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Saturday, 2 May 2009

Genesis of the debt disaster

In the 1990s, a young team at Wall Street investment bank JP Morgan pioneered a new way of making money – credit derivatives. Within a decade, the market for these exotic securities had exploded to more than $12,000bn – and some people later blamed them for fuelling the global financial fiasco. In the first of two extracts from her book, Fool’s Gold, the FT’s Gillian Tett reveals how the innovation genie was first let out of the bottle – and eventually devoured the system, to the horror of its creators. The first sign that there might be a structural problem with the innovative bundles of credit derivatives that bankers at JP Morgan had dreamed up emerged in the second half of 1998. In the preceding months, Blythe Masters and Bill Demchak – key members of JP Morgan’s credit derivatives team – had been pestering financial regulators. They believed that by using the new credit derivative products they had helped create, JP Morgan could better manage the risks in its portfolio of loans to companies, and thereby reduce the amount of capital it needed to put aside to cover possible defaults. The question was by how much. (Though these bundles of credit derivatives later went under other names, such as collateralised debt obligations [CDOs], at that time these pioneering structures were known as “Bistro” deals, short for Broad Index Secured Trust Offering). Masters and Demchak had done the first couple of Bistro deals on behalf of their own bank without knowing the answer to their question for sure. But when they were doing these deals for other banks, the question of reserve capital became more important – the others were mainly interested in cutting their reserve requirements.

Hedge funds reward the faithful

Thousands of investors have pulled their money out of hedge funds over the last year. But many of those who kept faith in their managers are suddenly being rewarded.

This is partly down to the improvement in market conditions in recent weeks. But it also reflects an exodus of hedge funds from the business in the second half of last year. This has resulted in a less crowded market, with far fewer funds chasing investment opportunities.

Investors pulled 20 per cent of their money from hedge funds in 2008 while industry assets shrank by almost $800bn to $1,200bn, according to estimates by the Hennessee Group, a New York hedge fund consultant, as the industry produced its worst results ever.

Time to abandon the foreign perspective

It is not uncommon for a journalist at a UAE newspaper to get a sympathetic pat on the shoulder at revealing his or her job to someone they meet for the first time. "Oh, it must be so hard to deal with the censorship," is a common remark.

The answer to that is not easy. While it would be unrealistic to deny that there is censorship in the UAE, it is not easy to agree with it either.

An experience that I once had sums up the complexities of working as a reporter in the UAE. While working on a major local story in 2006, I was told that an official had called in demanding that I not tread on sensitive territory.

Emirate's part-time investors trade information on the Web

Where is the next party? read the tagline of a discussion topic among members of an online investors community during the recent stock market rally in late March and early April.

As the discussion among the forum members on Dubai Share Talk (www.dubaisharetalk.com) continued, it was evident that many of them had made hits and misses. Some made money, some didn't. The entries captured the essence of short-term investing.

Part-time investors were trading to recoup some of their huge losses suffered in the past year. Obviously, it's not an easy job to predict which shares will go up and which will fall.

Emirates to delay B777 deliveries

Emirates will slow the delivery of new Boeing 777 aircraft next year, Gulf News has learnt.

Speaking a day before the delivery of the airline's 75th Boeing 777, Abdullah Al Shams, manager of the Emirates Boeing fleet acceptance team at the Everet factory near Seattle, said that from 2010 deliveries would be delayed by a few months.

"We do have deliveries until April 2010 and then we have a slowdown on the deliveries for the following year," Al Shams said.

Two options for wealth funds: which will they pick?

Remember when the biggest controversy in Gulf dealings with the West was the role of sovereign wealth funds?

In the wake of the financial crisis, it now seems quaint to consider that just last summer western banks could afford to be picky about who was giving them money. The moneybags from the Gulf, awash with revenue from oil at nearly $150 a barrel, were seen as sinister forces for political interference, or worse as shadowy front-organisations for extremists. That view is now “so August”, as they say in New York.

Hard up American and European banks will accept investment from virtually anybody. (One tongue-in-cheek suggestion recently was that a consortium of Somali pirates had taken advice on an equity investment in Citigroup, before turning down the proposal on grounds of risk.)

British help tackle money laundering

Money laundering and smuggling, including gun-running, are persistent problems in the region, and Abu Dhabi is getting help from British experts to tackle the problem,

Nearly 40 government officials will be trained in anti-money laundering and anti-smuggling intelligence methods this month by the Intelligence & National Operations unit of the UK Border Agency. It highlights a budding alliance with Abu Dhabi Customs.

Saeed al Muhairi, the general manager of the General Administration of Customs, a division of the Department of Finance, said the courses were important because money laundering was still happening despite GCC governments’ best efforts to stem it.

Vodafone Qatar $929m IPO fully subscribed

Vodafone's Qatari unit said on Thursday its QAR3.38bn ($928.6m) initial public offering had been fully subscribed, making it the second-largest IPO ever in the Gulf Arab oil and gas exporter.

Investors offered QAR3.35bn, after expenses, for shares in the offering, said Ray Maurer, managing director of QNB Capital, one of the lead managers of the IPO.

"Given the challenging times we are facing in the global financial markets, we consider it an enormous success to sell this issue," Maurer told Reuters. The company said in a statement the IPO was fully subscribed.