What the Dubai Default Means to the U.S.

As Ed Glasier wrote in the NY Times:

Last Wednesday, the government of Dubai announced the restructuring of Dubai World, one of the emirate’s three state-owned investment giants, which would “ask all providers of financing to Dubai World and Nakheel to ‘standstill’ and extend maturities until at least 30 May 2010.”

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It appears that spending billions on buildings in the desert to hold indoor ski lifts, multi-million dollar condos with no tenants, and commercial real estate offices with no occupants except other real estate companies and their lenders is not a great business model. Who would have thought?

On the Corner of National Review Online, David Yerushalmi had this to add about Shariah-Compliant Finance (SCF) the mechanism developed to avoid the prohibition against charging interest on loans:

To understand the rather opaque world of Islamic finance, one must understand the players. Since its founding, the modern SCF world has been driven by essentially two groups. The first we can label the Shariah fundamentalists. They come in the form of the fundamentalists in Saudi Arabia and Iran and the Muslim Brotherhood “political Islamists” operating principally in Egypt, Jordan, Pakistan, Indonesia, and Malaysia. These Shariah-inspired financiers understand SCF as “financial jihad” — indeed, as part of a larger stealth campaign to institutionalize Shariah in the West.

What makes this institutionalization a bit tricky is that the financial jihadists must convince the Western financiers and their governmental counterparts that Shariah-inspired finance is somehow distinct from Shariah-inspired global jihad against the infidel West. In other words, how do you export a financial model among infidels when that model is built upon a doctrine that manifestly calls for the death and destruction of the infidels and their political and social systems? The answer to this quandary is found in the second group of SCF advocates: the Western facilitators.

I recommend also reading the NY Times piece by Andrew Sorkin, called A Financial Mirage in the Desert . He writes:

Just as the United States stood behind its banks, in part, to avoid losing the confidence of foreign investors, Abu Dhabi might have to do the same.

That had to be what Citigroup, with its firsthand expertise with bailouts, must have been thinking when it lent $8 billion to Dubai last year. Oh, and here’s an interesting fact: Citigroup made the loan to Dubai on Dec. 14, 2008. Take a look at the calendar — that’s after it received tens of billions in TARP funds. Citigroup’s chairman, Win Bischoff, said at the time, “This is in line with our commitment to the U.A.E. market in general, and reflects our positive outlook on Dubai in particular.” Good call. …As Mr. Buiter described them on his blog, “these were window-dressing pseudo-Islamic financial instruments that were mathematically equivalent to conventional debt and mortgage contracts.”

So our taxpayer money was used to bail out Citigroup, who turned around and used that money to invest even more money in indoor ski lifts, multi-million dollar condos with no tenants, and commercial real estate offices with no occupants except other real estate companies and their lenders. But because of the nature of Shariah-Compliant Finance, Citigroup now owns the assets. That’s how they get around the prohibition against charging interest. The lender instead buys the target property and rents it at a profit to the tenant. Anyone want to go skiing in our US taxpayer owned indoor ski lift?

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