Tuesday, November 11, 2008

The Rothschilds: The First Barons of Banking


by Rupert Wright

Nobleman: Baron David de Rothschild, the head of the Rothschild bank. The Rothschilds have helped the British government since financing Wellington's army to fight the French in 1815.

Among the captains of industry, spin doctors and financial advisers accompanying British prime minister Gordon Brown on his fund-raising visit to the Gulf this week, one name was surprisingly absent. This may have had something to do with the fact that the tour kicked off in Saudi Arabia. But by the time the group reached Qatar, Baron David de Rothschild was there, too, and he was also in Dubai and Abu Dhabi.

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Although his office denies that he was part of the official party, it is probably no coincidence that he happened to be in the same part of the world at the right time. That is how the Rothschilds have worked for centuries: quietly, without fuss, behind the scenes.

“We have had 250 years or so of family involvement in the finance business,” says Baron Rothschild. “We provide advice on both sides of the balance sheet, and we do it globally.”

The Rothschilds have been helping the British government – and many others – out of a financial hole ever since they financed Wellington’s army and thus victory against the French at Waterloo in 1815. According to a long-standing legend, the Rothschild family owed the first millions of their fortune to Nathan Rothschild’s successful speculation about the effect of the outcome of the battle on the price of British bonds. By the 19th century, they ran a financial institution with the power and influence of a combined Merrill Lynch, JP Morgan, Morgan Stanley and perhaps even Goldman Sachs and the Bank of China today.

In the 1820s, the Rothschilds supplied enough money to the Bank of England to avert a liquidity crisis. There is not one institution that can save the system in the same way today; not even the US Federal Reserve. However, even though the Rothschilds may have lost some of that power – just as other financial institutions on that list have been emasculated in the last few months – the Rothschild dynasty has lost none of its lustre or influence. So it was no surprise to meet Baron Rothschild at the Dubai International Financial Centre. Rothschild’s opened in Dubai in 2006 with ambitious plans to build an advisory business to complement its European operations. What took so long?

The answer, as many things connected with Rothschilds, has a lot to do with history. When Baron Rothschild began his career, he joined his father’s firm in Paris. In 1982 President Francois Mitterrand nationalised all the banks, leaving him without a bank. With just US$1 million (Dh3.67m) in capital, and five employees, he built up the business, before merging the French operations with the rest of the family’s business in the 1990s.

Gradually the firm has started expanding throughout the world, including the Gulf. “There is no debate that Rothschild is a Jewish family, but we are proud to be in this region. However, it takes time to develop a global footprint,” he says.

An urbane man in his mid-60s, he says there is no single reason why the Rothschilds have been able to keep their financial business together, but offers a couple of suggestions for their longevity. “For a family business to survive, every generation needs a leader,” he says. “Then somebody has to keep the peace. Building a global firm before globalisation meant a mindset of sharing risk and responsibility. If you look at the DNA of our family, that is perhaps an element that runs through our history. Finally, don’t be complacent about giving the family jobs.”

He stresses that the Rothschild ascent has not been linear – at times, as he did in Paris, they have had to rebuild. While he was restarting their business in France, his cousin Sir Evelyn was building a British franchise. When Sir Evelyn retired, the decision was taken to merge the businesses. They are now strong in Europe, Asia especially China, India, as well as Brazil. They also get involved in bankruptcy restructurings in the US, a franchise that will no doubt see a lot more activity in the months ahead.

Does he expect governments to play a larger role in financial markets in future? “There is a huge difference in the Soviet-style mentality that occurred in Paris in 1982, and the extraordinary achievements that politicians, led by Gordon Brown and Nicolas Sarkozy, have made to save the global banking system from systemic collapse,” he says. “They moved to protect the world from billions of unemployment. In five to 10 years those banking stakes will be sold – and sold at a profit.”

Baron Rothschild shares most people’s view that there is a new world order. In his opinion, banks will deleverage and there will be a new form of global governance. “But you have to be careful of caricatures: we don’t want to go from ultra liberalism to protectionism.”

So how did the Rothschilds manage to emerge relatively unscathed from the financial meltdown? “You could say that we may have more insights than others, or you may look at the structure of our business,” he says. “As a family business, we want to limit risk. There is a natural pride in being a trusted adviser.”

It is that role as trusted adviser to both governments and companies that Rothschilds is hoping to build on in the region. “In today’s world we have a strong offering of debt and equity,” he says. “They are two arms of the same body looking for money.”

The firm has entrusted the growth of its financing advisory business in the Middle East to Paul Reynolds, a veteran of many complex corporate finance deals. “Our principal business franchise is large and mid-size companies,” says Mr Reynolds. “I have already been working in this region for two years and we offer a pretty unique proposition.

“We work in a purely advisory capacity. We don’t lend or underwrite, because that creates conflicts. We are sensitive to banking relationships. But we look to ensure financial flexibility for our clients.”

He was unwilling to discuss specific deals or clients, but says that he offers them “trusted, impartial financing advice any time day or night”. Baron Rothschilds tends to do more deals than their competitors, mainly because they are prepared to take on smaller mandates. “It’s not transactions were are interested in, it’s relationships. We are looking for good businesses and good people,” says Mr Reynolds. “Our ambition is for every company here to have a debt adviser.”

Baron Rothschild is reluctant to comment on his nephew Nat Rothschild’s public outburst against George Osborne, the British shadow Chancellor of the Exchequer. Nat Rothschild castigated Mr Osborne for revealing certain confidences gleaned during a holiday in the summer in Corfu.

In what the British press are calling “Yachtgate”, the tale involved Russia’s richest man, Oleg Deripaska, Lord Mandelson, a controversial British politician who has just returned to government, Mr Osborne and a Rothschild. Classic tabloid fodder, but one senses that Baron Rothschild frowns on such publicity. “If you are an adviser, that imposes a certain style and culture,” he says. “You should never forget that clients want to hear more about themselves than their bankers. It demands an element of being sober.”

Even when not at work, Baron Rothschild’s tastes are sober. He lives between Paris and London, is a keen family man – he has one son who is joining the business next September and three daughters – an enthusiastic golfer, and enjoys the “odd concert”. He is also involved in various charity activities, including funding research into brain disease and bone marrow disorders.

It is part of Rothschild lore that its founder sent his sons throughout Europe to set up their own interlinked offices. So where would Baron Rothschild send his children today?

“I would send one to Asia, one to Europe and one to the United States,” he said. “And if I had more children, I would send one to the UAE.”

Monday, November 3, 2008

U.A.E. "Economy" - (Part Deux)

You need to ask yourself a couple of questions? Pretty easy to answer actually…why would you pay these inflated prices when you can buy a place in Toronto, NYC, Vancouver, LA or Miami for far less and for better value? Why will tourist come here to visit the malls to pay inflated prices for items when it's cheaper at home? Why will they come to swim in the polluted beaches?

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This market is crashing and will crash harder than that of the US and UK, and much more quickly. The market in the UAE (Dubai in particular) does not have the strength to withstand this downfall. First off, it relies heavily on foreign buyers to keep it afloat. Coupled with the fact that the US Dollar has gained strength by 25% and the Dirham remaining constant (in the last 3 months), this means that property is 25% more expensive to a foreigner. Take into account that the banks are also reducing their loan to values down to 60-65% making it more difficult for the same foreigner to purchase property. Finally, that same foreigner is getting slammed buy his/her own economy to make matters worse. I would give it a year more in the UAE (specifically Dubai) and then we shall see when things hit the fan for real. Unlike the US or UK, the fundamentals are that there is no real industry here except construction and all but 15% of the population here are "expatriates", so this is not like any of the markets elsewhere. Tourism is not going to boom when you have the tourists going in recession and the AED value soaring. Also if you think about it, the source of income for investors in Dubai comes from rent. Now with new laws on visa renewals, RERA, land department rules and the fact that they are looking to stop villa-sharing (soon to be apartment-sharing) how do you expect people to afford the rents? In turn, how do you expect owners to pay off mortgages? This will eventually mean banks and financiers who have given the credit to buy property are going to find thousands of people defaulting on the loans (look at the current subprime crisis in the US). In addition, this default will prevent payment to the developer which begs the question, how will your property get built in order for you to rent/sell it? Developments here are funded either by the payments made by the buyers or by construction finance loans, both of which are in bad shape. All this coupled with the fact that wealthy people have lost millions from deleveraging their debt positions, homes are not as much in demand means that we are on the verge of not just a real estate crash, but a total economic collapse in Dubai.

It’s funny how bitter people are these days, after they allowed greed, deception, hype and short-term mentality enriched a few while spoiling it for the many and selling Dubai's long term future. And yes, I know, it is worse in the US and UK, so far. But that is because the US and UK are on the leading edge. It will get worse in the Gulf, especially Dubai, much worse. It could very well be the mother of all melt downs. Why? First, the US and UK do not have to import speculators to buy their over-hyped properties. Second, just look at the numbers. According to Kuwaiti newspaper Al Qabas, the size of projects under construction or under planning in the Gulf is $2.5 trillion (not including completed property), compared to $400 billion in oil revenues (probably at high oil prices) - the rest is made up in borrowed money. If you add up these projects under construction along with the ones that have been completed (which are already over-priced and held mainly by speculators), I can see the size of assets subject to distress to easily exceed US$1 trillion. What is the potential size of the meltdown? History offers some insights: real estate in Singapore declined by 80% in just 18 months in the 90's, and property prices in the US have already declined 25% on average and are expected to drop another 10-15%. Just to put things in perspective, this subprime mortgage mess in the US is estimated at US$1-1.4 trillion. Get the picture?

Dubai is no longer competitive. It's simple economics. If you have tripled your money then you look like a speculator to me, so if you are now prepared to sit on your property, if it gets completed that is, and rent it out to those who can afford it, if you can find any, then I wish you luck. Otherwise, I predict that some of your off plan properties will remain off plan, you will not be able to sell any of your existing properties for a profit any time soon and your chances of earning rent returns that are anywhere near the ROI that you would expect based on the price you paid for the property are nil.

The public sucks

You may have noticed that there's one thing I don't complain about: Politicians. Everybody complains about politicians. Everybody says, "They suck". But where do people think these politicians come from? They don't fall out of the sky. They don't pass through a membrane from another reality. No, they come from American parents, American families, American homes, American schools, American churches, American businesses, American universities and they're elected by American voters. This is the best we can do, folks. This is what we have to offer. It's what our system produces: Garbage in, garbage out.

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If you have selfish ignorant citizens, you are going to get selfish ignorant leaders. So maybe, maybe it’s not the politicians who suck, maybe it’s something else that sucks around here…like…the public. Yeah, the public sucks. There’s a nice campaign slogan for somebody, “the public sucks, fuck hope” because if it’s really the fault of all these politicians, then where are all the good people with conscience? Where are all the bright and intelligent Americans ready to step in; ready to save the nation, lead the way? We don’t have people like that in this country. Everybody’s at the mall, scratching their ass, picking their nose and taking their credit cards out of their fanny wallet to buy a pair of sneakers with lights in them.
But....I have solved this political dilemma in a very direct way: I don't vote. On Election Day, I stay home and I don’t vote, Fuck ‘em!! Two reasons I don’t vote, first of all it’s meaningless. This country was bought, sold and paid for a long time ago. The shit that gets shuffled around every four years doesn’t mean a fucking thing. Secondly, I firmly believe that if you vote, you have no right to complain. Now, some people like to twist that around. They say, "If you don't vote, you have no right to complain", but where's the logic in that? If you vote, and you elect dishonest, incompetent politicians, and they get into office and screw everything up, you are responsible for what they have done. You voted them in. You caused the problem. You have no right to complain.

I, on the other hand, who did not vote -- who did not even leave the house on Election Day -- am in no way responsible for what these politicians have done and have every right to complain as loud as I want about the mess that you created that I had nothing to do with."
So I know that a little down this year you’re going to have another one of those really swell presidential elections that you like so much, so you enjoy yourself, I know it’ll be a lot of fun. I’m sure as soon as your elections are over your country will approve immediately. As for me I’ll be home on that day, doing essentially the same thing as you…the only difference is when I get finished masturbating I’m going to have a little to show for it folks.

R.I.P. George Carlin