The Kuwait Stock Exchange Explodes

Kuwait has been run since the 1700s by about twenty Sunni families who migrated there from the Nejd, in the heart of Arabia. One Nejd family, the al-Sabahs, ruled the country, to allow the others to make most of the money that there is to make. And when the oil boom came along, those families that were well installed in key businesses made very large amounts indeed.


The government pays for the education abroad of any qualified Kuwaiti boy. This has opened a social fissure in the country as non-Nejdi young men, mostly Shiites from the north, return from foreign studies feeling better prepared than their Nejdi counterparts, only to find their way to the top of the leading companies and ministries blocked by their ancestry. They became active in business anyway, and with the oil boom everybody prospered.


In 1980 these newly rich non-Nejdi Kuwaitis, who come right after the Lebanese as the keenest traders among the Arabs, discovered the joys of investing in the stock market. When the market had turned sickish in 1976 and 1977 the government had moved in to support prices, buying heavily for its own account, so that nobody would suffer. So the speculators looked at stock market investing like the gambling scene in Fledermaus, when it is announced that the prince will double the winnings of the winners and refund the losings of the losers.


Thus, when in 1980 the non-Nejdis started to put serious sums into stocks, and prices started to move, it was a coiled spring. Only a few dozen uninteresting companies were traded on the official exchange, so the unofficial market, or Souk al-Manakh, situated in an old structure once used for camel trading, became a cauldron of speculative activity, thronged with portly gentlemen in flowing white gowns (thobes) with capacious pockets full of papers, worry beads in one hand, cigarette in the other. Many plungers preferred to use their car telephones to trade while caught in one of Kuwait’s dreadful traffic jams. Ramadan was the most active period, since everyone was so bored. It was pleasant to amble down to the al-Manakh after dinner and gamble until midnight or 1 a.m.


One Kuwaiti financial custom made a wild boom almost inevitable: well-established traders’ postdated checks were accepted almost like cash. Legally, the payee could present a postdated check at any time, not only on the date written. But this was never done. It would have violated the old Kuwaiti tradition of trust, which also made it unthinkable that payment might not be made at all. A family simply had to make good on its commitments. There had, in fact, never been a bankruptcy. So when some stocks on the Souk al-Manakh began to jump 10 percent or 20 percent or even 50 percent a month, speculators rushed in to buy with postdated checks drawn against funds they did not have. They knew they could sell the shares to raise the cash when the checks came due.


Furthermore, buyers did not mind issuing checks dated in the future for double or triple the purchase price, convinced that quotations would rise that much by the time they had
to pay.


So a market arose in postdated checks. Financial institutions hesitated to lend on shares, particularly queer companies on an unregulated exchange, but checks were fine—default was inconceivable.


This mechanism for creating buying power was gasoline on a fire: the market roared up. Soon new investment companies were formed to invest in other Manakh companies; there were even companies to invest in companies that invested in Manakh companies—a Fund of Funds of Funds, so to speak, each selling at large premiums over their assets. Many of the ultimate underlying companies were dubious speculations incorporated in Bahrain or the Emirates, subject to no regulation by Kuwait. Only about half of the Manakh companies even published annual reports. Entirely new ventures sold stock against postdated checks for several times the issue price; the checks could then be discounted—typically with foreign banks eager to break into the Kuwaiti financial scene—and the money applied to further speculation. It was a pure bubble. Legally, only Kuwaitis could trade, so all the Palestinian, Egyptian, and Pakistani lawyers, doctors, and accountants held stock through Kuwaiti nominees, leaving themselves without legal standing.


At the peak of the boom, in early 1981, some stocks were advancing 100 percent a month or more. A few went up ten times in 1980-81. Gulf Company for Industrial Development advanced fifteen-fold. The capitalization of the entire market soared from some $5 billion to perhaps $100 billion.


Kuwait is the financial center for the Arabian Gulf, so inevit¬bly the frenzy spread. In nearby Sharjah, for example, there had some time before been a real estate boom as oil-rich local magnates put their profits into bricks and mortar, which they could see and touch. The failure of two banks had resulted in a collapse of the property market, and the magnates suddenly viewed their empty buildings with different eyes. The al-Manakh boom looked like a glorious chance to flog off a hundred-odd million dollars’ worth of these structures, packaged as a public company. One of the most important components was a hotel that had been converted into a hospital, so the exciting name of Gulf Medical was devised for the assemblage. The stock was offered slightly below one dinar and was 2,600 times oversubscribed. For a whole week, one to two planeloads of completed subscription forms arrived daily from around the Middle East. The National Bank of Sharjah, which was acting as subscription agent, couldn’t cope with this volume of paperwork, and hired forty Egyptian school teachers to help out. Gulf Medical soared over 800 percent on the al-Manakh, and a lot of the magnates felt rich again.


A Little Matter of Being Temporarily Overdrawn


Some hyperactive speculators were able to push out billions of dollars of postdated checks. Eight individuals, called the Cavaliers, floated a total of $55 billion in checks, with the most energetic one, Jassim al-Mutawa, a Passport Office employee still in his twenties, passing off $14 billion all by himself. His brother, Najeeb al-Mutawa, didn’t bother to record the checks he issued on the stubs in his checkbook. He thought they balanced, but when he finally totaled things up he found they didn’t quite: he was $3.4 billion overdrawn. To troubled Western observers, Kuwaitis would say, pityingly, “You think of our market in terms of your own. But things are different here. Our government can’t permit a collapse. Why tie up your money in something dumb like Standard Oil of Indiana when here you can make 30 percent a year?”


This explosion of credit could not be infinitely expanded. Three particular needles punctured the balloon. The first was the oil glut. The weakening of oil prices on top of lower sales meant that Kuwait’s oil revenues in 1982 were only a quarter those of 1980. Then the new finance minister, Abdelatif al- Hamad, let it be known that he had no intention of supporting the market at the insane levels to which it had risen. Indeed, as it later emerged, he couldn’t have even if he had wanted to.


Finally, on August 20, 1982, a jittery holder of one of Jassim al-Mutawa’s postdated checks presented it for payment ahead of time—contrary to custom but conformably to law. Not surprisingly, the passport clerk couldn’t pay. Bang! The balloon exploded. In no time hundreds of speculators were in default. Collapse followed. Gulf Medical, for example, plunged about 98 percent to a sixth of a dinar.


In September, the Ministry of Finance ordered all doubtful checks to be turned in for clearance. Added up, they eventually came to over $90 billion, substantially more than Kuwait’s total foreign reserves.


A vast brouhaha began at once. The old Nejdi families had generally remained aloof from the frenzy, but many government figures had participated in the wild ride, including, it was rumored, Minister of Commerce Jassim al-Marzouk, who was supposed to be regulating it. Some members of the ruling al-Sabah family were caught in the crash, and many members of Parliament. Since most of the aggressive speculators were non-Nejdi plutocrats, the old ruling oligarchy is determined to make the wealthier ones pay up at least in part, even if it means bankruptcy.


In the meanwhile, commerce has slowed to a trickle, and the fissure between the old Nejdi Sunni families and the rising new Shiite entrepreneurial class is deeper than ever.