Kuwait's $90 billion "parallel" stock market has collapsed, rocking the Arab side of the Persian Gulf and causing a scandal inside Kuwait.
"The financial eagles of the gulf have crashed," remarked one Western financial expert, referring to the Kuwaitis' reputation as the sharpest investors and money men in the Arab world.
The crash touched off an uproar in Kuwait's parliament as deputies demanded that the government resign or at least move to restore business confidence.
The government is now taking steps to contain within Kuwait the political effects of the giant crash of the parallel market by helping thousands of small investors who were caught up in the frenzy of buying and selling of shares in companies registered in other gulf countries. Many of them existed only on paper.
It is also taking a tough line against the mighty of Kuwaiti society who gambled hundreds of millions, and in some cases billions, of dollars on the so-called Souk Mankh, an illegal, unregulated market that traded in shares of often shadowy companies outside Kuwait, with payment in checks postdated by up to two years.
At least four ministers and one high-ranking member of the ruling Sabah family are among those who stand to lose their fortunes and in some cases even go to jail.
"Those who can honor their commitments, fine," said Kuwaiti Finance Minister Abdel Latif Hamad in an interview with visiting correspondents. "Those who cannot, they can go to prison . . . . I have no regrets for taking this very hard position because Kuwait's name cannot be restored unless we are tough."
Hamad estimated that "only a hundred or so" were in danger of being sentenced to prison. But in Kuwait's small elite, this would be a huge number.
The Kuwaiti finance minister also said the crash had shaken Kuwait's regular stock market and set back by six to 12 months government plans to reform the system.
The crash had been in the making since last April, when activity on Souk Mankh, which lists only companies from other gulf Arab states, virtually came to a halt and doubts about its future set in. In July, thousands of postdated checks that had been used to buy, sell and swap shares in the gulf companies began coming due at the same time and debtors were suddenly unable to pay their creditors.
The magnitude of the crisis only became clear after the Oct. 20 deadline for registering the postdated checks with a government-appointed clearinghouse.
Hamad said 28,800 checks worth more than $92 billion were registered. He said a number of "fictitious claims" were made on the assumption that the government planned a partial reimbursment.
According to Kuwaiti press accounts, eight dealers had signed away $63 billion in checks and were at the center of the crash.
At least one of these dealers, parliamentary deputy Humud Jabri, has been able to write off some of his debts thanks to his generous creditors, according to these reports. A similar canceling of debts among big dealers and investors is thought likely to avoid bankruptcy for a number of others, but many are clearly headed for ruin.
The main financial and political problem facing the Kuwaiti government has been how to potect small investors -- Bedouins gambling away their gold hoardings, drivers and household servants.
The government proposed to establish a $1.7 billion fund to reimburse investors with bonds up to a maximum of $6.8 million per individual. Bonds worth up to $340,000 are to be repaid immediately but larger amounts are to be reimbursed over up to five years, depending on the amount of money involved.
Parliament approved the government bill earlier this month after heated debate. But this covers only a tiny fraction of the amount involved in the crash. Some Kuwaiti-based financial analysts foresee a substantial transfer of wealth within Kuwaiti society as big debtors are forced to sell off their real estate and other holdings to meet their obligations. Real estate values have already plummeted.
The Souk Mankh was a uniquely Kuwaiti phenomenon which developed as a result of vast oil wealth seeking outlets beyond the limited investment opportunities within the country.
The name means roughly "camel park" after its location in a new downtown building on grounds which in olden days served as a parking station for Bedouins coming in from the desert. The building began serving as a "parallel" stock market to the regular one just next door about two years ago as Kuwaitis set up companies for investment and speculation that could not be listed on the main market because of its stricter rules.
Kuwait requires a company to complete three years of activity before it can be listed on the regular stock market.
The Souk Mankh companies were officially established in Bahrain or the United Arab Emirates, where there is no stock market, and then their shares were traded in Kuwait almost entirely among Kuwaitis.
Other gulf Arabs used Kuwaiti partners to play the market, which for a year registered spectacular gains for virtually all its investors.
Some of the 39 firms currently listed are known to be financially sound and highly profitable investment houses owning high-priced real estate in Paris, London and New York. But others were set up overnight as speculative ventures and their shares traded at ever higher prices in the general euphoria even before they had opened their doors for business or published any account of their profits and losses.
Playing the Souk Mankh became a national Kuwaiti obsession, with almost every adult male spending lunch hours and evenings there swapping shares and paying for most of them in checks postdated six months or even one year.
These checks were then traded, sometimes at discounts, in return for more stock. Little money was actually exchanging hands until the checks began falling due.
The failure of one big dealer to pay such a check in midsummer touched off the run on the entire market and created the national crisis of confidence that the government is now trying to resolve by pushing through long overdue reforms.