Yes, the headline here is not that what al-Fayed did yesterday was crazy- in fact it may be the sanest thing he’s ever done- but that his reported $1.32 billion cut now makes him a certified billionaire. And given his colorful track record, rife with (alleged) bribery,  vicious feuds and bizarre conspiracy theories he has a strong case for now being the world’s craziest.

And that’s a dense field. Hitherto May 10’s announcement, the distinction probably belonged to self-proclaimed “#1 King of All Fun” generic-drug kingpin Stewart Rahr, though even he had stiff competition from an increasingly-senile Sumner Redstone and the irrepressible Mark Cuban.

Why does Al Fayed trump them all? Many reasons, but these three loom largest:

1. His Faux-Paranoia

Most billionaires are a little cagey- and for very good reason. As any poor soul who’s had the misfortune of winning the lottery can tell you, public wealth is a big burden: an infringement on you and your family’s security, privacy and a source of unmanageable junk mail. But Al Fayed’s raging paranoia is legendary and also inauthentic. As recounted in Maureen Orth’s engrossing 1995 expose in Vanity Fair:

Fayed has a personal security staff of 38-two teams that alternate, one week on, one week off, at his residence at 60 Park Lane, at his country house in Oxted, where his family lives, and at his castle in Scotland.  His “close-protection team” consists of 8 or 10.  One assumes that the millions of dollars this security costs and the level of his apparent paranoia, which extends to wearing only clip-on ties so that he cannot be strangled, must mean that Fayed’s life is under constant threat.  Not so, according to a half-dozen former guards I interviewed, who say that his security is mainly for show.

via Vanity Fair’s famous exposé of Mohamed ‘Al’ Fayed, by Maureen Orth.

2. His Genuine Paranoia

Not a charmingly-eccentric brand of neuroticism, mind you- but a rather repellant fear of anything “beneath” him. Again, as reported by Orth back in 1995:

Whenever Fayed suffers a spate of bad publicity, the press seems to be flooded with stories and pictures of him helping needy children.  In fiscal 1994, Fayed had House of Fraser donate £800.000 ($1.2 million) to charity.  Yet Fayed’s fear of germs is such, say ex-employees, that he can, barely stand to touch the children who get him so much positive press.  He does not allow his own children to attend the annual Harrods Christmas party, they say, for fear of contamination, and he keeps Wet-wipes in his pockets so that after shaking every little hand he can wipe his own.

3. He’s completely delusional

Evidence? It’s almost too plentiful to list here but it includes a) a conviction that the British government conspired to kill Princess Diana and his son Dodi Fayed in the 1997 car crash, b) the fact that in order to convince the government that he had the cash to buy Harrods back in 1984, he drafted a completely-fabricated press release claiming (among other things) that he hailed from an “old, established Egyptian family” of industrialists and was educated in British schools. And c) his defamation lawsuit against Vanity Fair for their critical profile was summarily dismissed.

I will grant Al Fayed this- he does win “Best Appearance by a Billionaire on Da Ali G Show.” No small feat, especially for a man who is paranoid, delusional and (one would think) completely lacking a sense of humor:

Well, maybe no. Not yet- but the two-day Presidential Summit on Entrepreneurship which ended yesterday at the White House is evidence of a promise fulfilled. Back last June in his much-ballyhooed speech in Cairo, Obama vowed to host a conference of prominent business people and leaders from predominantly-Muslim countries to network, discuss the region’s pressing economic problems and identify ways the US can help.

In terms of participation, the summit seemed a sure success, with attendees including Muslim rockstars of commerce like Grameen Bank-founder and microfinance-Evangelist Mohammad Yunus, Arif Naqvi, head of Arab private equity giant Abraaj Capital and Sudanese billionaire Mohammed Ibrahim, founder of mobile group, CelTel International. And as a diplomatic maneuver, it’s a smart strategy: after all, what topic could be more unifying and less-controversial than economic empowerment (aka turning a buck)? Especially when- as it is at this summit- the emphasis is on social as well as financial returns. Steering the Muslim-American dialogue to something other than terrorism, profiling, war and oil is not only a welcome change from the same old discourse, it’s an important chance to focus on the dual crisis of surging population growth and high unemployment endemic to the Middle East.

But is a feel-good confab with roundtables on vague subjects like “Promoting Entrepreneurship and Enabling Business” and “Culture of Entrepreneurship” really going to get us anything beyond a modicum of goodwill from a few economically-progressive Muslim leaders? Is it a legitimate sign of progress? Not by the history-books standard:

“In some ways Cairo is not going to be fulfilled until you get grander solutions to some of the big geopolitical problems,” said Juan Zarate, an analyst at the Center for Strategic and International Studies. “The president is going to be judged by his ability to move those big issues much more so than whether or not he hosts a conference at the White House,” he said.

Via: NewsDaily: Obama fulfills Cairo pledge with entrepreneur summit.

And is the White House really the best host of an event espousing the merit of entrepreneurialism? Particularly at a time when the administration has been so publicly battling the “unchecked greed” of  capitalism. As Tim Kane, a researcher at the Kauffman Foundation for Entrepreneurship noted:

To be fair and balanced, I’m not sure all of the White House folks get entrepreneurship and you get a sense some want to talk about social entrepreneurship instead. Believe me, the delegates from the Middle East noticed, and one would-be entrepereneur commented to me that, “We need help creating wealth before we start talking about giving it back.”

via Grading the Presidential summit on entrepreneurship – CSMonitor.com.

And how realistic is it, that these entrepreneurs will be able to launch or grow their businesses in a region that’s overwhelmingly under autocratic (real or virtual) rule? Andrew Albertson, director of the Project on Middle East Democracy, is not optimistic:

Washington does the region no favors by offering an entrepreneurship summit, one of its new initiatives, while avoiding the root problems hindering business such as political decay and corruption.

via Losing Cairo? | Foreign Policy.

Yet despite the fluff, spin and potential futility surrounding the whole gathering, Obama should still be lauded for holding it, for these 3 reasons:

1. New businesses- and the jobs they create- are critical to the Middle East’s near-term future.

According to a recent report by the Brookings Institution, the region’s youth unemployment rate is nearly twice that of the world at large. This, despite the fact that its youth population also happens to be one of the world’s best-educated demographics. Millions of educated but jobless youths in a region where the education and health care system, infrastructure and natural resources are already strapped is a recipe for discontent. If these quasi- or outright- autocratic rulers care to keep their populace pleased, they’d be best to empower entrepreneurs.

2. Speaking of discontent…

While there is no hard-and-fast evidence that poverty breeds terrorists (or that there is any petri dish for terrorists, anywhere), there is loads of anecdotal evidence that there is a link between a country’s youth unemployment and its homegrown terrorists. Frustrated, disenfranchised young people with schooling but little opportunity to use it to better their lives is a common profile of terrorist offenders and exactly the population nonprofits like the Education for Employment Foundation try to reach. EFE’s mission is to provide supplemental vocational and technical education to young people in predominantly-Muslim countries- future entrepreneurs or their potential employees.

3. The Summit focuses on what unites us

Again with the money thing. But seriously, encouraging and enabling people all over the world to make a living, support their families and innovate is, in my opinion, a more concrete and sensible approach to pushing democracy than any “Winning hearts/mind” campaign strategy of the Bush administration. A world of billionaires would probably still not be entirely peaceful but a world where people have the agency to improve their lives might be one in which folks have one less thing to fight over.

I say “comforting” because every time I try to suss out the salient details of any issue having to do with credit-default swaps, collateralized loans or subprime derivatives, I get so confused and lost I wonder if I am perpetrating my own personal fraud- moron hack journalist. So the news frenzy set ablaze last Friday by the SEC’s civil fraud case against Goldman Sachs has granted us a new opportunity to gawk at the stunning hubris of some Wall Street traders and remember that common sense has not yet been rendered irrelevant by ad networks, quant models, the iPod or Wikipedia.

To get a handle on just how much the involved parties didn’t know, a little background is helpful:

1. What’s the SEC’s suit all about?

In short, the SEC is accusing Goldman Sachs, the lionized Harvard of investment banks, of lying to investors. In finance- as in relationships- not telling the whole truth is tantamount to lying. When Goldman hawked to investors a shiny new product- a synthetic collateralized debt obligation tied to the performance of subprime residential mortgage-backed securities (sounds sexy- surely someone smart put it together) back in early 2007, they didn’t bother to tell investors that the fund’s holdings were chosen with the help of an independent hedge fund (billionaire John Paulson’s Paulson & Co.) who wanted the fund to fail. While Goldman was marketing the fund on the premise that the housing market was sound, bear Paulson was betting housing would flop and, the SEC alleges, made the portfolio pics accordingly. Spoiler alert: he was right. Paulson made $3.5 billion shorting subprime in 2007. [For more background, check out the SEC's formal complaint- it's surprisingly readable].

2. So what was in this fund, exactly?

A big pile of dodgy debt. No kidding. Investment banks nationwide binged on subprime mortgage securities back in the heyday of the housing bubble. High-risk mortgages- the kind banks were normally loathe to give out because of the high likelihood of default- were suddenly hot on Wall Street. Investors developed complex statistical models to determine borrower behavior (defaults, prepayments, etc.) driving bond value. Fancy algorithms- portfolio analytics- developed by the super-genius “quant” traders at banks showed that distributing risk over a broad “basket” of loans could turn subprime loans into safe ones. So by bundling some very risky loans in along with a heap of not-so risky loans, you had an AAA-rated product. A rock-solid way to mint money. The same way that mixing some arsenic into a pie crust recipe will make for an overall perfectly-healthy treat. Make sense? No? You’re right- it doesn’t make sense. These two Brits articulate the nonsensical-ness of it all rather nicely:

Because Paulson had a gloomy view of the future of mortgage securities, he participated in the market largely through Credit Default Swaps, insurance contracts which paid out a premium if a loan defaulted. Paulson essentially, had a lot to gain if housing went bust and (the SEC alleges) his firm influenced the Goldman fund’s portfolio picks to emphasize the dodgiest of the debt.

3. Why is this Goldman’s fault? Seems like Paulson is the bad guy.

Paulson so far hasn’t been implicated in any shenanigans though there’s a case that he should be. Goldman made the critical mistake not to be disclose to prospective investors the involvement of Paulson & Co. and their bearish view. In their response, they say ACA an “independent and experienced portfolio selection agent” and the largest investor in the fund, selected the portfolio. But how independent were they if they were the largest investor? And selected from what- a list given to them by Paulson?

The moral takeaway- and the thing that is really going to tarnish Goldman (and the stock market) in the long run is how arrogant and clueless those involved come across. “Fabulous Fab,” the named orchestrator behind the particular fund, is a straight-to-screen character. His now-famous 2007 email says it all:

“More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]… standing in the middle of these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!! (sic)” he wrote in an email to a friend in January 2007, according to the SEC.

via ‘Fabulous Fab’ emails revive broker conflicts – MarketWatch.

Surely politics has more than its share of ignorance and arrogance and the timing of the SEC probe could not be more politically-perfect for the Dems and Obama’s financial-reform agenda. But fraud is fraud and meddling in things you don’t fully understand is always a bad idea, be it home renovation or statistical derivatives models.

The Government of Qatar recently informed the U.S. Embassy that as of May 1, 2010 U.S. citizens will no longer be able to apply for tourist visas on arrival in Qatar.

via US State Department Info on Qatar.

The announcement goes on to detail how the Qatar-bound can go about figuring out how to obtain a visa- by contacting the Qatari Embassy, the Qatari Ministry of the Interior and a number of other red-tape-ridden governmental agencies. This is a drastic change from the country’s previous laissez-faire policy of doling out Visas upon arrival in Doha. And it’s not just Americans getting a chillier reception- residents of 33 other countries (including France and the UK) are reportedly also affected by the new restrictions.

The sudden change has caused a firestorm in the Twitter-sphere with confused, annoyed, inconvenienced expats and business travelers feeling a lot less welcome in a country that had until now been aggressively touting itself as a hot destination for business, culture and the arts. It has also miffed hotel execs, concerned about the law’s potential impact on a nascent tourism industry.

Given its global-domination ambitions, why would Qatar do this? Government officials are (unsurprisingly) mum but rowdy commenters on the Gulf News and wire service Zawya were full of theories:

#1 Security:

January’s assassination of a top Hamas official in Dubai (by assassins holding forged European passports) has rattled authorities across the Gulf- vigilante justice perhaps not being as commonplace in the GCC as elsewhere in the Middle East. Says one Edy Abbott:

This is one way to prevent the Mossad from using Qatar as their play ground. It seems European, Australian and Canadian passports can be forged quite easily without being punished and Qatar doesn’t want to see another 30 Mossad agents roaming its streets on a man hunt.

via Qatar To Tighten Visit Visa Regulations For UK, US Nationals.

#2 Bureaucratic Quid Pro Quo:

Qataris face arduous Visa processes prior to arrival in many major Western and Asian countries. Why shouldn’t the playing field be leveled? Per Marjorie:

This is part of Qatar’s new “reciprocity” kick. A few months ago they switched to a reciprocity system for driver’s licenses: American licenses can’t be automatically converted to Qatari ones, because the US doesn’t automatically convert Qatari licenses.

Via Global Voices Online » Qatar: Expats outraged by plans to scrap visa-on-arrival policy.

#3: Revenge for Long-Simmering Indignities:

Specifically, indignities having to do with racial profiling in the post-9/11 world. Says Wael Hallaj:

By any means the Qatari move to impose a visa on Europeans and Americans is a right one, the justification is clear and reasonable…Qatari citizen are humiliated at the European checkpoints.

Via New visa law set to isolate Qatar « ArabianMoney.

While it’s highly unlikely that Qatar immigration officials are acting from a purely punitive perspective, the Arab world’s sensitivity to visa and travel issues is very real and (particularly after last week’s diplomatic dust-up) very raw. As one Gulf diplomat put it to The Washington Post last week, last week’s incident “never would have happened” had the ambassador been Swedish.

But in the long run is this a good decision for Qatar’s economy? Seeing as the economic development plan they’d been cautiously unrolling over the past ten years relied heavily on courting international universities (filled with international students), journalists from all over and a veritable United Nations of energy companies, the answer seems to be no. As one Gulf blogger put it:

Whoever made this decision has perhaps not thought through the full consequences. It makes a mockery of the hundreds of millions spent promoting Qatar as a country ‘open for business’ and is a particular disincentive for multinationals to locate operations in the country.

via New visa law set to isolate Qatar « ArabianMoney.

And yet- as last week’s episode made clear- every country has the right to protect its borders. Maybe we shouldn’t be so quick to judge.

The “bad kid” in question here is of course Mohammad al-Madadi, the Qatari diplomat who made the boneheaded decision to take a smoke in an airplane lav yesterday and then crack a terrorist joke when caught. Not so funny, least of all to the flight’s 162 other passengers who experienced the distinct terror of having two F-16 fighters intercept the Denver-bound flight. All told, the incident was a scary shock, just three months after the attempted Christmas day bombing, and cost taxpayers an easy $1 mil.

Censure, you ask? Not for diplomats. While an ordinary citizen would face steep consequences for such cavalier comments (not to mention the federal crime of in-flight smoking) al-Madadi is protected under the archaic provision known as diplomatic immunity:

Under international protocol — the 1961 Vienna Conventions on Diplomatic Relations — diplomats in foreign countries enjoy broad immunity from prosecution. That immunity can only be waived by a diplomat’s home government, something that is rarely requested and even more rarely granted.

via The Associated Press: Officials: Plane scare diplomat to be sent home

This rule is familiar to most diplomats as the “park anytime, anywhere for however long,” pass and is typically more of a nuisance than a threat. One would think however, that in the case of truly-egregious flaunting of US law, officials would take action. Not necessarily.

But even without charges being pressed against him and without such a waiver, the U.S. could have moved to declare Al-Madidi “persona non grata” and expel him from the country. However, officials said they would not pursue this, given the close nature of U.S.-Qatari ties and the importance the country plays in the Middle East.

Had al-Madadi been so unfortunate as to hail from Yemen, Kyrgyzstan or maybe Mauritius he very likely would have been on the first plane home. But Qatar is different. Not only does the tiny Persian Gulf country lay claim to the world’s largest reserve of Liquified Natural Gas (or LNG, a form of energy considered environmentally-superior to oil fuel or coal), they boast a $65 billion Sovereign Wealth Fund and a burgeoning stock market that’s skirted the region’s financial slump thanks to its leaders’ slow-and-steady approach to economic development. And did I mention they are peaceful, pretty darn liberal (for the Gulf) and have embraced freedom of the speech more genuinely than arguably any other country in the region?

So yes, as a rare, stable ally in a contentious part of the world, Qatar is absolutely getting special treatment. It’s not fair but it is strategic and probably wise. Al-Madadi’s biggest crime here is arrogance. And although it might win favor with a certain hardcore subset of self-dubbed “Patriots” to send him packing, insulting Qatar is not worth the political price. If Qatar wants to compensate us for the time and trouble of a military jet entourage, we should take it. Gas, cash and priceless works of art accepted.

Despite his own reclusiveness, Sheikh Ahmed presided over some very public investments by ADIA in recent years, including stakes in Gatwick Airport, the Chrysler Building and an ill-timed bet on Citigroup (now the subject of a lawsuit). He also reportedly was a driving force behind the fund’s move toward quasi-transparency: after numerous requests from suspicious politicians and investors, ADIA published its first annual review earlier this month.

The loss of such a low-key, progressive government exec could not come at a more sensitive time for Abu Dhabi.  The city-state and its mysterious ruling family has been under an intense spotlight the past few months during its awkward, stilted showdown with debt-laden fellow emirate, Dubai. Though Abu Dhabi did fork over $10 billion and Dubai seems to have worked out a stop-gap deal with creditors, no outside party- that is to say, no one who is not an Al Maktoum or an Al Nahayan- knows what exactly went down. Are relations tense? Fine? Warm and fuzzy? The answer matters to many- Dubai’s creditors (including major banks), small-time investors, other GCC residents- pretty much anyone who would stand to lose if Dubai were to implode. So far, creditors have warmly welcomed Dubai’s proposed repayment plan based largely on their sense that it has Abu Dhabi’s (aka Uncle Money Bags) tacit approval. But no one knows for sure.

The crucial process of filling Sheikh Ahmed’s shoes at ADIA will be similarly murky- though no doubt dramatic for those rare few privy to the political machinations of the Al Nahayan clan’s competing factions:

As ADIA’s managing director, Sheik Ahmed, who was the son of Sheika Mouza, another wife of Sheikh Zayed, held one of the few pillars of the oil-soaked emirate’s economy not dominated by the powerful crown prince and his full brothers. Christopher M. Davidson, senior lecturer at Durham University and author of Abu Dhabi: Oil and Beyond, says that with Sheik Ahmed out of the picture, the crown prince and his brothers are likely to move on ADIA. “Then they will control virtually all of Abu Dhabi’s economy,” he says.

via Sheik Ahmed Body Found; New Power Struggle in Abu Dhabi? – TIME.

Davidson is referring primarily to Sheikh Mansour Bin Zayed Al Nahayan, another ambitious, powerful royal who hit the limelight twice in recent years- first, in September 2008 when he splashed out $300 million for hard-luck UK soccer team Manchester City and again one month later when he fronted Abu Dhabi’s controversial investment in Barclays. Mansour also heads up the emirate’s second-largest sovereign wealth fund, the International Petroleum Investments Co. or IPIC. A dual leadership role at both funds could give an inordinate amount of power to one individual- possibly creating a benign dictatorship- one that resembles Dubai’s imperfect political structure.

Relatively speaking, Sheikh Mansour is a high-flying Emirati. Comfortable in public and open to taking risks, he’s someone, Davidson notes, Dubai feels would look out for their best interests when it comes to loans down the road.

Davidson says “there’s no doubt” that he’s the one member of the al-Nahayan clan that Dubai would like to see take charge. But Sheik Mansour already controls IPIC. Will he be given the reins of both of the emirate’s massive kitties?

In all likelihood, Dubai is betting its bottom dollar the answer will be yes.

The lawsuit by former headmistress Nomvuyo Mzamane claimed Winfrey defamed her in remarks made in the wake of the 2007 sex-abuse scandal at the school. Mzamane said she had trouble finding a job after Winfrey stated she had “lost confidence” in her and was “cleaning house from top to bottom.”

via  Oprah Winfrey settles headmistress’ Pa. lawsuit – Yahoo! News.

After Mzamane sued back in October 2008, Oprah and her crack legal team were reportedly preparing to launch a defense grounded in part on freedom of speech. Per her lawyers, Oprah, understandably traumatized by the revelations of abuse at her namesake academy, was merely voicing her opinion. Her stunned, angry opinion.

And this is where the line between Oprah and “everyone else” is drawn. Oprah, she who has launched a dozen A-List careers, sent hundreds of books up the bestseller list and minted millions for scads of small-time manufacturers whose tchotchkes she anoints “favorites,”  has no ordinary opinion. Indeed, Oprah’s personal fortune is estimated to be a heady $2.4 billion, not because her media empire- movie/TV/radio production house Harpo, TV network OWN, her eponymous magazine- is raking in the advertising dollars. Hell no. [Though if she had figured out the secret of monetizing modern media, I'd be convinced she's the Second Coming]

While the $275 million in pre-tax income earned by her media assets is not chump change, it is her “it” factor, her invaluable EQ, her president-electing-influence that makes her not just rich but 400th-wealthiest-person-in-the-world-rich. While Oprah’s attorney’s stated her net worth as $1.2 billion, they were most likely only referring to the net market value of her hard assets. A broader but arguably more accurate valuation would also need to take into account her power as a tastemaker- which is likely what Forbes did earlier this year when it arrived at a $2.4 billion figure. By any metric, Oprah’s outsize influence is incomparable: a fact Mzamane’s lawyers were quick to seize on:

Mzamane’s lawyers, who noted Winfrey’s huge media reach, contended listeners would think the remarks were based on facts she had gleaned from the school’s internal investigation.

So if Oprah, who famously declared “free speech rocks” after winning the libel case involving the Texan ranchers, was victorious then- why not now? One could argue she’s richer, more popular than ever and soon to become a rarer commodity. But we’ll never know- at least not until the next time O expresses a negative thought aloud. As for Mzamane, O settled as anyone striving to Live Their Best Life ought:

“The two parties met woman to woman without their lawyers and are happy that they could resolve this dispute peacefully to their mutual satisfaction,” the statement said.

Image via Wikipedia

Fake islands are the way of the future. That, more or less, is the audacious belief underpinning the deal Dubai worked out yesterday with creditors to restructure $23.5 billion of frozen debt.

After four months of gloom and uncertainty, the deal is an enormous relief and prima facie, looks to be quite generous- surprising considering that just a few days ago bankers were preparing to take as much as a 40% haircut. The gist:

Dubai World will receive a $1.5bn cash injection from the government to cover working capital and interest payments, with the $8.9bn of government funding and claims turning into equity in the government-owned business, thereby subordinating the debt to that of other creditors.

Non-government creditors will receive 100 per cent of their claims – which the company said amounted to $14.2bn at the end of last year – through the issuance of two new tranches of debt with five and eight-year maturities.

via FT.com / Middle East – Dubai unveils debt restructuring.

The government’s message to the banks: you come first and you will be paid back, in full. Creditors of Nakheel, the other troubled Dubai real estate developer (apart from Dubai World) got an equally respectable deal: the government would inject $8 billion of cash and bondholders- even those holding notes due in 2010 and 2011- would be paid back on time.

Other bonuses: Abu Dhabi is apparently cool with this (of the total $9.5 billion of cash the government is ponying up, $5.7 billion is leftover from Abu Dhabi’s December bailout), Dubai says it won’t have to take on any more debt and there will be no fire sales (though divesting “non-core assets” like the QE2 is still part of their “strategy”). At the news, Dubai’s stock market surged 4.3%, Dubai’s other corporate bonds rallied and the cost of insuring the emirate’s debt against default dropped.

So Hooray! Everyone to the underwater martini bar at Atlantis The Palm, right? Not quite so fast. First, Dubai World and Nahkeel’s 90-odd creditors have to accept the terms (though the general consensus among insiders is that they’d be foolish not to). Second, there is still that lingering question of whether Dubai can make this whole model actually work.

In many ways, Dubai World and Nakheel symbolize what wasn’t working for Dubai. Both were real estate developers focused on building large, extravagant, expensive developments, many of which looked environmentally-unsustainable. When the real estate bubble burst last year, it was just that kind of high-end sprawl that was worst affected. Dubai’s magnanimous offer to bondholders is a firm vote of confidence in the quality of their own real estate assets. If the property market rebounds, the villas sell and Dubai regains its allure as a hot vacation destination, then the government will be able to make good on its promise to lenders and continue to borrow their way into a grander, glitzier tomorrow. If not….expect continued bargain rates at the Fairmont Dubai.

At the very least, Dubai looks to have its gumption intact. That’s a good thing, they will need it.

Dubai’s value proposition to the world was that it was tolerant and fun. Unlike Saudi Arabia, Qatar and even sister Emirates like Sharjah and Abu Dhabi, Dubai offered an unspoken promise to foreign revelers and investors alike that it would turn a blind eye to the kind of mild debauchery that went on in any large, cosmopolitan beach destination. Drinking, for example was permissible, though only in hotels- no major drawback, considering virtually every bar, restaurant, club and pool was located in or attached to a hotel. So long as everyone was making money, the good times rolled.

Suffice it to say, the good times are grounded. While creditors holding Dubai’s $26 billion of frozen debt wait anxiously this week to find out how much of a scalping they’re in for, local officials have launched a crackdown on immoral behavior. In December, an Indian couple employed by Emirates Airlines was sentenced to six months in jail for swapping suggestive text messages. Early last week two Britons were handed a month-long prison sentence for reportedly kissing in public. This week comes news of a ban on restaurants cooking with alcohol and heightened regulation of massage parlors.

Dubai of course has the right to enforce their laws but as the Wall Street Journal noted last week, moral martial law could deal a blow to the tourism machine that they can ill afford right now.

Tourism is crucial to Dubai and accounts for a fifth of the emirate’s economy. Close to 41 million passengers traveled through Dubai International Airport last year, making it one of world’s fastest growing. Emirates Airline, Dubai’s flagship carrier, indirectly contributes just over $10 billion to the sheikdom’s economy each year.

via UPDATE: Dubai Moral Crackdown Is Tourism Kiss Of Death – WSJ.com.

Why then, are they taking the risk? Two reasons: one political, one psychological.

*Abu Dhabi’s hold on the choke collar is getting tighter. The $26 billion question surrounding the aforementioned debt discussions is whether or not Abu “deep pockets” Dhabi will guarantee Dubai’s loans. The buzz from the rumor mill right now is that they will- which is precisely why many bankers feel a deal is imminent this week.

Oil-rich Abu Dhabi’s support for Dubai, once the subject of much concern among bankers, now looks more assured

via Markets Anxious for Dubai Debt Deal – WSJ.com.

For Dubai, the trade-off for that support is massive and amorphous. Probably not even Abu Dhabi knows exactly what role Dubai should play in the United Arab Emirates’ new world order but they do know that the role will be pointedly inferior to their own. This recent intolerance of naughty behavior is one clear result of conservative Abu Dhabi’s growing dominance in the region in general and over Dubai in particular.

*Because they can, dammit. Given the humiliating downward trajectory Dubai has been riding the past four months, I suppose you could forgive them for some flexing of autocratic muscle (they are after all, a dictatorship). Maybe not forgive- but understand. They have watched their real estate values plummet city-wide an average 50%, they’ve handed over naming rights of their marquee tower (still closed to visitors), they’ve unwittingly hosted one of the more-exciting international hit jobs in recent memory and contrary to fervent wishful thinking, they did not discover oil. But they can lay a smackdown on clueless, horny tourists. For a government that’s looked awfully impotent for quite some time, that’s not nothing.

Clearly Dubai Ruler Sheikh Mohammed bin Rashid Al Maktoum and his cabinet have some wreckage to pick through. So while government officials hold talks with creditors in London and try to stave off another strings-attached handout from Abu Dhabi, the Ruler has a new idea of how to raise cash. Let’s blow up the bubble:

Dubai government Monday introduced new laws that will allow locals to develop commercial and industrial land previously gifted to them by the sheikdom’s ruler.

The decree is designed to “revive the real estate and the commercial industry in the emirate,” according to a statement from the media office of Dubai’s ruler Sheik Mohammed bin Rashid Al Maktoum.

Under the new law, United Arab Emirates’ nationals will be given the right to own land gifted by the government and freely use the property without “previous constraints” provided they pay 50% of its assessed value for permission, the statement said.

via Dubai Reforms Property Laws Amid Real Estate Slump – WSJ.com.

Prior to 2002, the government technically owned all of Dubai. Local citizens (UAE nationals) were allowed to use and inhabit land on a “gifted-tenure” basis, meaning they could occupy it but with specific restrictions about what they could build or do with the property. Seeing as they got it for basically nothing, it seemed like an alright deal. After all, sacrificing freedom for handouts was pretty standard practice in the Gulf. But come 2002, foreigners and locals alike were able to buy 99-year leases- though foreigners’ purchases were restricted to certain areas, typically the big government-run developments. The result: a gold-rush for condo flippers the world over.

Now that the market’s collapsed and many of those flippers have failed or fled, the government’s trying to monetize some of that land it essentially gave away back before 2002:

Under the new law, United Arab Emirates’ nationals will be given the right to own land gifted by the government and freely use the property without “previous constraints” provided they pay 50% of its assessed value for permission, the statement said.

So that “free” plot of land you got last decade? Well, we’ll give you permission to actually use it if you pay up, so says the Ruler. It’s not the worst way to goose a stagnant economy- locals could get a bargain and the government gets easy, instant cash. Kind of like cash-for-clunkers or a three-figure stimulus check.  Three potential problems with this scheme:

1. How many recession-pounded locals are dying to dip their toes into commercial real estate, let alone get financing to do so? To put it mildly, Dubai’s commercial property market seems a touch saturated at the moment.
2. Who’s to say how much “50% of assessed value” actually is? Having valued dozens of Dubai properties for Forbes billionaire rankings, I can attest that this is a tricky and controversial exercise. Though a 50% market decline is the most commonly accepted stat, other analysts have pegged it as low as 20% and as high as 80%. Properties are worth whatever someone is willing to pay- which in many cases, is nothing.
3. At most, this will provide a short-lived revenue bump to the strapped emirate. If Dubai is serious about rebuilding their treasury supplies, here’s a crazy idea: taxes. It won’t be popular but maybe that whole no-corporate-or-personal-income-taxes idea should best be viewed as a great marketing ploy. One whose offer has just expired.

To put Dubai’s conundrum in comparison, let’s once again compare the poor state to Abu Dhabi. The very same day Dubai announced their odd offer/desperate request, Abu Dhabi’s Ruler issued this smug announcement:

President His Highness Sheikh Khalifa bin Zayed Al Nahyan, has ordered distribution of 800 residential plots to the UAE nationals in Abu Dhabi, Al Ain and Western Region to ensure social and family stability.

Sheikh Khalifa’s gesture reflects his keenness to provide good living conditions for each citizen as per the higher national goals within the framework of communal solidarity and social stability.

via Khalifa orders distribution of 800 plots to UAE nationals.

That’s right- HE Al Nahyan is giving away land for free, just because he can. NB: the offer is only extended to residents in those specific regions. Sorry Dubai. In this regard as well, you are on your own.