In the normally staid and conservative world of Saudi Arabian business, controversy rarely comes to light. The rulers and the big families that dominate commercial life there usually ensure any "delicate" situations are dealt with, well, delicately.So the goings-on at the Al Gosaibi conglomerate and its vaguely related Saad Group have brought some unwelcome attention to the kingdom's corporate culture and apparatus. Outside investors have not liked what they have heard so far.
What began as a little local difficulty for The International Banking Corporation (TIBC) of Bahrain has had knock-on effects in the UAE and Oman, and could have even more serious consequences in other financial sectors, including the global banking giant HSBC. The affair illustrates that Saudi is becoming an integrated part of the world's financial infrastructure, but also that it lacks the domestic sophistication to deal with problems that will inevitably arise in the post-crisis environment.
Although Al Gosaibi and Saad have been arms-length business partners for years - the partnership is personified by the Kuwaiti-born entrepreneur Maan al Sanea, the founder and chairman of Saad - the two are very different kinds of company. Al Gosaibi is an integral part of the Saudi commercial establishment, with its origins in pearl diving, consumer goods and energy services. Saad has some commercial businesses, but is predominantly a financial conglomerate that could keep pace with the best in the West for innovation, risk taking and leverage - all those things that brought about the global financial crisis.
Mr al Sanea's two main vehicles for the aggressive move into financial products were TIBC and Awal, both banks in Bahrain. Whether he funded their expansion with the official sanction of - and funds from - Al Gosaibi, is a matter of dispute between the two sides in this increasingly nasty affair. Those two banks are currently being investigated by the Bahraini authorities and by a team of international accountants and lawyers.
At the heart of their inquiries is a US$2 billion (Dh7.34bn) exposure that has sent shivers through the Saudi banking authorities and caused them to freeze Gosaibi and Saad accounts in the kingdom, in parallel with similar action taken by the UAE authorities.On the face of it, a $2bn gap should not be an insurmountable problem for Mr al Sanea, or Al Gosaibi. His personal wealth was recently estimated at $9.3bn, and Saad group assets were put at $30bn. Al Gosaibi is a cash generating commercial operation, with access to credit at the highest levels of the Saudi business establishment. The proud boast was that Al Gosaibi was only ever a phone call away from $1bn cash.
This is what has puzzled international investing institutions and the wealthy Saudis who trusted Mr al Sanea with their cash. If both Al Gosaibi and Saad are so creditworthy, why is the relatively small hole in the Bahraini banks such a problem? Why has Saad been selling international assets - like his stake in the British house builder Berkeley - at desperation pace in the past two weeks? Why have the rating agencies halted their coverage of Saad?
Most perplexing of all is the status of Mr al Sanea's holding in HSBC. Just over two years ago he snapped up some 3 per cent of the banking giant in a move hailed at the time as a sign of Saudi Arabia's global ambitions. He has made some reductions to that stake in recent months, and is now thought to be holding a stake of about 2 per cent. But that on its own is worth some $1.8bn, enough to plug the gap in Bahrain and still have some cash to spare.
Although Mr al Sanea has been selling down small amounts of his HSBC holding in recent weeks, he seems to be unwilling, or unable, to offload the entire stake. London banking sources suggest it has been used as collateral in a transaction that has hit a legal obstacle, and that he cannot liquidate the entire holding any time soon.Most businessmen and financiers in the world are having to come to terms with the aftermath of the financial crisis in their own way. Deleveraging is a painful process for all concerned, and Mr al Sanea is not alone in experiencing the trauma of asset sales at distressed prices. But what has made it more painful is the relationship with Al Gosaibi and its position at the heart of the Saudi business nexus. That is why he has had to explain his position to the Saudi banking regulator, SAMA, in detail in recent days, and why he has had restrictions placed on foreign travel.
Mr al Sanea is being given a chance to unwind the problem in his own way and within his own means, but there has to be a deadline. The affair has unsettled the Saudi financial establishment, the high-rolling individuals who have invested with him, and the international institutions that have shown confidence in the kingdom's energy-backed potential. The longer it goes on, the more damage all will suffer.