Souk al-Manakh: Kuwait's $94 Billion Postdated-Cheque Bubble

In the third week of August 1982 a share dealer in Kuwait City took a postdated cheque to a bank counter and asked to be paid. It came back unpaid for want of funds. Bounced cheques are ordinary everywhere, but this one had been written inside the Souk al-Manakh, the unofficial share market trading out of an air-conditioned building raised on the site of an old camel yard, and it was one of several thousand near-identical promises circulating among a few thousand men in a country of fewer than 1.6 million people. Within days the Ministry of Finance ordered every outstanding cheque registered and deposited.

Registration produced a figure that nobody in Kuwait had ever assembled, including the dealers who had signed the paper: roughly 26.6 billion Kuwaiti dinars of postdated cheques, about 94 billion US dollars at the exchange rate of the day, written by some 6,000 traders. Kuwait's gross domestic product that year was in the region of 20 billion dollars. A market operating in a converted garage had issued personal obligations worth more than four times the annual output of the state that housed it, most of it inside three years, against shares in companies that in many cases owned a licence, a letterhead and very little else.

An Overflow Valve the State Had Built Itself

Kuwait had been here before, on a smaller scale. Share trading in Kuwait grew up informally after the National Bank of Kuwait was chartered in 1952 as the country's first joint-stock company, and by the mid-1970s an exchange of sorts was running on the strength of oil receipts that had quadrupled after the 1973 embargo. That first boom broke in 1976 and 1977. The government responded by buying shares to arrest the decline, committing a support fund of around 150 million dinars, and then by closing the doors behind it: new joint-stock flotations were effectively frozen, and the official exchange was hedged with rules on who could list and how prices could move.

Money did not stop arriving because the exchange stopped listing. Kuwait's oil revenues ran from under 2 billion dollars in 1972 to roughly 18 billion by 1980, and a tenth of every year's receipts was already being diverted into the Reserve Fund for Future Generations, the sovereign vehicle that would later hold stakes in firms as distant from the Gulf as Metallgesellschaft in Frankfurt. What the post-1977 rules produced was a domestic surplus with almost nowhere legal to go — a small pool of tightly regulated blue chips, no new issues, and a population accustomed to the idea that share prices went up.

Two oil shocks built the pool. The 1973 embargo that followed the Yom Kippur War took the posted price from $3.29 to $11.58 in a year, and the Iranian revolution took it to $36.83 by 1980. Jill Crystal's study of the Kuwaiti and Qatari ruling bargains describes the political arrangement that followed: a merchant class bought out of power with a share of the rent, and a state that answered distress in the merchant community with money rather than with rules (Crystal, 1990). Both halves of that arrangement would be tested within a decade.

Gulf Companies and the Camel Yard

The instrument that made the second boom possible was a category, not a security. Companies incorporated in Bahrain, the United Arab Emirates and Oman — known collectively as Gulf companies, frequently promoted and owned by Kuwaitis — could not list on Kuwait's official exchange. They could, and did, trade in a parallel venue where the official rules simply did not reach.

That venue was the Souk al-Manakh. The name attached to the district rather than to any institution: manakh is where camels kneel, and the building that housed the market stood where animals had once been bought and sold. Its lower floors had been laid out as parking. By 1981 the space held ranks of desks, telephones and blackboards, and trading in it dwarfed the regulated market a short distance away. Michael Field, surveying the merchant families of the peninsula in the same period, recorded a Gulf business culture in which reputation and family name still functioned as collateral in transactions that no Western bank would have booked without documents (Field, 1984).

Supply was elastic in a way the official market's was not. A Gulf company could be incorporated in a neighbouring state quickly and cheaply, and its shares brought to the Manakh with no prospectus requirement, no disclosure regime and no meaningful test of whether the business existed. Shell promotion of this kind was not a Gulf invention — Australia's Poseidon nickel boom of 1969 had run on exploration licences over ground nobody had drilled — but the Manakh added a settlement mechanism that removed the last constraint on how much could be bought.

The Cheque as a Credit Instrument

In a normal market, leverage is rationed by a lender who assesses the borrower. In the Manakh it was rationed by nothing at all.

A buyer who wanted shares and lacked cash wrote a cheque dated six or twelve months forward, and paid for the delay with a premium over the spot price. Premiums ran high — rates well above 50 per cent a year were routine, and annualised figures of 100 per cent and more were recorded on some paper. No bank stood between the parties, no margin was posted, and no clearing house netted anything down. The seller took the cheque as an asset and frequently endorsed it onward to buy shares of his own, so the same signature travelled through several hands.

Two consequences followed mechanically. First, a dealer's capacity to buy was limited only by the willingness of other dealers to accept his signature, which in a rising market was close to unlimited. Second, every participant was simultaneously a creditor and a debtor to a chain he could not see the end of, so a single default would not stay local. Charles Kindleberger and Robert Aliber place the Manakh in the standard sequence — displacement, credit expansion, euphoria, distress, revulsion — and note that the credit expansion here was privately manufactured, arising inside the market rather than being extended to it by banks (Kindleberger and Aliber, 2005).

Fida Darwiche's account, written from the Kuwaiti documents within four years of the collapse, sets out how far this went: prices for some Gulf companies reached multiples of book value that had no relationship to any earnings the firms had ever reported, and the forward premium became the object of trade in its own right, valued more highly than the shares it was nominally financing (Darwiche, 1986). By the summer of 1982 the capitalisation claimed for the parallel market placed Kuwait, on paper, among the largest equity markets in the world — a claim of the same species as the one made for Tokyo at the peak of the Japanese asset bubble, and resting on prices at which only a trivial fraction of the stock had actually changed hands.

The Numbers That Registration Produced

Ordering every postdated cheque lodged and registered was the moment the market found out what it had done.

Jassim al-Mutawa's position is the detail that survived into every later account, and it survived because it is almost self-parodying: a young employee of the passport department had put his name to obligations of about 14 billion dollars. He had no assets remotely approaching that figure and had never pretended otherwise. His signature circulated because it was accepted, and it was accepted because it circulated. Eight dealers, al-Mutawa among them, accounted for the majority of the total.

Kuwait's banks had not written the cheques, but they had lent against shares whose prices the cheques had set, and they held the deposits of dealers whose net worth had just been revealed as negative. When the Central Bank of Kuwait examined the system, the assessment that emerged and has been repeated ever since was that every commercial bank in the country other than the National Bank of Kuwait was technically insolvent. The state did not permit a single one to fail.

Settling an Amount That Did Not Exist

The government's difficulty was arithmetic before it was legal. Claims of 94 billion dollars could not be honoured at face value by a country earning under 20 billion a year, and enforcing them would have transferred the entire private wealth of Kuwait to a handful of creditors who were themselves insolvent to somebody else.

Kuwait's response was to unwind the chain rather than enforce it. A clearing company was established in August 1982 to register, net and settle the paper. Special arbitration panels were created to adjudicate the claims, and the principle they applied cut the total sharply: the forward premium embedded in each cheque was treated as speculative excess rather than as an enforceable debt, so claims were reduced towards the underlying cash value of the shares. A fund of several hundred million dinars was set up to buy shares from small investors at supported prices, ranking the smallest holders ahead of the dealers. Losses were allocated administratively, by a state acting as the only solvent party in the room.

Abdlatif al-Hamad, the Minister of Finance and Planning who had spent the boom warning about it, left office in 1983. The National Assembly pressed for an accounting of who had been bailed out and on what terms, a line of questioning that named prominent families and did not endear the chamber to the government; the Assembly was dissolved in 1986. Prosecutions followed for the largest dealers, and a formal exchange was re-established that year by Amiri decree, with a purpose-built floor, a listing committee and a supervisory structure that the parallel market had existed precisely to avoid.

What the state could not do was restore the balance sheets underneath. The 1986 collapse in oil, which halved the annual average price in a single year, arrived while Kuwaiti banks were still carrying Manakh-era loans, and the Difficult Credit Facilities programme moved much of that portfolio onto the government's books. Settlement legislation was still being drafted and redrafted when Iraqi armour crossed the border in August 1990.

What the Manakh Actually Demonstrated

Postdated cheques were not exotic. They were the most mundane instrument available in Kuwait, which is the point: the market did not need a derivative to build four times GDP in leverage, only an IOU that everybody agreed to treat as money and nobody was required to register. Tulip contracts in 1637 and the subscription instalments that carried the South Sea Company in 1720 worked the same way — a promise to pay later, endorsed onward, circulating faster than anyone could count it.

The regulatory lesson was the sharper one, and it was aimed at the authorities rather than the speculators. Kuwait's post-1977 rules did not reduce the appetite for shares. They relocated it, from a venue the Central Bank could see to one it could not, and then left it there for five years while the oil price did the rest. Every element the official market had been fitted with after 1977 — disclosure, listing standards, price limits — was present in the country and absent from the place where the trading was actually happening.

A single figure fixed the episode in the literature, and it is not the 94 billion dollars. It is the 14 billion attached to one clerk in the passport office, which stands as the cleanest illustration on record of what a signature is worth in a market that has stopped asking. The paper bearing it was still being argued over in Kuwaiti courtrooms eight years later, when the shooting started.