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There’s an old saying that people with too much money on their hands soon find themselves with the opposite problem, and Dubai has just handed the world a prime example.

Global financial markets were rocked late last week by the startling news that the Persian Gulf emirate’s sovereign wealth fund (SWF), Dubai World, is effectively insolvent and has arbitrarily declared a six-month moratorium on debt payments it’s unable to make.

Global currencies from Colombia to Singapore took a tumble, and stock markets worldwide had a panic attack, fretting that some of the world’s other 30 or so SWFs might soon also be in dire straits. Many SWFs have extensive debts outstanding with the world’s largest banks.

For all the worldwide efforts to bail out the global banking system, it has only returned to stability, not good health. Having endured the spectacular collapse of the U.S. housing market, the system is now girding for a string of defaults in commercial real estate. Additional failures among SWFs, unforeseen until last week, would not cause a second global credit freeze. But they would further delay a complete recovery of the banks and a sputtering world economy.

What’s the origin of this latest shock to world finance?

As global trade and commodity prices – particularly oil – spiralled upward earlier this decade, a Niagara of money poured into the coffers of export powerhouses like China, Korea and Singapore. And into the state treasuries of commodity producers including Saudi Arabia, Kuwait, Russia and Dubai.

Those states created so-called sovereign wealth funds to hold all that money. By mid-decade, the SWFs’ rapidly growing assets were expected to reach as much as $12 trillion (U.S.) by 2015, just shy of the size of the U.S. economy. With oil heading for a $147.50 per barrel peak, that estimate didn’t seem far-fetched.

The opportunity to tap these new and massive pools of cash was seized upon by capital-hungry real estate developers, private equity shops and hedge funds worldwide.

And in some quarters, the SWFs were seen as a threat to national security. That worry came to a head, ironically enough, in the ultimately failed attempt in 2006 by Dubai Ports World to acquire some of America’s biggest East Coast seaports. DP World is the principal arm of the now crippled Dubai World. The deal was thwarted by objections in the U.S. Senate.

"Should we be outsourcing our own security?" U.S. Democratic Senator Charles Schumer said of the spectre of state-controlled Arab investors in charge of inspecting cargo coming into New York and New Jersey ports.

Stephen Harper got into the act. While sanguine about the loss of Alcan, Dofasco, Inco and other iconic firms to foreign private-sector buyers, Harper vowed to block takeovers by government-controlled SWFs on national security grounds.

That paranoia was immediately reminiscent of the much-feared Japanese accumulation of Western assets in the 1980s. Japan was then the world’s top creditor nation and seemed poised to take over America’s industrial crown jewels. Japanese purchases of Columbia Pictures and the Rockefeller Center were seen as a mere appetizer.

You know the rest.

Japan’s overheated economy was peaking as it began its short-lived U.S. foray, which was soon followed by the implosion of the Japanese property and stock-market bubbles. For good measure, the Rockefeller Center and Hollywood purchases were dumb. They were made at the top of the market – a beginner investor’s folly – and lost a tonne of money for their Japanese buyers. The Japanese economy was to endure 10 years of stagnation in the 1990s – Japan’s so-called "lost decade" – and the Land of the Rising Sun has not fully recovered to this day.

Despite that object lesson, no thought was given to a similar fate for the more recent SWF bubble. After peaking at about $3 trillion in 2007, total SWF assets had plummeted in value by May of this year to a mere $1.8 trillion.

The obvious culprits are the global recession and resulting 11 per cent drop in global trade that sharply reduced Western cash inflows to goods exporter China and oil producer Dubai.

Less obvious is that the wet-behind-the-ears SWFs made lousy investments, as the Japanese had done in their moment of exuberance.

Abu Dhabi’s Investment Authority snapped up $7.5 billion worth of stock in Citigroup Inc. at prices in the mid-$30s. The stock in that U.S.-government controlled basket case now trades in the $4 range.

The Beijing-controlled China Investment Corp. was taken to the cleaners when the principals of Blackstone Group LP, America’s biggest private equity firm, decided to cash in through an initial stock offering. The Chinese paid $3 billion for a slab of Blackstone equity, or about $38 a share. That stock now changes hands at about $14 a share. Dubai World’s piece de resistance of poor investing judgment was the billions of dollars in loans it made to property giant Nakheel, developer of the much-photographed, palm-tree-shaped resort a few hundred metres off the Dubai coast. That landmark is a sort of Sydney Opera House run amok that always struck me as an overblown symbol of national coming-of-age rather than a viable financial proposition.

Not everyone has been crying in their beer since the Thursday shocker, despite the extensive collateral damage Dubai World has wreaked on global capital markets. The managers of the much older sovereign wealth funds of Alberta, Alaska and Norway, mocked for their conservative investment practices when the newbie SWFs were spending with reckless abandon, have been vindicated.

And in contrast to the prolonged Japanese decline, China, Korea, Kuwait and almost all of the other SWF-owning states will be on the mend relatively soon as the global economy recovers, enabling them to backstop losses on their SWFs.

Just as the fear of Japan was misplaced, so too the SWFs of communist and Arab nations. The concern should have focused on the SWF’s ineptitude.

The crack-up of Dubai’s once stupendously endowed SWF is also a powerful reminder that it’s wrong to associate investing smarts with those in possession of large sums of money. The world’s biggest banks not long ago were awash in more money they could intelligently handle. And tens of millions of workers are unemployed today as a result of the ill-advised bets they made. The everyday analogy is the lottery winner uncertain of what to do with his windfall who finds himself broke within a year. But at least his folly is not the cause of widespread misery for others.

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The worldwide decline in equities spurred by Dubai’s efforts to reschedule its debt is a sign that government spending alone won’t be enough to protect financial markets, according to Arnab Das of Roubini Global Economics.

Stock volatility will probably jump as countries and companies default on loans, said Das, the head of market research and strategy at RGE, the advisory firm founded by economist Nouriel Roubini.

Shares slumped from Shanghai to Brazil and European shares fell the most in seven months yesterday after Dubai World, the government investment company burdened by $59 billion of liabilities, sought to delay repayment on much of its debt. Governments have spent, lent or guaranteed $11.6 trillion and central banks held interest rates near zero percent to end the first global recession since World War II.

“We’re bound to see a rise in risk aversion,” Das, who is based in London, said in an interview. “The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear. We still have to work out those balance sheet stresses. The recovery is proceeding, but significant challenges still lie ahead.”

Japanese stocks fell today after commodity prices declined and the dollar depreciated to a 14-year low against the yen, dimming the overseas earnings prospects for exporters. The Nikkei 225 Stock Average lost 1.9 percent to 9,204.65 as of 10:10 a.m. in Tokyo. Futures on the Standard & Poor’s 500 Index slipped 2.1 percent after the MSCI World Index of 23 developed- country markets lost 1.4 percent yesterday.

Bank Writedowns

Banks wrote down or lost $1.7 trillion from the collapse of the subprime mortgage market and raised $1.5 trillion since the credit crunch began in 2007, data compiled by Bloomberg show.

“In some countries and sectors, debtors will be able to get by because government intervention has made it easier for them to refinance,” said Das. “In other places, excessively leveraged debtors, who always get access to too much credit during a boom, cannot roll over their debt and will default.”

Das, the former head of emerging-markets strategy at Dresdner Kleinwort, joined RGE last month to lead a new team that advises investors on allocations in stocks, bonds, interest-rate products, commodities and currencies in developed and emerging markets advance payday loans. Roubini, an economics professor at New York University and chairman of RGE, predicted the financial crisis that spurred credit losses and asset writedowns at global financial companies.

Protected Investors

Roubini’s 2006 warning about the crisis shielded clients from the worst slump in global equities since at least 1988. He said in March that the stock rally that began that month was a “dead-cat bounce” and that it may “fizzle” in May. The MSCI World Index of has since rallied 68 percent, and the Standard & Poor’s 500 Index has climbed 64 percent in the steepest rally since the Great Depression.

Roubini warned in July that the economy is “not out of the woods.” Reports since then have shown that the U.S. exited a four-quarter contraction in gross domestic product, expanding 2.8 percent from July through September.

The benchmark index for U.S. stock options, which measures the cost of using options as insurance against declines in the S&P 500 over the next month, has dropped 49 percent this year. It surged last November to a record 80.86, a level almost four times higher than its 20.28 average over its 19-year history.

Market Correlation

The so-called correlation coefficient that measures how closely markets rise and fall together reached the highest level ever in June, with the S&P 500 and benchmark measures for raw materials, developing-country equities and hedge funds rallying in tandem, according to data compiled by Bloomberg. Oil has jumped 71 percent this year, the Reuters/Jefferies CRB Index of 19 raw materials climbed 21 percent and the MSCI Emerging Markets Index soared 69 percent.

“All this should magnify differentiation between riskier and less risky asset classes and names, after a couple of quarters in which correlations have risen sharply as market participants put on risk pretty much across the board,” Das said. “That will make it harder to make money simply by riding the liquidity wave from central banks. People are going to have to start focusing even more on the fundamentals.”

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U.S. shoppers may stretch tight budgets this year to reward loved ones after months of thrift, a softening of heart that store chains hope will erase the holiday season sales debacle of 2008.

Retailers from Wal-Mart Stores to Gap, RadioShack and Walgreens opened their doors on Thursday as U.S. families celebrate Thanksgiving, aiming to capture early bird shoppers a day before the official start of holiday shopping on “Black Friday.”

The unsettled state of the U.S. economy, with a 26-year high in unemployment and tighter access to credit, has industry holiday sales forecasts varying from a decline of 3 percent to an increase of 2 percent.

“The consumer is confused. They don’t know whether to spend or not,” said Marshal Cohen, senior analyst at retail consultant NPD Group.

Carlos Abril was browsing at an Old Navy in Manhattan on Thursday, but said he would not shop nearly as much this year.

“It’s tough this year, so we’re cutting back,” he said. Abril does not plan to spend on himself but would buy gifts for his nephews and other children in his family.

A weak U.S. dollar, however, has been a boon to tourists.

“Stuff is always cheaper here anyway and even more so with the dollar,” said Katy Moore, a visitor from Ireland, who was shopping at Foot Locker. She exited the store with a bag and said she would spend quite of bit of money while on vacation.

As the year-end holidays draw closer and deeper discounts beckon, consumers may splurge a bit more. Industry experts expect a strong turnout on the Black Friday weekend, but caution it will not mean a bumper holiday season as shopping trails off in the weeks before Christmas.

“The recession last year was a shock to the consumer. This year they are already tired of it,” Cohen said. “They might even reward themselves for being frugal for the whole year.”

The psyche of American shoppers is being closely watched, as a return to spending would drive overall U.S. economic growth. Early hopes for a consumer-led recovery have pushed retail shares up 47 percent this year, compared with a 23 percent rise for the Standard & Poor’s 500 Index.

Cohen, a 30-year industry veteran, travels to malls all along the U.S. East Coast over the holiday weekend. He now sets out on Thanksgiving Day as so many more stores open on the holiday itself. While traffic to stores on the Thursday is relatively light, people who do make it out are mostly hard-core shoppers and highly likely to buy.

“It’s the ultimate conversion factor,” he said.

For a graphic on U.S. holiday sales trends, click on (here)

For a Reuters Insider segment on holiday sales, click on(link.reuters.com/wuj63g) 

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The International Monetary Fund said it will have access to a credit line of up to $600 billion to make loans during financial crises after contributing countries agreed to fold commitments into one pool.

The agreement, yet to be approved by the IMF board, adds as many as 13 members from the current 26 to the so-called New Arrangements to Borrow, including emerging nations China, Russia, Brazil and India, the IMF said in an e-mailed statement.

The decision “marks an important moment for multilateralism and the fund, which will help the IMF’s effectiveness in its response to crises,” Managing Director Dominique Strauss-Kahn said in yesterday’s statement.

The deal goes beyond a pledge by leaders of the Group of 20 nations to contribute up to $500 billion to a credit arrangement that’s currently worth $54 billion, the IMF said. The worst financial crisis since the Great Depression prompted more nations to seek aid from the fund, created after World War II to help ensure the stability of the global monetary system.

The agreement, which merges existing commitments into one facility, makes it easier for the IMF to tap into its supplemental resources. The credit line will be “an effective tool of crisis management as a backstop for the international monetary system,” the IMF statement said cash advance loans.

While a general agreement on the NAB was reached at the G- 20 meeting in Pittsburgh in September, talks on the specifics stalled over divisions between some emerging and developed nations over voting rights relating to the credit facility.

Borrowed From Members

The IMF has estimated that its current credit line was insufficient when the financial crisis boosted demand for loans. It then started to borrow from individual members, such as Japan, to continue lending to countries in difficulty.

To ensure the institution would continue shoring up economies around the world, G-20 leaders in April pledged to add $500 billion to the IMF’s resources.

Some of these contributions were bilateral loans, while China agreed to participate by buying the first IMF notes. Some countries, like the U.S., made theirs directly to the NAB.

When the new credit-line agreement is activated, all the bilateral loans will fall into it, Andrew Tweedie, who heads the IMF Finance Department, said in a Nov. 20 interview. It won’t come into effect before next year, he said.

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Joanna Lohman, a real estate specialist and professional soccer player, can add another job to her plate: general manager of the Washington Freedom.

The team is expected to announce the appointment in coming days. Her first agenda item as GM of the professional soccer team is changing the team’s name.

“We created the name over here in Tokyo,” said Lohman, who is currently practicing the sport overseas. “One idea was the Freedom Reserves, but as athletes we don’t aspire to be a reserved player.”

The new name of the team will be Freedom Futures. An official announcement is expected soon from the team.

Lohman said the name draws attention to future soccer players in the U.S. and to “the future of America for business.” She said her primary goal is to help players in the league secure long-term careers in the corporate world.

Future Minded

Lohman, also a vice president with Tenant Consulting LLC, holds a business and mathematics degree from Penn State.

“Being the GM of a sports team is the marriage of my skill sets,” she said, who also has a long-term goal to be GM of the Washington Redskins. “I truly believe the [Women’s United Soccer Association] has untapped resources in these amazing, talented players, who don’t realize their potential and power that can be [used] in corporate America.”

She admits it’s a struggle for some female players to realize that potential.

“When you are so passionate about soccer it’s hard to view yourself in a non-sports world position,” she said.

Her first plan of action as general manager is to put a good product out on the field by recruiting the best players to play.

“We have one of strongest teams in the country and will continue that,” she said.

In terms of business, she said this year will be a growing period for the team. The 2010 season starts in early spring.

“I want players to feel they can come here and learn on and off the field. I want to get our players incorporated in local businesses and charities and learn to walk and talk and be a valuable resource to the company.”

She said those skills will come with resume building and interviews, or “anything to build a platform for a career.”

Player update

The 27-year-old is currently in Japan with her Washington Freedom teammate Rebecca Moros, practicing with the NTV Beleza.

She has been training overseas since early September and was expected to leave Oct. 22, but is opting to stay another month because of the “incredible” experience she has been having with the team. She’s hoping to get better at the sport in order to return to the U.S. National Team, where she helped the U.S. women’s team win the Peace Cup in China, and the Penn State player was named Pennsylvania’s NCAA Woman of the Year in 2004.

“The training environment is so unique and different. In [the U.S.] we are strong athletes and run fast and jump high. Here they train in small, tight spaces and are so good with their feet and the ball.”

While she was invited to practice with NTV Beleza in Japan, she cannot play in the games because she does not have a work Visa.

It’s hard to get one in Japan, she said, because their work Visas require a minimum payment of $25,000 a year. “But often that’s too much for a company to pay when they can pay someone a bit less in Japan.”

Plus, she admits, “five hours of working on top of [practicing] would be a bit much. It’s been physically demanding and when I’m not playing I like down time.”

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Stapleton and NorthSide, by the numbers

Stapleton NorthSide

Land area 7.5 sq. miles 2.3 sq. miles

Projected new homes 10,000 10,000

Projected new jobs 30,000 22,000

Tax increment financing $280 million (so far) $390 million (projected)

Construction start 2001 2010

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Japanese government ministers increased pressure on the central bank to tackle falling prices in the world’s second-largest economy.

“My understanding is that Japan is in a deflationary state,” Deputy Prime Minister Naoto Kan told reporters today in Tokyo. The government will tell the central bank that “monetary policy plays a significant role” in fighting deflation, he said.

Kan’s comments, echoed by other ministers after a Cabinet meeting today, underscore the government’s growing rift with the central bank, which is concluding a two-day monetary policy meeting today. Finance Minister Hirohisa Fujii, who said today deflation is a critical factor when setting economic policy, and Prime Minister Yukio Hatoyama have said the central bank is too optimistic about the outlook for the economy.

“There’s a sense of crisis” regarding deflation, Fujii said today, calling on the central bank to respond to the threat while adding that rates are already “very low” limiting room for further monetary policy action.

The world’s second-largest economy grew an annualized 4.8 percent last quarter, the fastest pace in more than two years, while a gauge of prices excluding imports fell the most in 51 years, a Cabinet Office report showed this week cash advance in one hour. Consumer prices excluding fresh food dropped for a seventh month in September and the central bank said last month it expects them to keep sliding through fiscal 2011.

Independence

The central bank, whose independence is guaranteed by law, is accustomed to such comments by government officials. Lawmakers from the previous ruling Liberal Democratic Party would call on the policy board to keep rates low, with some politicians such as Hideyuki Aizawa going as far as suggesting the governor’s job was on the line if he didn’t yield to government requests.

Kan, who is also the nation’s economic and fiscal policy minister, didn’t elaborate on what steps the Bank of Japan should take. Economists expect central bank Governor Masaaki Shirakawa and his policy board to keep interest rates at 0.1 percent today.

Financial Services Minister Shizuka Kamei said the bank should be more aware of aligning its policies with the government when prices are falling.

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Carla Eng, president of Abstract Displays Inc., is one of 11 Ohio businesswomen named Ohio Keys to Success award winners for 2009, the Ohio Department of Development said Monday.

Eng was named a winner in the Marketing/Advertising/Public Relations category – the only winner from Southwest Ohio. She and other winners will be honored Thursday, at an afternoon ceremony at the Vern Riffe Center's Capital Theater in downtown Columbus.

“The department is proud to recognize Ohio’s businesswomen who play a key role in the economic growth and future of our state,” said Lisa Patt-McDaniel, director of the Ohio Department of Development, in a news release.

Abstract Displays, headquartered in Blue Ash, provides exhibits and displays for trade shows and other events low cost payday loans. The company, this year, was named to the Northern Kentucky Chamber of Commerce’s “Emerging 30” list of small businesses with outstanding revenue growth, and was also named a “Torch Award” winner by the Cincinnati Better Business Bureau for marketplace ethics.

The Keys to Success awards are sponsored by the ODD’s Division of Entrepreneurship and Small Business; Ohio Small Business Development Centers; U.S. Small Business Administration; Central Ohio Women’s Business Center; Key4Women/KeyBank; Kroger Co. and the ODD’s Minority Contractors Business Assistance Program.

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China on Monday made a fresh, thinly veiled criticism of the United States for running lax monetary and fiscal policies that risk undermining the dollar.

Countries whose currencies are held as reserves by global central banks are failing to take sufficient account of the global repercussions of their domestic policy stances, Assistant Finance Minister Zhu Guangyao told a financial forum.

“We call upon major reserve-issuing countries to take responsible monetary policies,” Zhu, who was speaking in English, said.

China holds an estimated two-thirds of its $2.27 trillion in foreign exchange reserves in dollar-denominated assets, and Premier Wen Jiabao urged the United States in March to safeguard the value of China’s holdings.

Zhu, who did not mention the United States by name, was speaking on the first full day of U.S. President Barack Obama’s visit to China.

China’s top banking regulator, Liu Mingkang, leveled unusually frank criticism at the Federal Reserve on Sunday, describing the U.S. central bank’s pledge to hold down borrowing costs and the weak dollar as a “new systemic risk.”

Zhu did not touch on the main U.S. complaint about China’s policy stance — its firm belief that the yuan is undervalued.

(Reporting by Alan Wheatley; Editing by Jonathan Hopfner)

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