A Story About The Reach of Dubai's Troubles

Dubai World's recent debt servicing problems, mentioned in this post, gave US investors quite a scare for a day or so.

But, that was then. Now, we've had two days of so-called 'Dubai relief rallies.'

I'm still wondering why.

As I understand the situation, described by a guest on CNBC a few days ago, the UAE came in and guaranteed the local banks from failing due to either having made unrecoverable loans to the project, or holding the project's bonds as assets. The commentator was quite specific in noting that the project debt wasn't being backed by the UAE. Nor investors at large.

No, apparently in an attempt to reassure global investors of Dubai's continued efforts to join the list of the world's financial centers, the UAE would guarantee that Dubai's banks didn't touch off a global bank run or panic.

So, I'm wondering why this rather limited support for the gigantic fun city resulted in such massive US equity rallies.

Then I got my own, small version of the apocryphal JP Morgan story which I related in that linked post.

Yesterday, while getting a haircut, I discovered that my barber is Jordanian born.

She and I were talking about various topics and the Mideast came up. She opined on how extravagant Dubai is, with, she alleged, the world's only seven star hotel property.

She then confided that her boyfriend invested both his and her funds in the project, by way of a fund which bought condominiums. The amount of money wasn't small, given that she is a hairstylist. It was in significant six figures.

I asked if she had heard about last week's little hiccup. She had not, but her amiable chatter changed to a more worried series of questions.

She then admitted that her boyfriend had been worried about their investment, but "was afraid to call" the people managing the fund in which they had invested.

I quoted a guest on CNBC yesterday morning, who contended that Dubai bonds which were priced at 110 last week were selling for 56 today. The woman's face went dark and worried.

When I heard about the Dubai debt default being imminent, and then the restructuring, I naturally assumed that the affected investors would be mostly large, sophisticated banks, hedge funds, insurance companies, etc.

Not a local hairstylist and her boyfriend.

Kind of brings it all home, doesn't it? A bit like 1929, wherein a personal service vendor whom you normally tip tells you of her investment in an overseas luxury resort development.

Let's hope Dubai's problems end better than Wall Street's in '29.