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Kuwait’s Souk al-Manakh Stock Bubble
Perhaps the greatest speculative mania of all time was Kuwait’s Souk al-Manakh stock bubble in the early 1980’s, which is as fascinating as it was devastating. The bull market began when investing in local “Gulf Companies” became in vogue with Kuwaitis who wished to “ride the coattails” of the oil-induced Middle Eastern economic boom. A peculiar Kuwaiti custom allowed traders to pay for stocks using post-dated checks, under the assumption that default would be unthinkable. Unsurprisingly, human avarice prevailed as some traders speculated in stocks paid for by billions of dollars worth of unsecured checks, causing the stock market to inflate like a balloon and pop in a most analogous manner.
The rise in oil prices in the late 1970’s created an unprecedented amount of wealth in the oil-rich Persian Gulf countries, with Kuwait receiving a particular ly large share of the good fortune. As US stocks embarked down a perilous bear market, Kuwaiti shares were experiencing a seemingly unstoppable bull run as nouveau riche Kuwaitis turned to stocks as an investment vehicle to store their wealth. The bull market was abetted by the scarcity of Kuwaiti stocks, which consisted of “only a few dozen uninteresting companies [that] were traded on the official exchange.” (1) The scarcity was the result of the royal sheiks’ reluctance to grant the corporate charters necessary for companies to become publicly traded for fear that companies “might become vehicles for stock speculation.” (2) Kuwaiti investors, however, weren’t concerned with risk, as their collective memories recalled a market panic in 1976 and 1977 in which “the government had moved in to support prices, buying heavily for its own account, so that nobody would suffer.” (1) These traders assumed that the government would always be on the sidelines ready to bail the market out if needed in the future, in effect, creating a floor underneath share prices.
By the summer of 1981, an unofficial over-the-counter stock market was formed called the Souk al-Manakh, which started specializing in the trade of highly speculative “unregulated non-Kuwaiti companies, ” such as those incorporated in Bahrain or the United Arab Emirates. (3) Formerly a camel trading venue (1), the Souk’s history was long intertwine d with trading. Not long after the Souk’s founding, the market became a hotbed of speculation, overflowing with “portly gentlemen in flowing white gowns (thobes) with capacious pockets full of papers, worry beads in one hand, cigarette in the other.” (1) Interest in Kuwait’s heavily-regulated official market dwindled as the Souk earned the reputation of being the more exciting of the two markets, in which one could double their money within a few months. Sharing more similarities with a casino than a stock market, the Souk al-Manakh attracted wealthy high-rollers whose preferred method of trading entailed placing orders via car phones. (1) Boredom during Ramadan spurred daily flurries of trading activity lasting well into midnight, as a form of entertainment. (1)
Souk stocks were “Gulf companies” incorporated outside of Kuwait and not subject to Kuwaiti regulation , with interests ranging from property to poultry farming (4). Fitting the market’s gambling nature, most of these companies were little more than “shell games” (2) with very little in the way of assets, let alone earnings, “with only about half of the Manakh companies even publishing annual reports.” (1) Company fundamentals mattered very little, however, to traders who regularly saw these same stocks rising 20 to 50 percent a month (1). According to “Collapse of the Souk”: “ Eventually , the securities of fifty-four real and ficitcious off-shore companies were traded on the Souk with no relation to company performances or prospects. Most of these companies had been established as recently as 1979 or 1980.”
Adding fuel to the fire was the type of informal margin financing through the use of postdated checks, which were accepted as a cash equivalent , as per Kuwaiti custom. This type of personal credit didn’t require a bank balance; the “receiver hopes that there will be one when the due date rolls around.” (5) The Kuwaiti culture mandated that payment would be made, as a default would have violated the tradition of trust (1), as well as caused a loss of face upon the entire family. The rapid influx of speculative capital caused Kuwaiti stocks to skyrocket, with Souk shares increasing by an average of 63 percent in 1981. (3) The prospect of nearly instant wealth proved too enticing, causing many Souk players to draw against funds they didn’t have, convinced that they could simply sell off their shares to raise cash when the checks came due. This type of speculation involved financial leverage, which can greatly amplify any gains or losses in the underlying market. Greed caused traders only to see themselves tripling their money as compared to the equally plausible scenario in which they could have incurred large debts, resulting in bankruptcy . Trading on the Souk epitomized financial Russian roulette. Stock speculation fever gripped Kuwaiti culture as thousands of traders, with little business experience , rushed to get their hands on any stock they could find.
As the Souk al-Manakh market soared to incredible new heights, many speculator s became willing to issue postdated checks for double or triple a stock’s purchase price, confident that the share prices would rise by that much by the time they had to pay. (1) An informal futures market arose in postdated checks as investors, upon receiving their shares, used them as collateral to borrow even more money for stock speculation. The traders who received the double or triple-premium postdated checks in return for selling their stock, then proceeded to discount the checks in return for cash; that cash was then parlayed into an even larger stock investment . (3) Like the tulip bulb mania and the South Sea bubble before it, the Souk al-Manakh “miracle” was an illusion, an inverted pyramid reliant upon share prices increasing exponentially for its continued existence.
Word of the Souk al-Manakh “money machine” spread like wildfire around the Middle East, causing wealthy Palestinians, Egyptians and Pakistanis to purchase stock through Kuwaiti nominees as only Kuwaitis could trade legally. Non-Kuwaitis were just as eager to invest despite their lack of legal standing. At the boom’s peak, in 1980-1981, some stocks were advancing 100 percent per month, with some advancing ten-times. One stock, The Gulf Company for Industrial Development, even advanced fifteen-fold. The combination of extreme stock gains and astronomical amounts of leverage made many speculator s millionaires and billionaires many times over.
The IPO market flourished as enterprising and crafty business people sought to take advantage of the credulous investing public’s insatiable appetite for shares of all kinds. Scam companies were spawned overnight, with neither customers nor products, while legally escaping the regulation of Kuwaiti authorities. One IPO example was formerly a failed $100 million real estate venture, that was converted to a hospital, called “Gulf Medical,” and brought public by the individual s looking to recoup their initial investment . So successful was the IPO, that it was 2,600 times oversubscr ibed, where, “for a whole week, one to two planeloads of completed subscription forms arrived daily from around the Middle East.” The investment bank hired forty Egyptian schoolteachers to process the stacks of paperwork. Over the next few months, Gulf Medical proceeded to to advance 800 percent, garnering the owners a handsome profit. (1)
Kuwait’s Souk al-Manakh Stock Bubble
Perhaps the greatest speculative mania of all time was Kuwait’s Souk al-Manakh stock bubble in the early 1980’s, which is as fascinating as it was devastating. The bull market began when investing in local “Gulf Companies” became in vogue with Kuwaitis who wished to “ride the coattails” of the oil-induced Middle Eastern economic boom. A peculiar Kuwaiti custom allowed traders to pay for stocks using post-dated checks, under the assumption that default would be unthinkable. Unsurprisingly, human avarice prevailed as some traders speculated in stocks paid for by billions of dollars worth of unsecured checks, causing the stock market to inflate like a balloon and pop in a most analogous manner.
The rise in oil prices in the late 1970’s created an unprecedented amount of wealth in the oil-rich Persian Gulf countries, with Kuwait receiving a particular ly large share of the good fortune. As US stocks embarked down a perilous bear market, Kuwaiti shares were experiencing a seemingly unstoppable bull run as nouveau riche Kuwaitis turned to stocks as an investment vehicle to store their wealth. The bull market was abetted by the scarcity of Kuwaiti stocks, which consisted of “only a few dozen uninteresting companies [that] were traded on the official exchange.” (1) The scarcity was the result of the royal sheiks’ reluctance to grant the corporate charters necessary for companies to become publicly traded for fear that companies “might become vehicles for stock speculation.” (2) Kuwaiti investors, however, weren’t concerned with risk, as their collective memories recalled a market panic in 1976 and 1977 in which “the government had moved in to support prices, buying heavily for its own account, so that nobody would suffer.” (1) These traders assumed that the government would always be on the sidelines ready to bail the market out if needed in the future, in effect, creating a floor underneath share prices.
By the summer of 1981, an unofficial over-the-counter stock market was formed called the Souk al-Manakh, which started specializing in the trade of highly speculative “unregulated non-Kuwaiti companies, ” such as those incorporated in Bahrain or the United Arab Emirates. (3) Formerly a camel trading venue (1), the Souk’s history was long intertwine d with trading. Not long after the Souk’s founding, the market became a hotbed of speculation, overflowing with “portly gentlemen in flowing white gowns (thobes) with capacious pockets full of papers, worry beads in one hand, cigarette in the other.” (1) Interest in Kuwait’s heavily-regulated official market dwindled as the Souk earned the reputation of being the more exciting of the two markets, in which one could double their money within a few months. Sharing more similarities with a casino than a stock market, the Souk al-Manakh attracted wealthy high-rollers whose preferred method of trading entailed placing orders via car phones. (1) Boredom during Ramadan spurred daily flurries of trading activity lasting well into midnight, as a form of entertainment. (1)
Souk stocks were “Gulf companies” incorporated outside of Kuwait and not subject to Kuwaiti regulation , with interests ranging from property to poultry farming (4). Fitting the market’s gambling nature, most of these companies were little more than “shell games” (2) with very little in the way of assets, let alone earnings, “with only about half of the Manakh companies even publishing annual reports.” (1) Company fundamentals mattered very little, however, to traders who regularly saw these same stocks rising 20 to 50 percent a month (1). According to “Collapse of the Souk”: “ Eventually , the securities of fifty-four real and ficitcious off-shore companies were traded on the Souk with no relation to company performances or prospects. Most of these companies had been established as recently as 1979 or 1980.”
Adding fuel to the fire was the type of informal margin financing through the use of postdated checks, which were accepted as a cash equivalent , as per Kuwaiti custom. This type of personal credit didn’t require a bank balance; the “receiver hopes that there will be one when the due date rolls around.” (5) The Kuwaiti culture mandated that payment would be made, as a default would have violated the tradition of trust (1), as well as caused a loss of face upon the entire family. The rapid influx of speculative capital caused Kuwaiti stocks to skyrocket, with Souk shares increasing by an average of 63 percent in 1981. (3) The prospect of nearly instant wealth proved too enticing, causing many Souk players to draw against funds they didn’t have, convinced that they could simply sell off their shares to raise cash when the checks came due. This type of speculation involved financial leverage, which can greatly amplify any gains or losses in the underlying market. Greed caused traders only to see themselves tripling their money as compared to the equally plausible scenario in which they could have incurred large debts, resulting in bankruptcy . Trading on the Souk epitomized financial Russian roulette. Stock speculation fever gripped Kuwaiti culture as thousands of traders, with little business experience , rushed to get their hands on any stock they could find.
As the Souk al-Manakh market soared to incredible new heights, many speculator s became willing to issue postdated checks for double or triple a stock’s purchase price, confident that the share prices would rise by that much by the time they had to pay. (1) An informal futures market arose in postdated checks as investors, upon receiving their shares, used them as collateral to borrow even more money for stock speculation. The traders who received the double or triple-premium postdated checks in return for selling their stock, then proceeded to discount the checks in return for cash; that cash was then parlayed into an even larger stock investment . (3) Like the tulip bulb mania and the South Sea bubble before it, the Souk al-Manakh “miracle” was an illusion, an inverted pyramid reliant upon share prices increasing exponentially for its continued existence.
Word of the Souk al-Manakh “money machine” spread like wildfire around the Middle East, causing wealthy Palestinians, Egyptians and Pakistanis to purchase stock through Kuwaiti nominees as only Kuwaitis could trade legally. Non-Kuwaitis were just as eager to invest despite their lack of legal standing. At the boom’s peak, in 1980-1981, some stocks were advancing 100 percent per month, with some advancing ten-times. One stock, The Gulf Company for Industrial Development, even advanced fifteen-fold. The combination of extreme stock gains and astronomical amounts of leverage made many speculator s millionaires and billionaires many times over.
The IPO market flourished as enterprising and crafty business people sought to take advantage of the credulous investing public’s insatiable appetite for shares of all kinds. Scam companies were spawned overnight, with neither customers nor products, while legally escaping the regulation of Kuwaiti authorities. One IPO example was formerly a failed $100 million real estate venture, that was converted to a hospital, called “Gulf Medical,” and brought public by the individual s looking to recoup their initial investment . So successful was the IPO, that it was 2,600 times oversubscr ibed, where, “for a whole week, one to two planeloads of completed subscription forms arrived daily from around the Middle East.” The investment bank hired forty Egyptian schoolteachers to process the stacks of paperwork. Over the next few months, Gulf Medical proceeded to to advance 800 percent, garnering the owners a handsome profit. (1)
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