Culture, expat tribes and UAE investment banking

To paraphrase Winston Churchill, never in the annals of mankind have so few bungled so much ($100 billion and counting!) other people's money into banking black holes, owing so much to so many. Bankers, supposedly conservative fiduciaries who are protected from failure by deposit insurance, have gambled billions with all the herd instinct and zeal of croupiers in Las Vegas and Monaco.

I guess we have to learn the hard way why Warren Buffett called derivatives "weapons of financial mass destruction". Culture, tribes and hubris played a seminal role in the structured finance flameout. Bonuses paid to rocket scientists to originate CDO toxic waste created a moral hazard heads I win, tails you lose conflict with clients. Citigroup lost $130 billion in market cap because its lawyer CEO Chuck Prince was clueless about the landmines that existed on and off his balance sheet. As late as last summer, Prince claimed the "LBO party continues and we continue dancing". Merrill Lynch, whose brokers want to manage our money, lost more money than JP Morgan, Credit Suisse, Lehman Brothers and Barclays Capital combined trading on its own account. Goldman ran two parallel books. Its structured finance originators sold CDO/ mortgage derivatives by the billions to clients while its elite traders shorted subprime excreta in an epic trade that netted $4 billion. Yet could widely different market outcomes be explained by culture, ego and the warring tribes of Wall Street? Sure. Is there a lesson for us in the UAE? Absolutely.

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As the head proprietary trader managing risk in global asset classes, I know culture is everything in the networked, hyper- volatile financial markets of our times. Trading desks are a Darwinian jungle and only the most brilliant, committed, driven executives can tiptoe across the minefields that periodically blow up in the capital markets. Open communications, a globalist ethos and an almost mystical feeling for risk is mission critical.

The team I forged in the grim post 9/11 market in 2001 is still with me at Bin Zayed Group, we run arguably among the largest, most complex the global equities and FX trading books in the Gulf. I am impotent without my team. Team moves export the culture, technical capabilities and intense loyalties of a proven group when one executive is responsible for hundreds of millions in risk capital in a business where money (and panic) moves at the speed of light in the digital netherworld of the world financial markets. D' Artagnan the French musketeer put it, all for one and one for all is the only credo I know to manage a proprietary trading desk that lives and breathes the global markets, as we do from sunrise in Singapore to sunset in Manhattan. Of course, successful trading teams are never built overnight. The bureaucratic, hierarchic, accountant run, petty command and control, politician/ mediocrity dominated retail banks, securities firms and private offices that are all too common in the UAE can never achieve success in global trading. This much, at least, is certain.

I routinely meet private bankers from prestigious global banking names who are so clueless about capital markets that even our trainees crack up at their bland platitudes. Of course, this is only natural since the dominant paradigm in Gulf investment banking is salesmanship, not risk management, not the probabilistic assessment of complex real time market outcomes. Leonardo da Vinci was so right when he said that while talent worships genius, mediocrity knows nothing higher than itself.

There is a talent and governance deficit in Gulf investment banking that is rooted in the cultural DNA of regional societies. The "follow the leader/ Daddy knows best" syndrome can prove fatal in banking. I find it no coincidence that imperious, imperial CEO's were responsible for some of the biggest disasters in GCC finance, behind the failures of BCCI, Niscorp, NCB, Bahrain Middle East Bank, Oman's Al Ahlia etc. Expat tribalism is also at its most vicious in Gulf banking. Any buy side cognoscenti in town can name the UAE's Lebanese bank, Egyptian bank, Pakistani bank or Indian bank, where executives from a single nationality dominate and shamelessly promote/ recruit friends and cronies with the same passport. This business model, with its overtures of Sicilian Omerta and tribal clannishness, is a recipe of eventual disaster. Executives who cannot navigate the cosmopolitan milieu that is Dubai, who do not get the thrill from foreign cultures and dozens of nationalities, are bound to fail in a market like the UAE. Ethnic cleansing in the banking and securities milieu is surreal. I know of a UAE securities firm where a Tamil accountant recruits only fellow Tamil or South Indians, a recipe for monumental disaster. Tribal politics is the antithses of excellence and good governance. Believe me, the Tamil Tiger land mines will eventually explode.

Henry Blodget and Frank Quattrone would have minted money like Midas or Croesus in UAE investment banking. Take the case of the DP World IPO. I was shocked that banking analysts never questioned the excessive valuation of the company even though the stock market drove down its shares to 1.05 from the 1.30 offer price. In fact, some analysts (whose banks had pocketed huge underwriting fees at the IPO. What a jolly coincidence!) even upgraded the bank shares to 1.45 and above while the shares hit new IPO lows. How can any sane investor believe these sellside analysts and bankers ever again? It amused me that some DIFC international banks also offered us (the witless client!) "structured products" with leverage/sukuk conversions where clients were saddled with 1.45 and 1.50 IPO price. Did any heads roll? Did any CEO acknowledged that self serving analysts did investors wrong? Is there a regulatory issue? Readers on my column know that I modeled the DP World IPO and came up with a buy range of 1.00 - 1.05 and sell range of 1.25 - 1.30. This column alone saved me and my friends tens of millions of dollars in unnecessary losses as we did not bid and DP World traded as low as 1.05 after the IPO. Are there ironclad mechanisms to ensure that investor interests are protected from such self serving investment banks? Sadly, as someone who deals with dozens of advisers, brokers and bank salesmen everywhere form Moscow to Wall Street to Muscat, I must conclude that the culture, tribes and egos in UAE investment banking make it impossible for me to trust the sell side any longer.