Discover more from The Bubble Blog
Deserts, Dollars, and Delusions: The Collapse of Kuwait's Souk Al-Manakh Bubble
The Souk Al-Manakh bubble occurred during a formative period in Kuwait's history. The nation had gone from a regional backwater to a wealthy oil power in just a few decades.
This massive influx of wealth led to significant cultural and economic changes in Kuwaiti society.
It also led to one of the greatest stock market booms and busts in history.
The Backdrop to the Boom
Kuwait had been a traditional pearl trading hub. But the discovery of oil in the 1930s changed everything. By the 1970s, oil exports were generating enormous revenues for the government.
The living standards of Kuwaitis soared.
With wealth came more cosmopolitan aspirations. Kuwait underwent a rapid modernization drive. Western-style malls, hospitals, and infrastructure projects appeared across the desert landscape. The Souk Al-Manakh bubble was partly fueled by this appetite for speculating in stocks. Frowned upon by the tenets of Islam, it was novel and seductive concept for many Kuwaitis.
The rise of the Souk Al-Manakh also reflected tensions between traditional society and the newly wealthy class. While well-intentioned, the government's paternalistic economic policies often constrained investors' options.
So when the chance came to speculate freely in the Souk Al-Manakh’s unregulated frontier, many jumped at the opportunity.
The Birth of a Bubble
This bizarre financial bubble emerged out of Kuwait's sudden oil wealth. In the 1970s, oil prices surged after the OPEC oil embargo sent shock waves through global energy markets. As a major oil exporter, Kuwait saw its petrodollar income skyrocket seemingly overnight. Much of this newfound money made its way into stocks. This created a speculative mania whose devastating bust seemed inevitable.
Kuwait had established its official stock exchange in 1977. But trading started slowly on the new exchange. That prompted the government to halt new stock offerings. It even bought up shares itself to provide support. By the end, the government-owned 40% of all listed stocks.
With the official exchange struggling to gain traction, an alternative informal market sprang up in 1978 in the old camel trading garage. This new exchange was dubbed the Souk Al-Manakh: “the market at the resting place for camels.”
Yes, the greatest bubble in history boomed and busted in an air-conditioned parking garage that once housed a bustling camel trading souk. e.
Unlike the official exchange, the Souk Al-Manakh traded unlisted shares of companies. It actively sought to evade government regulations.
The foundations of the stock bubble were laid in 1979 and 1980. War in the Middle East caused oil prices to spike again. Money poured into the Souk Al-Manakh. Investors eagerly snapped up shares in obscure companies with little operations or assets. Share prices soon detached from any rational valuation, fueling massive speculative fervor.
At its peak, this parking garage stock market ranked as the world's third-largest exchange, trailing only New York and Tokyo.
Checks as Good as Cash
The Souk Al-Manakh also pioneered a unique form of trading using post-dated checks. Investors could buy shares by writing a check with a future payment date. That allowed for almost unlimited leverage. Sellers could then borrow against these checks before they cleared. The practice skirted margin lending restrictions.
These post-dated checks circulated as cash in the overheated market. Traders used them to purchase more shares, endlessly passing them to the next willing buyer. Worthless or bad checks abounded. But no one cared as long as stock prices kept rising.
Jassim al-Mutawa, a Passport Office employee still in his twenties, bought $14 billion himself. He paid with useless checks. His brother, Najeeb al-Mutawa, didn't bother to record the checks he issued. When he finally totaled things up, he found they didn't quite: he was $3.4 billion overdrawn.
He was perhaps the world's largest debtor at the time.
The Party Crashes
In 1982, the wild speculative party came to an abrupt end. By now, oil prices had begun sliding down from their historic highs. Investors suddenly rushed to cash in their post-dated checks before they bounced. The Souk Al-Manakh index plunged nearly 60% in just three brutal months. Hundreds of companies went bankrupt overnight. Every single bank but one collapsed. Bad checks overwhelmed the system.
The government initially refused calls for a bailout. They wanted to let foolish speculators suffer the consequences. But it soon relented. The damage threatened to spill over into the official stock exchange and the broader economy. It established a $1.7 billion government rescue fund. It limited payouts to individual investors to a measly $1.7 million.
Sifting Through the Wreckage
Sorting out the rubble of the Souk Al-Manakh debacle took years of effort. Defaulted checks totaled a staggering $93 billion in value. That was more than four times Kuwait's entire GDP. Just nine prominent dealers were found to owe nearly two-thirds of this astronomical sum.
Dozens of market operators were arrested in the weeks following the crash. The previously vibrant Kuwaiti economy sank into a severe recession. But the government attempted to cushion the economic blow. It even bought up land to aid overextended real estate investors.
The story of Kuwait's "garage" stock market bubble contains timeless lessons. It illustrates how an influx of petrodollars can fuel speculative manias. The allure of overnight riches overwhelmed common sense. Its crash provides a sobering reminder that markets are inflated by leverage and easy money. The Kuwaiti stock bubble was undoubtedly one for the history books.