From the London Irvine Report - December 29, 2008

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"The old Greenspan gambling system’s dead, but until we know the full scale of the losses we can’t begin to build the replacement says Liam Halligan. Does anyone really know the true derivatives position of JP Morgan Chase or Goldman Sachs? How much are the Fed, the ECB, the BOE and BOJ, really on the hook for?  How much gold is really left in the central bank vaults, rather than double counted and “leased” into the market never to be seen again?  Until the bankers and politicians get some old time religion and honesty,  the fiat problem will just keep growing until the bankruptcy of us all."

 

-----with the result that write-downs in the global financial system to date have reached $993.9 billion, against $919 billion in capital — which is to say that the entire global financial system is insolvent, except for Fed bailouts. Bloomberg (the professional service, not the publicly available news) has done the numbers, and they are impressive. Freddie Mac had $56 billion of writedowns against $15.6 billion of capital, Freddie Mac had $58.4 billion of losses against $20.8 billion of capital, Washington Mutual had $45.6 billion of writedowns vs $12.1 billion of capital, and so forth.

Only full disclosure of toxic debts will get the West moving again

It has been a year of financial explosions

By Liam Halligan Last Updated: 5:44AM GMT 29 Dec 2008

 

The commercial pillars holding up the Western world - banking prudence and sound credit - have been smashed to smithereens.

 

The "advanced" nations are now flirting with economic collapse. The emerging economies have also suffered "collateral damage" – the West's "sub-prime" debt bombs now threatening the stability of global commerce.

 

The developed world is on course to contract by 1.1pc during 2009. That will hurt. The emerging markets are also set to slow – their growth falling to 3.1pc – as China and India feel the impact of lower Western demand.

 

But 2010 could be even worse – unless policymakers can piece the global economy back together. And the prevailing policy response –soft bail-outs, ultra-low interest rates and unfettered government spending – not only won't work, but will compound this crisis.

 

So how should Western governments respond? How can we escape this credit crunch, and prevent it being repeated?

 

As the Bank of England Governor Mervyn King said last month, "getting the banks lending normally again . . . is more important than anything else". After piling into risky assets for years, the Western banks now refuse to lend to millions of credit-worthy firms and households. That's jammed the wheels of finance, making fears of recession self-fulfilling.

 

The money markets are locked because the banks don't trust each other. Even they don't know how much toxic debt is out there – and which bank could be the next to fall. That's why the spread between the London Inter-bank Offered Rate and overnight interest rate swaps of the same maturity remains so wide – and wider in the UK, now, than either the States or the eurozone.

 

The crucial inter-bank market will remain frozen until the banks are forced, under threat of prosecution, to reveal the true extent of their sub-prime liabilities. Such "full disclosure" won't be easy – involving the exploration of millions of complex derivative contracts, often across borders – but it simply must be done.

 

America's first serious reaction to "sub-prime" was the Troubled Assets Relief Programme – buying up hundreds of billions of dollars of dodgy loans the banks didn't want any more. When that didn't work, the US asked banks to forfeit some share capital in return for government cash, as in the UK.

 

But that's failing too – as shown by sky-high Libor rates. So, as a matter of urgency, the West must copy the hard-headed Swedes – who, in the early 1990s, insisted nationalised banks write down the full extent of their non-performing loans before more public money is spent on recapitalisation. Only then – once the sub-prime losses are fully-exposed – can securities markets clear and the inter-bank market reboot.

 

http://www.telegraph.co.uk/finance/comment/liamhalligan/3982447/Only-full-disclosure-of-toxic-debts-will-get-the-West-moving-again.html

 

"The tremendous merit of gold is, if we want to put it that way, a negative one: It is not a managed paper money that can ruin everyone who is legally forced to accept it or who puts his confidence in it. The technical criticism of the gold standard become utterly trivial when compared with this single merit.”

Henry Hazlitt

Dr. Jamil El Jaroudi, Chief Executive Officer, Elaf Bank, a Bahrain-based Islamic investment bank with an authorized capital of $500m, examined the challenges of innovation in the Islamic banking industry during the opening day of the 15th World Islamic Banking Conference held in the Kingdom of Bahrain.

Dr. Jaroudi was speaking at a session entitled, 'Creating the Next Generation of Islamic Finance Solutions: The Product Innovation Imperative'. 

During his presentation Dr. Jaroudi pointed out that although innovation has become a 'buzz word' within the industry, the need for innovation in Islamic banking is real and is paramount to its continued survival. 

Dr. Jaroudi examined innovation over four spheres: products, people, the market and regulation. He said, 'Innovation is crucial to revitalizing Islamic roots, improving customer satisfaction and creating new and sustained sources of income. 

Dr. Jaroudi, a prominent industry expert continued:

'Growth in liquidity instruments will pave the way for long term investments, in particular, 'asset backed liquidity management instruments' are a progressive domain for innovation.'

He called for more products of handling and transferring risks particularly cross border risk and particularly currency risks, more work done to confirm, adapt or evolve products such as the (IPRS), Islamic Profit Rate Swap or (ICCS) Islamic Cross Currency Swaps and encouraged the analysis of (DEP) Diminishing Equity Participation as a bridging tool to encourage more people to look at Musharaka as an ultimate and most deep rooted instrument in Islamic Finance. 

Addressing the importance of human capital, Dr. Jaroudi stressed that the dilemma was not how to attract skilled professionals but how to successfully retain them. 

He went on to talk about the 'the market place' as an area where innovation in Islamic banking is needed, 'shareholders and owners of Islamic banks should believe in this industry and its orientation towards medium to long term activities. This means forgoing immediate, short term profits for a sustainable medium to longer term higher profits.' 

Dr. Jaroudi said he would like to see more firms like Elaf Bank entering the market with the intention of developing the Islamic secondary market and with the aim to be market makers. 

Elaf Bank's Chief Executive was optimistic about the future of Islamic banking and concluded, 'The developments noticed by the industry in recent years and the ongoing turmoil in the markets, leads me to believe that Islamic finance will soon provide very substantial and promising opportunities for specialization and diversification.'

Abu Dhabi Islamic Bank opens Ras Al Khaimah branch

4 December 2008

04:15

Datamonitor News and Comment

English

(c) 2008 Datamonitor plc. All rights reserved

Abu Dhabi Islamic Bank has opened a new branch in Ras Al Khaimah, which is the 45th location of the bank in the United Arab Emirates.

The new branch will provide Shari'a-compliant products and Islamic finance solutions in the region.

Ali AlShaqoosh, head of branches at Abu Dhabi Islamic Bank (ADIB), said: "We are planning to open new branches and install new ATMs in Dubai and Northern Emirates to rapidly expand our branch network within the coming year. The new branch, along with the existing one in Ras Al Khaimah, will service the residents of the emirate and neighboring suburbs too."

QNB al Islami and QIIB enter finance agreement

5 December 2008

Global Banking News

English

(c) 2008, Electronic News Publishing. All Rights Reserved.

QNB Al Islami, the Islamic branch of Qatar National Bank (QNB), Qatar International Islamic Bank (QIIB) and Qatar Real Estate Investment Company (AlAqaria) have entered into a financing agreement.

According to the Shari’ah-compliant finance agreement, the two banks would provide AlAqaria with an Ijara finance package worth QAR1bn. The fund would be used in the future development of AlAqaria projects in Qatar which are currently estimated at QAR2.5bn.

The financing is to come into effect from 1 January 2009.

[Editorial queries for this story should be sent to gbn@enpublishing.co.uk]

Retail Banking

Liquidity shortage triggers price war

5 December 2008

Middle East Economic Digest

English

© 2008, Emap Communications. All rights reserved

With global financial institutions no longer lending to each other, and loan growth outstripping deposit growth in the region, competition for customers is becoming intense among Gulf banks

Melissa Hancock

The banking story of the second half of 2008 has been the end of interbank lending. The drying up of liquidity has prompted several Gulf banks to switch their focus from investment and wholesale banking to retail...

Al Salam Investment signs partnership agreement with German HSH Nordbank. 

5 December 2008

Middle East and North Africa This Week

English

(c)Copyright 2008. Internet Securities, Inc. All rights reserved 

"Dubai-based investment company Al Salam Investment (ASI) signed an agreement with German shipping and renewable energy financer HSH Nordbank, ASI said in a press release. The two partners are expected to formally set up a joint venture in 2009 to strengthen funding and investment operations throughout the MENA region. They believe that Islamic finance, regional sovereign wealth funds, and economies driven by strong energy sectors are being predicted to hold the key to the recovery of the global economy. The union of regional operator ASI with the conservative traditions of conventional global financier HSH Nordbank will create a strong player operating on Islamic principles initially in the GCC and in the medium term throughout MENA region..."

Malaysian Islamic reinsurer ACR eyes foreign markets

5 December 2008

Reuters News

English

(c) 2008 Reuters Limited

KUALA LUMPUR, Dec 5 (Reuters) - Malaysian Islamic reinsurer ACR ReTakaful SEA wants to grow in Indonesia, Brunei and Bangladesh, seeing long-term prospects for the business despite a global economic downturn, the firm said on Friday.

Rising demand for sharia banking products would drive the takaful, or Islamic insurance, market, ACR ReTakaful SEA Chief Executive Zainal Abidin M Noor said.

"We are in a difficult period at the moment in the sense that (there are) a lot of uncertainties," Zainal told reporters at the company's launch.

"But we are still optimistic. We still see that the growth of takaful is still much better than the conventional insurance at least in respect of the non-life side."

The company, which is a subsidiary of Dubai-based ACR ReTakaful Holdings Ltd, is also keen to tap opportunities in the Thailand and Philippines, he said.

ACR ReTakaful SEA will serve these countries from its base in Kuala Lumpur, he said.

Under Islamic insurance, members contribute to a pool of funds which is used to indemnify participants who suffer a loss.

Global premiums in Islamic insurance total about $2 billion to $3 billion and are expected to reach more than $7 billion by 2015, according to industry figures.

The industry is relatively small and many takaful firms currently cede part of their risks to conventional reinsurance firms because there is a lack of Islamic reinsurance capacity.

The Islamic reinsurance market is worth $1 billion, according to industry estimates.

ACR ReTakaful SEA has written about $5 million of gross premium income, the company said.

ACR ReTakaful Holdings is a joint venture between Singapore-based ACR Capital Holdings Pte Ltd, Malaysian state investment arm Khazanah Nasional Bhd. and the Dubai Banking Group.

Lawyers not worried about slowdown in Mideast, China; KING & SPALDING'S MIDDLE EAST managing partner says Gulf region is doing well through global economic crisis

BY VESNA JAKSIC

5 December 2008

Fulton County Daily Report (Atlanta)

1

Volume 119; Issue 237

English

Copyright 2008 ALM Properties, Inc. All Rights Reserved.

LAW FIRMS WITH OFFICES in the Persian Gulf and China are starting to feel the impact of the global economic crisis, but lawyers pointed out that these regions are still faring better than other parts of the world.

"I think the Middle East is not immune to what's going on in the rest of the world," said Philip R. Weems, the Dubai, United Arab Emirates-based managing partner of Middle East offices for Atlanta's King & Spalding. "However, I think the Gulf is doing quite well through it."

International investors may reduce their investments in the Middle East as they assess their worldwide portfolios, Weems said. But even so, many practices in the Gulf have continued to prosper, including Islamic finance, he said.

Islamic finance is a system that follows the principles of Islamic law, or Shariah. These include socially responsible investments, while prohibiting interest-based banking and investments in sectors such as gambling and pornography.

King & Spalding is one of two Atlanta-based firms with a Dubai office, which it launched almost two years ago and followed with offices in Riyadh, Saudi Arabia, and Abu Dhabi, United Arab Emirates. The offices—with a total of 23 lawyers—have a busy Islamic finance practice and also offer construction and projects services.

Kilpatrick Stockton last month opened a small Dubai office to expand its construction practice into the Middle East. The two-lawyer office started with several U.S. clients that also are newcomers to the region, with the goal of also representing local participants in the frenzied Gulf construction boom.

Even as closings and layoffs hit a number of U.S. offices, expansion in the Gulf has continued. And while China is starting to see signs of a downturn for the first time in years, lawyers say this region also is far from experiencing the crisis seen in the U.S. and Europe.

In the Gulf region, many firms established their presence in Dubai in recent years, but nearby Abu Dhabi—capital of the United Arab Emirates—seems to be the latest hot spot.

In October, Akin Gump Strauss Hauer & Feld announced the opening of an office in Abu Dhabi and said it plans to have at least 20 lawyers there within four years. Holland & Knight opened an office in Abu Dhabi in September, and Clifford Chance did so in August. Baker & McKenzie announced in October it would open in Abu Dhabi sometime this year. New York's Dewey & LeBoeuf, which has said it will close four U.S. offices by early next year, plans to open doors next year in Abu Dhabi, as well as another capital in the Gulf region—Doha, Qatar.

"Over the last year, firms are really coming to Abu Dhabi," said Donald P. Moore, executive partner of Holland & Knight's Abu Dhabi office. "Some of them are shifting their resources here. I think everyone is certainly seeing Abu Dhabi as the next big thing. Everyone wants to be here."

While there still is plenty of work for lawyers in Dubai, several lawyers there said some of it has slowed down in recent weeks. This is reflected in areas such as real estate, where lawyers said prices have dropped in recent months. Abu Dhabi is not as developed as Dubai so there is still plenty of work ahead, lawyers said, pointing out that the city has most of the United Arab Emirates' oil reserves and plenty of financial resources.

Both Abu Dhabi and Dubai—and the Middle East region in general—are doing well during the global economic crisis despite some slowdown in recent weeks, lawyers said.

"We remain as a firm very committed to the region, and I would say very bullish on the region," said Steven H. Davis, chairman of Dewey & LeBoeuf. "There has been a huge accumulation of capital in the Middle East and that will drive a lot of commercial activity, even in the face of weakness in global financial markets."

Even if there is no new capital flowing in, the existing amount is large enough to provide a cushion against problems affecting other parts of the world, Davis said. Lawyers said most countries in the Gulf region—such as the United Arab Emirates, Saudi Arabia and Qatar—have large cash reserves in sovereign wealth funds. The governments tend to finance almost everything out of their operating budgets so they are not as leveraged as other nations, lawyers said. Work for the government and government entities is just as strong, they said.

Roger Parker, Reed Smith's London-based managing partner for Europe and the Middle East, said the global financial crisis will likely have a bigger impact in the Gulf in 2009 than it did this year. But even if firms face a negative period in the near future, Smith said the region will continue to be a hot spot for lawyers.

"If anything, the position will be reinforced because they are not so dependent on the leveraged finance techniques that have been deployed by the Western banks," he said. "I would think that these strongly emerging markets will continue to develop at a faster pace than their Western counterparts and therefore continue to be of key interest."

Many countries in the Gulf are emerging economies, so any slowdown likely will not change the fact that they are still growing faster than most countries, lawyers said.

China is another example of this, attorneys said. The country's 2007 gross domestic product growth rate is estimated at nearly 12 percent, according to the CIA's World Factbook.

"That kind of economic growth, combined with strong commercial activity, creates the need for lawyers," said Dewey & LeBoeuf's Davis.

Even if that figure is cut in half, Davis pointed out that's still more growth than most economies will see. For example, the 2007 gross domestic product growth in the United States was only 2 percent, according to the Factbook.

Thomas W. Albrecht, a Chicago-based partner at Sidley Austin who is a member of the firm's management committee responsible for Asia, said China has seen a slowdown in recent weeks in practices that focus on financial institutions, investment banks and capital markets.

"That's the bad news," said Albrecht, co-head of the firm's global securitization and structured finance group. "The good news is that the region still has underlying strengths. Fundamentals are still very strong and it's my sense that part of the world will emerge from this probably stronger than the rest of the world, simply because of the underlying fundamentals."

While inbound investment may decline, Albrecht said he still expects to see a lot of outbound investment. Many companies in China have global ambitions and are now thinking about acquisitions they can make in the U.S., Europe and other parts of the world, he said.

Sidley Austin continues to view the Asia-Pacific region as one of great strategic importance, Albrecht said.

"If anything, we look for opportunities to use the temporary weakness to expand our footprint, if we can find the right lateral candidates to do that," he said.

Vesna Jaksic writes for The National Law Journal, a Daily Report affiliate. She can be reached at vesna.jaksic@incisivemedia.com.