The Bank of Japan may act to drive down the value of the yen (various)

Dubai will sell valuable assets to reduce its debt. (Reuters)

Douglas A. McIntyre

The FT report of the new deal is that Dubai will restructure the debt of Dubai World and its real estate arm Nakheel. Nakheel, in particular, needs the capital. The value of many of its holding has collapsed with the global commercial real estate market.

Abu Dhabi is critical to the restructuring of debt. The $10 billion it provided to its neighbor Dubai will be used, in part, to solve the poorer kingdom’s troubles. Almost $6 billion of the money from Abu Dhabi will be used for the new creditor program.  The FT reports that “Dubai World will receive a $1.5bn cash injection from the government to cover working capital and interest payments, with the $8.9bn of government funding and claims turning into equity in the government-owned business, thereby subordinating the debt to other creditors.”

That is the comforting part of the transactions. Non-government credits will get back all of their principal–about $14 billion in total. But, they will get this in the form of note with five-year and eight year majorities. Dubai may have no better chance to make good on these obligations in a few years than it does now.

Unsecured creditors will get a new set of notes, but of course they will remain unsecured, which means that any future problems with Dubai’s sovereign obligation will put them at the bottom of a very long list of debt payments, none of which the government can promise it will make.

The new deal is the best deal that banks and other creditors will get because they ultimately have less leverage with a sovereign nation which is essentially a theocracy than the do with a multinational corporation which they can liquidate. The desert sand is nearly as valueless as Dubai’s commercial real estate holdings.

Douglas A. McIntyre

The NASDAQ yesterday reached a mutual deal with Borse Dubai that will allow it to gain control of the OMX.  In exchange, NASDAQ is giving up most of its holding (appears to be a 28% stake of 31.5%) in the London Stock Exchange.  But NASDAQ is also kicking in a 20% stake of its own stock.  The NASDAQ purchase price would be equivalent to about $41.00 per per share, and it appears this is for only a 5% voting stake with an ‘independent trustee’ holding the rest. NASDAQ will also get a stake in Borse Dubai, but we are going to stop there. because this is starting to sound like a monopoly game where the second and third tier players gang up on the likely winner. 

There are just two problems: the Qatar Investment Authority has steppedin to potentially give a higher bid for the OMX with a 9.98% stake androughly a 20% of the LSE.  The bigger problem is that Senate BankingCommittee Chairman Christopher Dodd (D-Conn.)  is out saying thisrequires close review, and Senator Schumer is saying it raises seriousquestions about allowing foreign governments to acquire U.S. financialexchanges.  Hopefully this is just political jawboning and saberrattling.

Many in the markets have the feeling that uncheckedand fettered capitalism is the best path to prosperity.  That may betrue and it might not, but some sense has to be put into the equationon both sides.  If workers are competing against child and slave labor,that isn’t fair; but conversely if governments will not even allowstakes to be held in companies then the pendulum is going to far thatway too.

This is not the Dubai Ports deal, which was a highlypoliticized event.  This is a small stake with limited voting rightsand influence, and to top it off in case the insulated boys in D.C.didn’t realize it then they should look closely: NASDAQ NEEDS HELP, BIGTIME.  The boys in D. C. didn’t exactly go out and claim how the NYSEacquisition of Euronext to become NYSE Euronext (NYSE:NYX) might beunfair to the Europeans, and that was for all practical purposes acomplete power shift and total buyout. 

The single largestshareholder in the mega-giant bank Citigroup (NYSE:C) is Al-Waleed binTalal, and that wasn’t a horrific scare when they needed it.  Trying tocalculate how many US-workers (not including the private securityworkers) and the tens (or hundreds?) of billions of dollars that we getannually in Middle-Eastern infrastructure construction and maintenancecontracts is beyond our own databases.  It’s also beyond that of the U.S. Labor Department because if you see the calculations they make you know they are using a single abacus that always double-counts in favor of the house.

Some protectionism andsome regulation is actually OK for everyone, because if everyone is uncheckedand has no rules then there will be a bad end.  But total protectionism(particularly over certain stakes) is almost equally as bad and will ultimately becounter-productive.  If the D.C. regulators would accept the state ofthe world for what it is and go ask NASDAQ if this is what it needs,they will hear a resounding "YESSSSS!" back on the phone.

NASDAQclosed up only 1.35% today at $36.51, well short of the $41.00+ termswith Dubai for a small stake and well under the $38.00+ opening pricesbefore the saber rattling started.

Jon C. Ogg
September 20, 2007