U.S. Subprime and now Dubai Subprime – More to Come?





Nov 30 2009
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Looking at how poorly Maxis stock price performs since it’s relisting in the local stock market, those who didn’t get it through the supposingly transparent IPO balloting and was sulking can now grin from ear to ear (didn’t I tell you so? *grin*). The stock didn’t get to touch RM6.00 a share (as I expected because at RM6.00 the stock would be trading at a whopping EPS of 20 times) and fortunately retailers didn’t chase the stock. As I’ve mentioned earlier the local stock market is probably already at its peak but most importantly Maxis is now a different animal. Faced with saturation in mobile telecommunication sector, investors need more than marketing talk to be convinced that it’s worth throwing more money investing the stock.

You may already know about this by now but the fact was retailers who applied for Maxis IPO via ATMs (automated teller machines) other than CIMB’s ATMs had pathetic low percentage of securing the shares. Hence if you wish to talk about transparency (in balloting) maybe this is a simple area to start investigating why the special preferences to CIMB, the banking company owned by none other than PM Najib’s brother which happened to be the main underwriter of Maxis IPO exercise. OK, let’s stop talking about Maxis IPO because there are more important issues that you should know.

The latest bombshell in the global financial market is definitely the crisis faced by once the mighty-booming Dubai. The United Arab Emirates’s investment and development engine, Dubai World, announced last week that it was seeking a six-month delay in paying creditors on nearly US$60 billion in debt. As a result Dubai’s stock exchange plunged more than 7 percent while share prices of Dubai World tumbled almost 15 percent when market opened early Monday (today). UAE’s central bank may did the right thing by instantly pledging to make funding available to all banks in the country (including foreign banking’s branches) but it didn’t promise any carrot to help Dubai World. This US$60 billion (some said US$90 billion or more) can potentially become the largest sovereign debt default since Argentina.

But why didn’t we see it coming? Actually I’ve written about this potential Dubai bubble some moons ago although I had refrained from exaggerate the matter. Dubai is one of the 7 Arab Emirates and the support thrown in by her brother, cash-rich Abu Dhabi, was sufficient to transform the country into a finance, real estate and trading hub of the middle-east. Unlike other cuntries in the region, oil contributes about 6% to Dubai’s US$80 billion economy. However when come to business Abu Dhabi made it clear to Dubai that it needs collaterals in return for financial helps and hence the Burj Dubai was one of the properties pledged to Abu Dhabi. On the surface Dubai continues to show off her tallest building, underwater hotels, indoor show skiing in the desert, most expensive hotel Burj Al Arab, Palm Islands and so on.

You see, Dubai has a population of only 1.5 million but only 20% are citizens while the remaining 80% are expatriates. Indian, Pakistani and Bangladeshi constitute to these so-called cheap labors in building the Dubai’s ambitious plan. Dubai has been ruled by Al Maktoum dynasty since 1833 and you don’t need to be genius to know what will happen when the current ruler happens to be the Prime Minister as well. The only difference from such monarchy-cum-dictator and Malaysian’s PM-cum-dictator is the former does not know what property bubble is until it burst. In Dubai, expatriates can purchase properties without much scrutiny or prove of financial capabilities as if they were buying vegetables from the bazaar. Properties were hot commodities and speculators (or rather gamblers) borrowed as much as possible from banks to maximize their units of ownership.

With rental of a studio unit fetching RM7,000 per month you don’t need to be a university graduate to bet your money on properties, including the labours coming from Indian, Pakistan or Bangladesh. You need to pay at least 6-months of rental downpayment, mind you. In fact if you’re working there as an expatriate and you did not borrow money from the bank to speculate the properties in Dubai, you would be laughed on (because of your stupidity). This is because you won’t get sued or thrown into prison if you can’t pay for the properties you bought. And now the bubble had burst, everyone sell like mad. Actually the bubble burst began about a year ago but it wasn’t reported as widely as the U.S. subprime crisis. Only those who were working there knew about the seriousness of the Dubai subprime.

So, supposingly big brother Abu Dhabi which has a whopping US$650 billion in wealth was to write a small cheque to settle little brother Dubai’s debt, won’t that solve the problem? But I supposed Abu Dhabi would not be so stupid as to pick up the bill without looking at the worthiness, brother or not. Why not you ask former PM Mahathir who was reportedly (Barry Wain) squandered RM100 billion under his 22-year iron-fist rule to help reduce the country’s current deficit? Get the idea? My goodness, Malaysia is so bankrupt that PM Najib has no choice but to implement GST (Goods and Services Tax) just to earn addition RM1 billion in tax revenue – at the expence of Average-Joes.

Anyway, the question is – would Dubai’s subprime crisis goes away tomorrow as if there’s nothing happens or would Abu Dhabi pick up the skeletons after it collapsed? Would there be similar subprime elsewhere waiting to explode before the U.S. economy can recovers? Some said Vietnam, Greece or even Russia may have fun in crafting their names as the next contributor in subprime crisis.

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Comments

yes, i have heard about this some time ago but cant really talk about it becos it was privileged info. finally, it's out in the open. do u know some local banks have exposure there?but then again, their exposure is probably dwarfed by the huge totality.

I was among those who applied but was unsuccessful. IPO price was RM4.75, and today (1st Dec 2009), Maxis is trading between RM5.37-5.44. If I had been successful, and then sold my shares, there will be an extra RM500 or more in my pockets. How can I "grin from ear to ear" for not making at least RM500 easy money?

That interesting. Will BN government the next contributor in subprime crisis? I hope not.

1. The politikus n its cronies squandered Rakyat's money, then park it overseas, Dubai included for its safe-prudent islamic policies. Now the $-value holding emaciated at least 30%.2. These bandits will tune their brains 7×24 on recovering their $-value.3. These crooks will oppress law abiding Rakyat of their hardearned $ to recover and top up too the ill gotten $ stashed away under their pillows, overseas accounts, overseas properties and etc etc…. whilst you and I are worrying about our families daily meals….

The problem is more than just subprime crisis. The entire Islamic financial system is rigged for failure.We have seen the recent Sukuk crash, and now we have a major subprime problem. The main factor behind this isn't just rampant capitalism, but the latent stupidity of the Islamic finance system that allows defaults and disallows interest rates (but instead imposes what's effectively a compounded interest that must be paid in full).This one-two combo results in loan takers who are eventually unable to serve the loan (thanks in part to the exorbitant effective interest rate) but at the same time, are able to default on the loans.Recipe for disaster? You bet.In Dubai's case, with the subprime crisis as bad as it is, I won't be surprised if the banks are unable to chase their bad debts and all they can seize are the bad properties left behind by the debtors who would have fled the country by then.One loss leads to another loss, and the cause of the losses are running free and heading home.Bravo to Islamic finance!

Awesome article.

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