119 states "From the contents of these three SLA's it is evident the SLA dated 1 July 2003 was applicable to the loan book which was intended to be managed and maintained by the Exchange. As such the content also creates the impression that the documents related to the application, and complete client relation should have been managed by the Exchange, without excluding TIBC's responsibility to perform proper due diligence". 
25. Paragraph 170: "Deloitte provided us with a draft of their relationship analysis of the loan clients to TIBC, the Exchange, Mr. Al Sanea and Saad Trading. The analysis alleges that the majority of the loan clients are either known to Mr. Al Sanea or employed by his business enterprises." 

Some comments. These are predicated on the assumption that the Report is reasonably accurate as to its description. 

Here are a few things that deviate from the banking practice I am familiar with. Of course, sometimes there is a sound reason why there is a deviation. If we were given the reasons for these practices, we might be able to better understand why they were adopted. 

1. Generally CEOs are not involved in the mechanics of releasing payments. That is, the operational step of inputting a password into a funds transfer system like Swift which then transmits the payment instructions to the bank's correspondent. Depending on the size of a transaction and a bank's internal control system a CEO might sign the approval for a payment, but then the bank's Operations Department would input the payment into the funds transfer system and release the payment. The procedure E&Y describes at TIBC would be to give greater control to executive management. What would be interesting to understand would be why such control was needed. 
2. According to the internal control principles I've been taught one never allows another person to use one's password. Each authorized party should have his or her own unique password. It's unclear to me why there was this alleged departure from this standard. 
3. While I had understood from TIBC's 2008 Annual Report that the Exchange acted as collateral management agent and nominee for the Saudi Investment Portfolio, I was surprised to see the role ascribed to them in the Report with respect to credit origination and relationship management.  TIBC seems to have been operating more as an investor than a commercial bank.
4. I was also surprised to read the statement attributed to one of TIBC's officers that no confirm for the Bank's Saudi Investment Portfolio was obtained for Fiscal 2008 by the Bank's external auditors. It would be interesting to know if this is true. And if true, what the reason was? 
5. Just a short "end note".   What is quoted above is a report.  It is not a judicial determination of guilt or innocence.  Merely a report. 

 Post on Hibis Europe Limited Report on Awal Bank here.
 

Zain Deal Motives Under Scrutiny

And the FT does a bit of scrutinizing.

As to the basic story, this really isn't "news" nor is it a revelation.  Nor was it when you read it earlier here or elsewhere.

The basic story is Kuwaiti "investor" overextends self while using OPM and high leverage.   

About as remarkable as the headline "Sun Rises in East". 

And the point to note is that it is not just one family business group advocating the sale.   Kuwait is blessed with an abundance of "wise" "investors" who overextend themselves with OPM and leverage.

Economist: The Collapse of TIBC - A Mystery in the Gulf

In case you missed it, an interesting post over at The Economist with some details about the alleged mechanics of the collapse of TIBC.

One question occurs to me whenever I read accounts like these.  What were the AlGosaibis doing?  Were they having Board meetings that weren't recorded?  Didn't they think that as directors they should be attending board and executive committee meetings?  That the Chairman should be signing the annual accounts?

I also love the use of the term "Potemkin Bank" - which I believe I've read somewhere else.

Finally, if anyone can make available a copy of the Ernst and Young report, I'd be most grateful.  I still haven't been able to get one.

Dubai Announces That An Announcement About the Dubai World Restructuring Plan is Immiment - Clever Post from Wall Street WTF Blog

A pretty good post that pretty much sums it up.

Here's the link.

Public Service Announcement: Maan Al Sanea NOT Arrested

19 February Update:  I was advised that it is highly likely that Mr. AlSanea may be prohibited from traveling outside of the Kingdom of Saudi Arabia.  And that this may be considered a form of "arrest".

I've gotten a couple of hits from readers using the search term "Al Sanea + Arrest".  So it seems there are rumors floating around out there.

I have seen nothing in the press (Arabic or English) about any arrest.  I have checked with someone in the area who advises that as far as he knows Mr. Al Sanea appears to be moving about as he did in the past.

Where I think this is coming from are one or more Arabic language blogs which have recently  run commentaries on Mr. Al Sanea's career. 

This one here  has the headline "Arrest of Maan AlSanea for Money Laundering" in very large letters.  Then in the second line of the headline in much smaller type is the word "previously" (سبق).  It's easy to miss this if you're reading quickly.  Here's a second - again with a headline that might be misinterpreted.

When you read the entire second article you'll see this refers to unsubstantiated allegations that he was arrested in 2007.  The blog also notes that despite the news of his being jailed  then then he turned up at a Chamber of Commerce meeting a day or so after the report and threatened to sue the newspaper for printing defamatory remarks about him.  Again just to hit the nail on the head one more time - these are unsubstantiated allegations from 2007.

It would therefore seem there's nothing to the current rumor.

Islamic Legal Experts Discussion on Dubai, Dubai World and Nahkeel

 

Reuters presents a  short video streaming panel discussion among Islamic financing experts.    

I've included it here primarily because it contains some interesting comments, including something similar you may have read elsewhere about the "Implicit Guarantee".   

There is also an added cultural benefit.  Some rather interesting camera work.  Who would have thought of having the camera linger on water glass or a pencil during a discussion of Islamic financing?  Financial videos saved from being overly boring by a bit of avant garde framing.

Fitch Downgrades Dubai Holdings Commercial Operations Group

You'll remember a while back there was quite a "war of words" between S&P and DCHOG when S&P downgraded them to B.   Among one of the countercharges levied by DCHOG was that S&P really didn't understand what it was doing.  That it had a  "lack of understanding of DHCOG's business, its operations and relationship with the Government of Dubai."

Yesterday Fitch weighed in with a downgrade to B+ - marginally higher than S&P's,  However, their comments will give cold comfort to DCHOG.

1. The rating action reflects Fitch's amended rating approach for DHCOG. The agency now rates DHCOG on a standalone basis rather than a top down parent and subsidiary basis. This is due to a continuing lack of substantive information on the government's ability to support the group in case of need.
2. DHCOG is on ratings watch negative.  The resolution of the RWN could result in a downgrade of DHCOG's ratings by more than one notch.  
3. A resolution of the RWN will be contingent upon the receipt of DHCOG's audited 2009 annual accounts, confirming the group's ongoing ability to generate cash flow, retain adequate liquidity and avoid a potential covenant breach at the December 2009 test date. The removal of the rating watch will also be contingent upon DHCOG successfully refinancing the upcoming July 2010 facility, or obtaining additional government funds to repay the facility.

In terms of the basic standalone credit analysis, the two rating agencies are in broad agreement.  The difference between their two ratings is immaterial.

DHCOG can take comfort from the fact that there is no harsh criticism about information flow and adequacy of documentation.  Otherwise Fitch seems to be pretty much on the same page as S&P.  And as well perhaps from Fitch's apparent willingness to factor in government support.  It's question mark seems to be "ability" not "willingness".

IMF Public Information Notice on Article IV Consultations with the UAE

The IMF released today the Public Information Notice ("PIN") on its Article IV Consultation with  the UAE Government.  The PIN begins with a review of the country's condition and then Executive Board recommendations.  The latter are the heart of the PIN in terms of getting an understanding of what the IMF considers the major issues and the solutions (at least in broad terms).

The recommendations are written in diplomatic language.  So criticism is indirect.  Areas for improvement may be "noted", "stressed", "emphasized".  The tone of these words suggests both the size of the shortcoming and the intensity of the Executive Directors' recommendations.   Also there is "on the one hand but on the other hand" mechansim which is a polite way of raising issues. First, the IMF praises something as having been done well, then it turns to the meat of issue by raising that which has not been done or not been done well.  One can of course also look at the positive statements as an assessment of the achievements of the country.   Like all other such reports, it's best to look at several years to get a sense of progress made, recurring or unsolved issues and new issues that may have emerged or where the emphasis may have changed.  Interpreting PINs is an art not a science so one should have a bit of healthy skepticism about the absolute accuracy of one's analysis.

That's my introductory tafsir.  There is also an IMF prepared guide to the defining what certain terms used in relation to the Directors mean.  This is useful in determining how many directors held a particular view.  For example, in this PIN, you will note that it says that "most directors" agreed that the US$ peg made sense.  That means 15 or more.  Here's a list of the 24 current Executive Directors.

So what were the recommendations and what might we infer (note that word: infer not know for certain)?

1. Commended on actions taken in face of global crisis but noted that DW restructuring poses significant challenges to the economy.  Not just a statement of fact but setting the stage for further comments.  And note this is the first topic addressed and you will see it as a sub theme or motivator for most of the recommendations. 
2. Directors agree on the fundamental strengths of UAE economy but it will be important to have balanced and sustainable growth.  Translation:  No more indoor sky mountains and other uneconomic fripperies.  No artificial real estate booms.
3. Re the DW restructuring they want a speedy, orderly, cooperative, and predictable approach to debt restructuring.  The implication here is that they don't see this taking place at present.
4. They underscored that the process should seek to enhance transparency and information disclosure and ensure comparability of treatment among creditors.  Concern about some creditors being favored over others.  Perhaps the Nakheel Bond? Perhaps a worry about side deals for UAE banks?  And as we have heard before "transparency".  So some of this is forward looking - not an admonition regarding sins of the past but an encouragement not to sin in the future.
5. Emphasized need to restructure GREs.  The language here is strong.  "Emphasized" "vigorous".  Basically the message is to kill non economic GREs. And again probably pretty clear which Emirate's GREs are of primary concern.
6. Then a push for updated provisioning etc with banks. And I'm reading a strong concern about shortcomings in regulation of systemically important banks.  In other words how the heck did some of the large banks get such large exposures to DW?  As well as rather poor regulations.  The CBB UAE has already taken steps to address some of these issues and new regulations are expected in the very near future.
7. The comment on greater co-ordination rationalization of investment decisions at the Federal level.  It's doesn't take a crystal ball to figure out that they are commenting primarily on one Emirate's "investment" decisions.
8. Directors stressed the need for increased transparency of economic and financial data, including financial accounts and business strategies for GREs. Together with improved corporate governance, Directors concluded that these steps would contribute to facilitating access of viable GREs to capital markets.  The clear implication is that they feel that GREs are not up to standard on these issues.  The recent article in The National about the mess in Dubai World's entities is precisely the sort of thing they were referring to.  Also note the choice of the adjective "viable".  That implies to me that the Executive Directors think there are some non viable GREs.
9. And finally a recommendation for improvement in national accounts.  Pretty much a standard mantra for the IMF.  And as has been demonstrated recently, even in Europe there is some fudging of national statistics.

Some "Islamic" Lenders Didn't Follow the Shari'ah

A  theme you may have heard earlier here is in today's The National (Abu Dhabi).

For those of you don't know, Mohammed Daud Bakar is Malaysian.  A very sharp fellow.  He spoke at a conference I attended once.  And gave a succinct insightful analysis of Islamic banking as well as the differences of opinion between the "Malaysian" and "Gulf" interpretations of which transactions are permitted.

The point of this is not that there is something wrong with Islamic banking.  But rather that bankers can  cut corners while claiming they are following the Shari'ah just like conventional bankers can do the same with whatever code of ethics they claim to be following.  The pursuit of the buck (a form of shirk) affects many.

Limitless US$1.2 Billion Debt - Limitless Maturity?

Reuters reports that Limitless' US$1.2 billion "Islamic Loan" due next month is likely to be rolled over.  It's noted that lenders have been rolling over significant amounts of Dubai World and Nakheel debt - billions it seems.

The major additional bits of news from this article:

1. Limitless' lenders want to negotiate the repayment of their loan separate from the DW rescheduling.
2. They are currently valuing Limitless' holdings.
3. The loan is from 2008.  It was led Emirates Bank (now part of Emirates NBD),  Emirates Islamic Bank, Arab National Bank, and National Bank of Abu Dhabi.  The syndicate also includes Royal Bank of Scotland, Hypo Real Estate (Germany) well as banks in Malaysia, Pakistan and Taiwan.
4. I see the lenders have decided they'll try an amortizing loan this time.  A very wise move.  In fact an extremely wise move.   One that helps limit one's exposure and keep it from becoming limitless.

Central Bank of UAE Limits Bank Dividends for 2009

AlKhaleej Newspaper (Dubai) reports that the CB UAE has written to banks advising them not to pay cash dividends more than 50% of 2009 profit and not to issue bonus shares more than 60% of 2009 profit.  You may have seen the article in The National (Abu Dhabi) which makes this sound like a "request".  The language here is of an "order" or "decision" -   قرار

Some experts are said to favor this move as it forces banks to strengthen their financial positions.  And some baniks as well no doubt relieved that a CBB order gives them cover from angry shareholders about a lower payout ratio.  On the other hands other banks objected asserting that the Board of Directors and shareholders were the ones best qualified to determine how much of current year profit needed to be retained.

7 banks are named as having received orders to lower their payout ratios: Dubai Islamic, Sharjah Islamic, Abu Dhabi Islamic, Investbank, United Arab Bank, Bank of Sharjah, and National Bank of Umm AlQuwayn.

The article states that the majority of the boards of national banks have proposed partial distributions of profit contrary to expectations of greater conservatism in dividend distribtuions in order to strengthen banks' financial positions in order to meet fundamental challenges in the coming stage.

That I think is understandable.  I was once told by an "old grey beard" from the GCC that there were two things GCC investors loved:  real estate and dividends.  No cash dividends would be a difficult pill to swallow.

The only question I'm left with is - why the restriction on dividends in the form of additional stock? As part of the process of granting stock dividends, the bank would capitalize the dividend amount in paid in capital removing it from retained earnings.  Once this is done that amount (like the rest of paid in capital) is not available for ordinary dividends.  In fact, it is not to be distributed to the shareholders -usually - until the dissolution of the company.  One would think the CBB would encourage stock dividends as a way of preventing cash dividends this year.    Anyone out there have any ideas?

Gulf Finance House - Board Meets with CBB Governor

Update 18 February:  Here's link to GFH Press Release which is source for the news articles.

The Gulf Daily News reports that the Board of GFH and some of its senior officers met with HE Rashid AlMaraj, Governor of the Central Bank of Bahrain and other senior officials of the CBB.

There are several possible interpretations as to the reason for this meeting.

My take is that the CBB is concerned about GFH and wants to make sure that GFH is fully engaged and has a proper strategy to extricate itself from its current constrained position.  Boards aren't generally invited to tea at the CBB.  And certainly not if everything is going swimmingly.

I think it's also telling that one of the indirect quotes attributed to Mr. AlMaraj related to the "importance of of updating the central bank with the latest developments at GFH".   One presumes this comment was made because of a perceived shortcoming in this area.  Otherwise, there would be no reason to mention it.  And of course those of you who read this blog will know that I've expressed a concern about this area more than once in the past.

The word "debated" is used in relation to discussions on GFH's strategy.  This could either be significant - in that the CBB raised some serious questions about the strategy.  Or just a poor choice of words by the journalist or even perhaps a less than artful translation of an Arabic word (if the story is from the GDN's Arabic "parent" paper).  On that score I'd note that the article on the meeting in AlBilad Newspaper does not use the term "debated".  The thrust of that article was a presentation by GFH of various elements of its strategy.  The term "debate" was not used.

Clearly, one would expect that during the presentation the CBB would ask questions and on certain points probably challenge the bank - at least to see how well thought out its plans were.  And perhaps to point out areas it thought were weak areas.  Since we don't have a transcript of the meeting, we don't really know the nature of these discussions.

Hopefully, GFH will find an exit and a path to a profitable future.

1-2

 
Hard to swallow indeed.  But swallow we must.

On to Saturday.

Dubai Rescheduling: "The Murky Gulf"

 

Speakers' Corner Hyde Park

Copyright Heniz-Josef Lucking

Creative Commons Attribution-Share Alike 2.5 Generic license. 

I almost burned my hand earlier today when I picked up my copy of the FT. Luckily I was still wearing my mittens. It's cold here.

It's been more than a few hours since that encounter.  So now the FT is safe to handle.

It didn't take me long to find the source of the heat - there are scorch marks on the editorial page.  

The Murky Gulf indeed.

Of late lots of people have been mightily exercised about transparency.  A Lord, A Deputy, the IMF (a topic for a separate post) and now the FT adds its voice to the chorus.

Certainly, there could be more transparency in Dubai as some might even wish for in the management of the finances of certain members of the EU.  And perhaps even on the other side of the "pond".  Kalaam sharif is not only a good idea from a business perspective but an ideal shared across many borders as this phrase suggests.  It's the right thing to do.  Despite what follows in this article, make no mistake AA is partisan of transparency.

But I think all this hub bub over transparency is a bit misplaced.   

Many of the current critics of Dubai would be silent on the issue of transparency if the Shaykh up the road wrote a check and paid off the foreign bankers.  I don't recall any jeremiads when Shaykh Khalifah put his pen to cheque book for Nakheel.  No demands for transparency on that transaction.  Demands, if any, were more likely that he keep his cheque book out.  

The fundamental issue, I believe, is that the handwriting has appeared on the wall.   And it seems to say:   "Mene, Mene, Tekel Parsin".  Which as any good banker knows means "Long tenor.  Probable loss.  Haircut rather short". 

And so the Lord and the Newspaper no doubt have many good reasons, perhaps as many as 5 billion, to raise the banner of transparency.

It's also a bit of a stretch to bring this topic up now.  Did anyone - even those naive financiers who believed and perhaps still do in the "Implicit Guarantee" - think that Dubai was a paragon of disclosure when they entered the market?  A modern financial Athens on the Creek?  Do they also believe that the PRC is one?

Did they miss L'Affaire Philip Thorpe in 2004?  Were they asleep when the Head of Dubai Customs was jailed much earlier for some rather serious wrongdoing and then miraculously pardoned?  Was this the first foreign country they ever did business in? 

The most economical and profitable due diligence is done before one makes a loan or investment.   Think of it as one's annual physical.  Later due diligence often turns out to akin to an autopsy - interesting but not particularly useful to the subject.

The Sky is Falling: Doomsday Regulation Scenario

The FT has an ominous article today quoting research done by JPMorgan Chase (a completely disinterested party, by the way) on what will happen to banks if all the regulations currently being considered are imposed on banks.

It's actually quite scary.  The projected average return on equity would drop to 5.4% from a projected 13.3%.  This could cause untold pain on shareholders and management.  And no doubt could have a very bad effect on the functioning of the economy because banks wouldn't engage in the sort of behavior that has given us our recent prosperity.

Or on the other hand banks could simply raise their prices - 33% we are warned - and the poor consumer would be hurt.  And you will notice that is really the focus of JPM's study.  They are warning against over regulation not for their own selfish purposes but to protect the innocent consumer.  I'd like to stop here for an observation.  You know if more of us would show just a bit of the concern for our fellow men that JPM displays in this research report the world would be a much much nicer place.

There's only one rub with this dire scenario:  the bit about "if all the regulations ... are implemented".

If a bright person at Motors Liquidation Corporation discovers a way to make a highly energy efficient  battery to power an electric car, MLC's stock will increase at least 20x.

Of course,  the probability of either of these happening is not high.  

The purpose of studies like these is to oppose attempts to impose greater regulations on banks by painting "doomsday" scenarios in a future that will never come to pass.  In the final analysis I suspect the  financial "reform" in the USA though perhaps at least or even more "radical" than the current health care bill in the Congress will prove to be "small beer".  Though one cannot discount that "death panels" for bankers may be just around the corner.

As usual, Suq Al Mal was way ahead of the market in identifying this manifest danger  See  SAM's earlier post - "Mr. Obama's War".  Though I'd note this post may not be suitable for the faint of heart.  It is rather graphic.

Analyst Disclosure:  The author of this blog holds a significant block of shares in a single "money center" US bank holding corporation. Suq Al Mal, however, does not trade in the shares of any company mentioned in this report  or any banking corporation or provide any investment banking or other advisory services to them. 

Duba Metro Payment Deal Apparently Reached

The FT reports that a payment deal has been reached and that work has resumed in earnest on the Metro.

Apparently, a multi-year repayment plan with some sort of a haircut on the amount claimed.  Earlier reports put the amounts due at around US$3 billion or so.

Gulf Finance House - Pretty Interview on Asset Sales

Reuters has an interview with Ted Pretty.  

Here are my comments.

1. Sorry to keep singing the same old tune, but I think the matters discussed in this interview are such that there should be a formal announcement on the BSE.  Not all of GFH's shareholders have access to Reuters.  Articles 42.1 and 42.5 of the CBB's Disclosure Rules seem the relevant chapter and verse.  After all I do remember reading somewhere earlier today about the need for transparency. This doesn't mean of course that management shouldn't give interviews, but that significant matters be disclosed promptly at the BSE - in my opinion.  The Reuters interview is from Tuesday.  Ample time to prepare a release for today.
2. With respect to the US$100 million facility (of which US$50 million matures 3 March), earlier I had understood from a press release that LMC had been engaged as an advisor.  It seems they are the arranger of the facility as well.  That doesn't appear to have been mentioned before.  
3. US$420 million of assets have been identified for sale (excluding the Bahrain Financial Harbor) with US$250 million to be sold.  US$250 million of asset sales are targeted for 1Q10.
4. Salim Rahimi, the long serving head of Real Estate, has left GFH.  A total of 35 staff members have been released.
5. The venture in Syria is still pending Central Bank of Syria approval and GFH is still in talks with investors about the bank.  You'll recall that this was mentioned earlier as a source of cash via an IPO within the next six months.  It's unclear to me if six months is a realistic time frame.