Saturday, October 11, 2008

A Basic Explanation of the Global Credit Crunch

At the outset, let me point out that I am not a financial expert, but one who has an active hobby in understanding finance and economics. My MBA degree also lends me certain credibility in this sphere. I will attempt to give a basic explanation of what happened during the past week in the financial crises that has wiped out people’s savings and fueled panic selling making markets lose 30% of their capitalization amounting to billions and billions of dollars.

The main reason (and there are many other reasons that have contributed to it) behind was a strategic planning mistake by the US banks. Instead of assessing the credit worthiness of the applicants and their ability to make the monthly payments when applying for loans, especially home purchases, they assessed the amount of credit based upon the current market valuation of the actual homes. Well, once the economy was healthy and booming with the prices of homes increasing on a regular basis, this was fine. However, it transferred the risk to the banks and this was the strategic mistake once the economy slowed down.

When they attempted to get rid of these home assets (once they reposed them), they could not at the price they had valued them in their balance sheets. Thus, a fire-sale ensued which led to huge write-offs.

The other strategic mistake is that they collateralized these mortgages to be able to take out more credit from other banks and become more aggressive. Thus, the domino effect happened and with one bank going down, the rest had to follow. That is why the bank bail-out was so important and the government having to guarantee people’s deposits. Otherwise, the ramifications would have been unthinkable.

However, I do not understand how this got translated towards the Arab world whereas the stock markets have shed about 20-30% of their market value over the past week. After all, accessing credit in the Middle East is a lot harder and restrictive than the Western world. In addition, there is only a small portion of mortgages as a percentage of banks’ portfolios relative to the Western world. Moreover, the high price of oil (which is our main produced component) shows no sign of easing or disappearing. In other words, our fundamentals are still strong. So, who can explain it to me?

One person who is a director for a reputed financial institution told me that if the market prices of real estate go down (and not maintain their prices within Dubai specifically and the Middle East in general), then we will see the effects over here. However, he also assured me that the sovereign wealth funds would be more than able to compensate by shifting their money from the Western world to the local country. With the stock markets collapsing as they are, let us all hope that we do not see this doomday scenario.

Friday, October 3, 2008

Mosiac of Airports in the UAE

One week ago, at daybreak, I arrived to Amman from Al Ain International Airport. Yes, I am as surprised as you are since about 12 hours prior to that, I was not aware that Al Ain had an international airport. Well, it is interesting how I ended up at this airport which I will relay to yourselves just now.

Doing a bit of pre-planning, I anticipated that there was going to be a rush for airline tickets during the Eid holidays and thus, I searched for a booking over 2 months ago while I was in Jordan for my summer holidays. Emirates airlines’ flight were already closed and Air Arabia’s prices were not that enticing. So, I ended up booking a Royal Jordanian flight via the internet. It was convenient as it would be departing at 3pm on Thursday so that I can end up breaking the fast in Amman with my parents and siblings and gain one extra day of holidays. In addition, I had traveled with Royal Jordanian airlines during the summer and their service was improved from the 90s when I used to travel during my college days.

Anyway, with the web-based electronic ticket booked and paid for, I did not pay much attention to it until it was too late. Apparently, Royal Jordanian had done a rescheduling of their flight from Dubai and changed it to an 1pm departure timing. Since I did not have a phone number listed, there was no one to call me about the change. My parents were able to find out that there was a Royal Jordanian flight with one seat available from Al Ain Airport. I quickly reserved on it and arranged for a ride to there at midnight.

During my ten years living and working in Dubai, I have had the opportunity to travel from 5 international airports within the UAE. They are Dubai, Abu Dhabi, Sharjah, Ras Al Khaimah (which is a story in itself for another post), and Al Ain airports. The busiest and most advanced is Dubai whereas it has become one of the busiest airports in the world with thriving duty free shops and facilities. For example, there is a laundry branch there whereas you can pick up/deliver your laundry for frequent travelers who reside in the city. During the holiday season (especially at Christmas and New Years), the airport becomes extremely busy and overcrowded with many travelers stretched across the vast passenger terminal. Abu Dhabi’s airport is just as advanced especially with the emergence of Etihad Airlines, but it smaller and not as busy. It bodes well for its future with expansion plans in place to cope with the increasing traffic, but still has not reached Dubai’s status.

Sharjah’s airport is simple (its design is similar to Al Ain’s), but has started to become livelier with Air Arabia operating from there. However, it is representative of the status of Sharjah meaning that Sharjah residents tend to be people in lower-paying jobs who seek affordability. Thus, Air Arabia is a budget airline and the bulk of the passengers are budget travelers with the airport’s facilities catering to that category of people. However, this was a smart move as it certainly occupies a niche being extremely close to Dubai’s airport (only half an hour drive away).

Ras Al Khaimah is by far the smallest airport (although Al Ain might be tied with it). In 2001, it only handled 28,000 passengers. There are only 3 passport counters with Al Ain having four.All of these airports reflect the status and character of the cities they serve. Generally, I believe this is true of all airports in the world. To get an impression of the city, one needs only see the airport. Ironically, that is usually a person’s first interaction with the city that they are visiting.

Thursday, October 2, 2008

Seperation of Identity and Self

First I must apologize for not posting earlier since I have been on vacation spending the Eid Holidays with my parents in Jordan. On this occasion, I would like to extend Eid greetings to all hoping that the Almighty grants everyone the strength and health to enjoy many more Ramadans and subsequent Eids with their loved ones and family. For my family it was great as all my siblings and I were gathered under our parent’s roof for two consecutive days. This has not happened for an extremely long time.

The subject of this post is derived from an earlier conversation with my brother. For background, I had visited my brother, who lives and works in the Cleveland, Ohio within the United States. As this was my first visit to him ever since he had gotten married, my brother was excited and proud to show me the city he works in. Having not been to the United States for over 6 years (my last visit was the summer of 2002), and being indulged/engaged in the modernity and sophistication of Dubai, I was critical. Please allow me to elaborate.
In the 70s and 80s, the Middle East region was 3rd world. Its infrastructure was retarded and had not evolved for a long time. Thus, the standard of excellence was the Western world (mainly the United States). The Arabs viewed the Western world with admiration as its standards of living and the amenities it offered far exceeding those of the Arab world. However, the equation has changed where the Arab world, and especially the Gulf countries, utilized their petro-dollars to develop their cities’ infrastructure and facilities. In addition, a new educated generation emerged who helped develop their countries even further. With urban planners having healthy financial budgets and an almost blank slate to work with, the foundations of development in these cities utilized the most advanced developments and technology to really built up top-notch facilities and buildings. Thus, Arab cities became modern and highly advanced cities. With these modern cities came modern facilities and services. Thus, we Arabs have become lucky to enjoy a high standard of living in our cities and have become used to it, and we caught up to the United States and exceeded it in some aspects. At least this happened in Dubai and was the basis of my critical appraisal of Cleveland.

However, my brother took my critical viewpoint of Cleveland as if he was responsible and that was the source of his irritation. I did not understand that. Now, I get to the subject of this post. It seems that it is part of human nature to identify with the city that you are currently residing in. It becomes a part of your identity and who you are. A person can carry many identifications; his own personality, his religion, his citizenship, his family, and his company. Sometimes, that identification becomes so blurred whereas a person criticizes something that one identifies with and that second person feels as if the criticism is directed towards him. Thus, the person becomes defensive.

I have two thoughts on that and I do not know which one is more appropriate. On the one hand, everyone has a natural tendency to have a sense of belonging. After all, human beings are social animals and need a sense of belonging to have a sense of purpose in their lives. They might try to alleviate the perceived shortcomings of their society via directly or indirectly discussing it and trying to change it for the better. They also proudly attach themselves to the success of their community/society although they might not have contributed any part in it. For example, a city baseball team wins the World Series and you are smiling and proud of it although you do not follow baseball at all. It is an interesting phenomenon.

However, the other side of the coin is that people must learn to detach themselves emotionally from things they identify with. For instance, my brother is not the mayor of Cleveland nor is he working as a city official. Thus, if anyone critiques an aspect of the city, my brother can agree with it or disagree. However in the grand scheme of things, it is about acceptance of others’ opinions without necessarily agreeing with them on the subject.

To be able to separate one emotionally from issues and not take them personally is one way for the whole world to get along. Although it is extremely difficult, it is an ideal that we should all strive to do. It would make the world a happier, more splendid place to live in. Do you not agree?