Dubai: The Typical Banker and Investor Response

No sooner had Dubai announced its debt standstill request than the typical banker/investor reaction set in place.

First, was the usual fear- "nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance".   Proof yet again, if any were required, of the power of the insights of behavioral finance.

Second, came the typical recriminations.  Only a short time ago, Sheikh Mohammed was a man of vision.  A reformer who would lead a modern day renaissance of the Arab world.   A leader who would build a new Singapore in the Gulf.  Today suddenly he's changed - or at least we are asked to believe he's changed - to a charlatan or an incompetent.  What a difference a day or two can make!  And a debt standstill request.

As an example, (though to be clear I am not accusing the FT or Ms. Khalaf of previously mindlessly cheerleading for Dubai), today's FT's lead editorial and a column by Rula Khalaf detail the manifest profligacy and unwise business and financing strategy of Dubai.  And do so in less than gentle language.  A small detail that the efficient market apparently overlooked - not the language, the analysis.  Sober bankers and investors tricked yet again despite the most careful due diligence and solid risk management skills.

Third, there are the (sadly) usual calls for a bailout.

The FT thunders that:  

"For its part, Abu Dhabi should give whatever help is needed to bring this episode of incompetence to a close. Abu Dhabi allowed it to be believed that it was backstopping Dubai, so it should make good its promises. This will require a public guarantee of Dubai’s debts – and soon. The reputation of the whole UAE depends upon it."  

Free market capitalism without the difficult central teaching of Adam Smith.  But done of course not to bail out bankers but to protect the reputation of the whole UAE.   A worthy goal.

Perhaps, while Abu Dhabi is at it, it might help out the BBA by guaranteeing the debt of Saad and AlGosaibi.  The repuation of the GCC may well depend on it.

Sadly, though, there is no thought of the reputation of banks and investors who have yet gain made some bone-headed lending and investment decisions.  Who indeed will restore their reputation?  Though one might search long and hard before one finds any criticism as scathing as that levied against Dubai.  In any case, responsibility is dealt with quite nicely by the market as described in the next point.

Fourth, once again the transference of responsibility.  When the going gets tough, the tough apparently find a scapegoat.  Clearly, not the sober careful bankers and investors  themselves.  No, it is Abu Dhabi who misled them.  And as well, I suppose, the now hapless Sheikh Mohammed.