The Dubai World debt puzzle.

I get accused these days of being a Dubai 'fan', all the more strange since I hope I have been pragmatic in my advice to both sides. Yes there is not denying that I do love the UAE, it has a great deal what is good and when it has needed improvement I have spoken out, not as a cynic but as a friend who means well. I have been a banker for a major part of my life, and have viewed banking and bankers from a close distance this past ten years.

As Dubai World announced its intention to restructure its debt, even though getting to that stage may well have been a comedy in its own right, I wondered about what bankers were thinking. Indeed, some claimed they were under the 'impression' that the Dubai government was the ultimate guarantor of the loans; a silly argument on two accounts, a. the documentation for the loans never state that, and b. the decree that set up Dubai World clearly states that the government would not in away guarantee the loans or obligations of Dubai World. So how come this sudden myopia on the part of the bankers.

Bankers are forgetting their heydays of lending, and this was like a wild spree. A European banker had the gall to say to me that they did not know the extent of the obligations of the Dubai World, and had they known them they would not have lent money! First of all if I had to choose the most ridiculous statement in this whole saga that would surely be my choice. You expect me to believe that banks piled on $26 billion of debt and did no due diligence, did not ask for financial statements, did not check the news back then where every month banks were announcing new lending syndicates, and my European banker friend was tucked away in London reading the Financial Times and signing away loan approvals. Banks have risk management departments, credit committees and legal minds that are keen to know the interconnectedness of each entity around the borrower and indeed the relationship, in legal and contractual terms with the shareholders.

But then when a bankers bonus is determined by the number of assets he writes onto the books of the bank, and the bonus is paid soon after the loan is booked, why should he really be worried about all the details? Were the bankers negligent in their lending? Perhaps in a sense yes; after all if they did their homework some of the lending could have been curbed based on the 'concentration of risk' argument, where the leverage piled onto Dubai World, even in the bright days was remarkably more that what the Dubai government itself was borrowing.

My banker friend also suggested he did not know what were the assets of Dubai World? Then the simple idiotic question comes up as to what was the basis of them lending? I can understand bankers wanting to know what is the value of the assets today, after the impairment in the market place, but to claim at that time bankers did not know what assets were covering their loans really sounds totally out of place.

I believe that while Dubai World may have been careless in its pursuit of glory or possessed with and abundance of wishful thinking that people will buy into their dream in droves, or a mixture of both, it does not absolve the bankers of their loss of reason. Yes corporate governance and all is fine, but this is all about asking the bankers and lenders to be clear of what they did wrong. I am surprised the financial press, who normally are good at pointing out who messed up are giving the bankers a bit of a free ride. But then every saga needs a victim and somehow the bankers want us to believe they were duped into this huge lending.

This is certainly not the case. The banking world does not work this way. The details on lending applications, especially of this size, run into volumes of analysis, opinion and credit and risk assessments . If these were not done then frankly these banks should just have to bear the brunt of their mistakes and at best agree to reschedule the debts and wait out the recovery.