All you Good People
that here pass by
as you are now so
once was I, as I am
now so Shall you be
to Follow me.
The one about whom I’m moved to write is Dr. Omar bin Sulaiman. “Dr. Omar” – as he is known to most – is a brilliant professional in the Emirates. Rising to the rank of Governor of the Dubai International Financial Center and Vice Chairman of the U.A.E. Central Bank, Dr. Omar was, indeed, deeply dedicated to manifesting the vision of Dubai as a regional and global financial center. And, left to his own intuition, may well have succeeded. However, like so many of his contemporaries in places like Singapore, Qatar, Saudi Arabia, Malaysia, and much of Europe, intuition just a few years ago was jettisoned in favor of “Big Blue” – figuratively and, regrettably, following the acquistion of PricewaterhouseCoopers consulting practice, literally as well. And mind you, whether you’re looking at Saudi Arabia’s growing interest in being the next “Silicon Valley”, Singapore’s A*STAR, or Vietnam’s newest technology centers, the price for consensus thinking will include sharing consensus outcomes.
I first met Dr. Omar on a phone call arranged by business associates in the United Kingdom and a dear friend in Egypt. The substance of the phone call was a discussion of how the planned Dubai International Financial Center and Exchange (DIFC and DIFX, respectively) could become a differentiated financial market – one that offered a global, unique position. I discussed the rare opportunity that the DIFX’s creation had in the world of equity markets – an opportunity afforded no other exchange on the planet. You see, if you really wanted a transparent exchange in which the market was not subjected to information asymmetries (“ignorance arbitrage”, as I like to call it), what better a place to do this then a market sympathetic to Islamic Finance and its strictures on ethical disclosure and risk sharing.
To understand the opportunity, let me take you on an exemplary journey through an actual market case…
You see, when I started M•CAM in the mid 1990s, we started reviewing the intellectual property of the world’s largest companies – many of which were (and still are) publicly traded. In many instances, technology alleged to be “core” to enterprises, was either inadequately protected or not protected at all by means of proprietary assertions made in the marketplace. Representations about drugs, cell phones, power systems, materials, transportation technologies, business methods, and countless other technologies, were incomplete in most cases and were outright misstatements quite often. Earnings projected off of patent licenses were often based on completely fraudulent positions. Against that backdrop, M•CAM was asked to review patents held by competitors but not to look at any information that could adversely impact the prospective client’s portfolio. In short, if you wanted to damage someone else’s assertion on a proprietary claim, that was fine, but if you used the same methodology on your own, it would be devastating.
After the United States’ and the European Patent Offices found out that they were caught issuing counterfeit properties to industry participants who then went on to represent their proprietary interests to the market, they closed ranks to defend the industrial base. Unfortunately, what they didn’t contemplate was that many companies, realizing that their patent portfolios were smoke and mirrors decided to abandoned their useless innovation artifacts and some – regrettably for the tax-paying public, decided to throw them away by way of patent donation. This process frequently involved colluding with a third party – usually a research institution who would vouch for “valuation” – and donating the properties for 10s or 100s of millions of dollars in tax deductible “donations”. The recipient institutions generally abandoned these “assets” as soon as they had completed using them as evidence of corporate sponsorship justifying Federal sponsored research grants.
Many of these same companies continue to flagrantly violate U.S. Treasury rules with what’s known as the In Process Research and Experimentation Tax Credit which is supposed to reward companies for new R&D. This loophole – estimated to be the second largest tax fraud in the U.S. at present – exposes the public markets to enormous tax liabilities and fraud penalties should the government ever decide to tackle this abuse.
So, back to the DIFC opportunity. What if you started a public market for companies that DID NOT have massive fraud skeletons in their closets? What if you launched a market, we suggested, where transparency included things like compliance with tax, intellectual property, and financial accountability? What if you launched a market where mining and oil companies were required to report on their use of indigenous lands and lands taken from displaced people so that the market could see the real price and real profit of an enterprise? What if you really made market ethics and transparency a differentiator? What if you actually used Ethical Standards – as set forth in numerous fatwa – as a global market differentiator?
For the record, Dr. Omar actually deeply considered this. In many meetings in Dubai prior to and immediately following the launch of the DIFX, we sat with him and administrators at the Dubai Financial Services Authority (DFSA) and discussed standards for a different market. However, when one is confronted with the inertia of incumbency, the appetite for differentiation wanes. And so it was that the bright vision of Dr. Omar and his patron, Sheikh Mohammed Bin Rashid Al Maktoum vanished in the dust storms blown by easy credit, credit default swaps, and sukuks which were indistinguishable from financial products unmoored from any responsibility or risk sharing. In short, the sirens of convention and ease, fully engulfed one of the most promising market opportunities of modern times. And, by September 2005, one of the most promising global market opportunities relented to the “Big Blue”.
The DIFC and NASDAQ Dubai are not lost. In fact, in the face of this past week’s announcement of Dubai World’s massive liquidity challenge, we may actually see an opportunity re-emerge. What we know is simple. Dubai is not unique. It followed many. Raising Tokyo a ski slope as the Japanese were razing theirs. Out malling Singapore and Hong Kong as the high fashion retail sector was being mauled in the rest of the world. Building castles in the sky while the atmosphere was toxifying for commercial and high-end residential markets.
As we see the global market continue to reel, the world needs a market based on transparency and ethics. While Dr. Omar has been the professional casualty of the tectonic tremor in Dubai, his intuition was not off. He came closer to the next financial reality than anyone else. And with so many other GCC and North Africa efforts trying to mimic Dubai, there is a lesson to be learned here. And if learned, the world will be better for it.