San José State University
Department of Economics
& Tornado Alley
Within the Islamic world there is a division between Sunni and Shiite. Shi'ism, founded in what is now Iraq, predominated in Iran but Sunni was the dominant political faction elsewhere. However it some areas, particularly on the perimeter of Iran, Shiites constitute a major element of the population. Kuwait is one such case. Kuwait is run by twenty Sunni families whose forebears migrated to Kuwait in the 1700s from the Nejd in eastern Arabia. This dominance foreclosed the opportunities for advancement within the government for the non-Nejdi. Instead the non-Nejdi have pursued business as the road to fame and fortune.
In the late 1970s the Government of Kuwait became involved in supportin the stock market. By the 1980s substantial funds were being invested in the stock market because it appeared that government support for the market guaranteed against losses.
In Kuwait it was common practice to make purchases with postdated checks. The checks were backed not only by the credit of the individuals issuing them but also by the extended families of the issuers. Family honor would be lost if there was default on a family member's check. Bank would discount such postdated checks. There had never been a bankruptcy in Kuwait so no one worried.
When the stock market boom in Kuwait was in full swing it was fueled by the practice of accepting postdated checks for stock purchases. People purchased stock expecting the price to have increased by the time the postdated check came due to not only cover the purchase price but also to provide a substantial profit. With prices increasing 10 to 20 percent per month this seemed entirely justified. There were some stocks that increased 100 percent per month. The total market value of all the stocks in Kuwait market rose from $5 billion to $100 billion.
The boom in Kuwaiti stocks inspired some creative marketing for nearby areas. In Sharjah there had been a property market collapse. A hotel had been converted to a hospital. This, along with other properties, was used to create Gulf Medical. Its initial public offering was oversubscribed by a factor of 2600. Planeloads of purchase offers arrived daily for a week and the Bank of Sharjah could not cope with the volume. The price of Gulf Medical increased 800 percent.
In the speculative boom things went crazy. One young employee of the Passport Office wrote $14 billion in postdated checks. The brother of the Passport Office employee was found to have overdrawn his bank account by $3.4 billion. The worst eight offenders had written checks for a total of $55 billion.
The bubble burst in 1982 when Kuwait found its oil revenues down 75 percent from the level of 1980. A new finance minister revealed that he was not going to support stock prices at the ridiculous levels they had reached. The collapse came when the holder of one of the postdated checks of the infamous Passport Office employee demanded early payment. The check could not be covered and panic insued.
The Ministry of Finance finally covered about $90 billion of postdated checks. The price of Gulf Medical fell 98 percent. Commerce declined and social tensionsl increased.
Source: John Train, Famous Financial Fiascos, (Crown Publishers: New York, 1985).
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