Another wave of writedowns

By Dave Anderson:

I'm a little late for this but pumpkin pie and good Kentucky bourbon has occupied my weekend, but the New York Times piece on Dubai's debt going bad is worthwhile because it highlights what I think should have been the proper course of action for basically any government, including the US government, should have taken when there was a massive debt overhang:

In the space of a few years the emirate�s investment arm, Dubai World,
racked up $59 billion in debt, borrowing to build lavish developments
like a giant island shaped like a palm tree to entice celebrities like Brad Pitt, and to invest in glittery properties like the MGM Grand Casino in Las Vegas....

Now that the boom has gone bust, both in Dubai and in the United
States, Dubai is stuck with a glut of real estate that no one wants to
buy or rent. Creditors and markets had always assumed that when push
came to shove, its oil-rich
neighbor Abu Dhabi would bail out Dubai. But that assumption was called
into question this week, and the resulting fear that Dubai might not be
able to pay its bills....

And not just emerging markets. �Dubai shows us that what we are now
facing is a solvency issue, not a liquidity issue,� said Jonathan
Tepper, a partner at Variant Perception, a research house in London
that has been outspoken on the debt problems facing European economies....

And while Abu Dhabi may well want to make its more exuberant neighbor
and its bankers suffer a bit for their profligate ways before it rides
to the rescue, that gives little comfort to investors already wary of
the region�s growing debt.

What I hope will happen in Dubai and pretty much everywhere there are significant problems with the amount of debt that was taken out is the following; the idiots who made systemically horrendous decisions are given a brass watch and are honorably kept the hell away from ever making an important decision again, the size of the problem is admitted, and basically everyone takes a haircut, including the super duper senior debt as the price of any implied or assumed guarantees and bail-outs. 

The US has another wave of large scale real estate defaults coming in the form of Commercial Real Estate imploding and the last big wave of the housing bubble resetting in the next year or two.  We need to have another whack or two at the systemically screwed banks, rating agencies, and shadow bankers who so far have not had any incentive to not screw up again.