THE SOULK AL-MANAKH STOCK MARKET CRASH

Over the past century, the global financial markets have seen many bubbles bursts like the 2008 U.S. Housing Bubble, The Dotcom Bubble, The Dutch tulip bubble etc. The Souk Al-Manakh oil bubble, however, is one of the most catastrophic yet unknown bubbles.

What is an economic bubble?

An economic bubble is when prices of an asset experience a rapid increase due to various reasons, followed by a sudden and significant decrease in prices, this happens because at these raised prices, no investor is willing to buy and a massive sell-off occurs, causing the bubble to ‘burst’ and investors to suffer.

What was the Souk Al-Manakh stock market crash?

In the late 1930s, Kuwait found massive amounts of black gold (oil) and after decades of extracting oil, Kuwait became one of the leading exporters of oil.

Even though the nation had come to an enormous amount of wealth, had no part in it and it was all owned and preserved with the top officials and businessmen, because these few people had so much of wealth, a stock exchange named Boursa Kuwait was launched.

Boursa Kuwait was extensively dominated by the wealthy and the stock exchange was home to a very short list of companies as the nation's royal sheik rarely allowed new IPO’s (Initial public offering) in. Because of the shortlist of companies to choose from, the Souk Al-Manakh stock exchange was born in 1978.

Unlike the Boursa Kuwait, the Souk Al-Manakh was not heavily regulated and allowed investors to invest freely. The Souk Al-Manakh grew massively because of the surge in oil prices during 1979 and created many millionaires. At one point its market capitalisation was the third highest in the world just behind the US and Japan.

How did the stock market crash?

The Kuwait government had a massive loophole for investors to invest without any money on hand. The government allowed investors to buy how many ever shares they wanted with post dated checks which were treated like cash. Stocks listed in the stock market were doubling in weeks as investors poured cash into them. It is said that a young man borrowed 14 billion dollars from the government to invest in the market. Investors didn't worry about the market going down as there was a small downturn later that year which the government bailed out.

After a while shell companies (These are registered companies that are there only on paper but do not exist in reality) started to get listed on the market because investors were investing in any company listed on the market. So now investors were putting the money they didn't have into companies that didn't exist.

As people started to realise that the companies they invested in were actually worthless they started to panic and were hoping that the government would bail them out. The government, however, made it clear that investors had to pay their loans on their own.

The damage was so critical that every single citizen owed almost $230,000 and coupled with oil prices slashing down by 80% and the Iraq forces invading them, it also put the entire gulf region into a never-ending recession. The country still hasn’t been able to recover from the damage.