Al-Hamour

Court order halts Kuwait Stock Exchange trading

I received a phone call last Thursday morning around 10:40 am informing me that all trading on the Kuwait Stock Exchange [KSE] has been suspended. Here is what the press reported:

Lawyer Adel al-Abdul Hadi says the Administrative Court in Kuwait City ruled on Thursday that all trading be halted. The order takes effect immediately and is to last until next court hearing on November 17 [1]

At first I was not sure of the story and I kept getting different answers so I decided to focus on the event itself and not the details of what happened. What is confirmed is the parties involved are a lawyer[s], Kuwaiti Courts, and the KSE. This is what I imagine happened:

المحامي: افففف ! كل يوم حد أدنى! كل اللي أشوفه أحمر! ليش الحكومة الكويتية ما تسوي شي؟

يدخل الفراش كعادته الساعة الحادية عشرة صباحا وبيده استكانة الشاي مع الدرابيل

الفراش: سنو فيه بابا، ليش زعلان؟

المحامي: هذا السوق، تدري اشكثر خسران؟

الفراش: سنو يعني؟ كم فلوس يبي بابا؟ أنا يعطيك

!المحامي: لو تشتغل 100 سنة معاشك ما يغطي ربع الخساير

الفراش: أنا يقول حق انتا سنو يسوي.. هادا في كراتشي سوق كل يوم ينزل. ناس نفر روح سوي “بروتست”  حق حكومة مال باكستان، حكومة وقف سوق

المحامي: ها؟ والله يطلع منك! انزين روح ييبلي بعد درابيل

Lawyer: Damn it! Its limit down every day! I see is red! Why isn’t the Kuwaiti government doing anything about this?

Tea Boy enters with red chai and darabeel [2] as he usual does at 11:00 every morning

Tea Boy: What’s wrong Baba. Why are you upset?

Lawyer: This market, you know how much I have lost?!

Tea Boy: What does that mean? How much money do you need, I’ll give you.

Lawyer: If you work for 100 years, your salary won’t cover a quarter of my losses!

Tea Boy: Let me tell you what to do. In Karachi, the market was down every day. People went to ‘protest’ and the government stopped the trading.

Lawyer: Huh? Well you do have some good ideas. Now go get me more darabeel.

The rest is history.

If anyone has a copy of the court ruling please email me a copy and I will post it

To be fair, stock markets do close when extraordinary situations prevail. An example would be 9/11 when the American stock markets were closed from September 11 - 14, 2001. However, it was a decision made by the government not for the government by a lawyer.

What actions should be taken

I believe that if there are people that are willing to spend the time and effort improving the public markets and investment community they should be addressing the following.

Issue: Liquidity

Objective: Liquidity is the lubricant the market needs in order for it’s internal gears to function smoothly. In addition, liquidity also provides forced sellers a means to exit their positions in order to fulfill their obligations.

Proposed Solution:

• Market makers: In a free market operation, a buyer will always seek a seller and vice-versa. At times, we find that there is a large gap between buyer and sellers in a market due to liquidity constraints. Market makers are in the business of ensuring liquidity is available to whomever needs in by always making a bid [buyer] and offer [seller]. Instead of the Kuwaiti government merely injecting cash into the market, I suggest they establish a KD 150-200 mm Market Maker fund. The government would appoint various investment companies, that meet the criteria, to become market makers using these funds. The company would benefit by being able to generate income on the spread and the government will address the issue of liquidity, a win-win situation.

Issue: Regulation

Objective: To ensure that a conflict of interest does not exist between the financial market regulator and an exchange operator.

Proposed Solution:

• FSA model: London’s Financial Services Authority is a good example to follow as an independent  non-government body with a wide range of rule-making, investigatory and enforcement powers in order to meet their objective. The FSA has no relation to the exchanges which operate in England and are accountable to the Parliament. [3]
• Private Bourse: Kuwait should allow the establishment of private bourses or exchanges. Not only does this improve efficiency through competition, but it also enables greater access to market participants for companies that currently do not meet listing requirements. However, this is not limited to equity exchanges as we should also develop exchanges to trade credit [bonds & sukuks] , commodities, and other financial instruments.

Issue: Transparency

Objective: Stockholders should always have the right to access company information as they are owners in the businesses they invest in. Management should not try and deceive shareholders and are expected to provide accurate and non-misleading information.

Proposed Solution:

• Frequent investor communication:  A simple way o ensure that stockholders are aware of the company’s activities is by holding events where the management discusses such issues. In addition to the annual report and general assembly, companies should have more frequent communication with investors and analysts covering the stock. This ensures that decision makers are equipped with the necessary information in order to make decisions as the whether to buy, sell, or hold. I suggest that companies have quarterly analyst and investor calls/meetings that discuss the financial statements produced.

Issue: Competence

Objective: Te ensure professionals managing and advising client assets are qualified to do so.

Proposed Solution:

• Regulation of investment professionals: Kuwait must develop licenses for investment professional who are managing or advising client assets. The General Securities Representative license [Series 7] is one example of the requirements needed in the US for a professional to communicate with retail investors, among other things. It is essential that we establish such guidelines and licenses in order to ensure that qualified and competent people are managing our money.

Obviously these suggestions are not the be-all and end-all of what needs to be done. However, I believe they tackle the most important issues we are faced with today. I am confident that if we focused our time and effort in trying to address these issues and implement the proposed solutions rather than having silly protests, we will be one step closer in establishing a more sophisticated financial community.

[1] The Associated Press. November 13, 2008.

[2] Darabeel: Arabic sweets

[3] Financial Servies Authority

Tags: kse, kuwait, kuwait stock exchange, lawyer, policy, trading

Gulf Bank of Kuwait Shipwrecked

The Credit Reaper has been a world tour this year, staying at the world’s best cities and footing the bill to the local investment, commercial, and central banks. Starting off in the US,  he then went on to take a tour of Europe via a short layover in Hong Kong. To date, the reported cost of his trip is estimated at US$ 650 bn with the US and Europe accounting for 95% of the cost and Asia only representing US$ 24 bn of that amount [1]. The banks have been calling this cost ‘credit losses and writedowns’ and with the aid of the respective central banks have been able to raise capital to cover the losses.

For a brief period things seemed to quiet down and the G7 were active in trying to clean up the mess. Little did they know that the Credit Reaper was partying in Beirut, apparently seen at Sky Bar, getting ready for the second leg of his tour. He arrived this morning at Kuwait’s International Airport carrying a large scythe with the word ‘Derivatives’ carved down the wooden shaft. First stop, Gulf Bank of Kuwait [GBK].

It was a quiet morning on the treasury floor at Gulf Bank’s HQ (MAK as referred to by the bank’s employees) until about 9am. The news spread like wildfire of the Reaper’s arrival and soon enough the Central Bank of Kuwait requested that the Kuwait Stock Exchange suspend trading of Gulf Bank shares [Bloomberg: GBK.KK Equity]. Here is a summary of that statement:

09:08:25 - Suspend trading of Gulf Bank shares at the request of the Central Bank of Kuwait [2]

• The bank’s clients have refused to settle losses on derivative contracts
• Gulf Bank will incur the losses until the matter is settled between the bank and its clients
• The Central Bank is working with GBK to resolve the issue and will appoint a member of its team to oversee all treasury trading and risk management
• The Central Bank will support the bank during this time and will ensure its deposits
• Kuwait’s government will pass a bill, brought forth by the Central Bank, to guarantee deposits at the Kuwaiti banks

After further investigation into the matter the following points were revealed:

• One of the counter parties with derivative exposure is POKREC. There are 5 - 6 other investors with similar exposure.
• The derivative product was short US$ and short volatility (That means if the US$ appreciates vs the Euro the investor losses money)
• The current estimated loss is Euro 700 mm. That is approximately US$ 882 mm or KD 240 mm. Gulf Bank’s Tier 1&2 Equity is estimated at KD 445 mm as per the bank’s 3rd quarter financials.
• Mr. Y Al-Muzaini is the appointee chosen by the Central Bank to oversee the treasury department’s activities
• GBK board members have been placed under country arrest and are not allowed to travel outside Kuwait

To help understand the magnitude of the situation and to put this in perspective, here are some of my observations and comments given the information so far:

Central Bank statements: The fact that the Central Bank has come out to support the banks is a good move to help promote stability. I wouldn’t be surprised if depositors are already lining up to take their money out of GBK [I will post pics of GBK branches]. With respect to the oversight, part of their mission is to ‘Control the banking system in the country’, and so they are being proactive in that nature. [3] However, I would not expect the Central Bank to start bailing out institutions that fail to be prudent in their risk management and investments activities. Such behavior will only promote companies on the edge of collapse to seek the aid of the government. I believe that the markets should determine their outcome and the industry leaders and participants to think about a possible consolidation where only the strong survive.

Derivative losses: As of now, it is not clear who will bear the losses incurred so far. However, the two possible scenarios play out as follows:

1. Counter party refuses payment: Gulf Bank takes the hit and records the loss on its own books. This will have major implications for the bank as the loss represents approximately 54% of the bank’s equity. In addition, GBK is suffering a KD 45 mm loss from treasury shares and if the stock continues to tank this will erode their ability to maintain an acceptable capital ratio. GBK has also classified a major portion of their investment holdings as Available for Sale. As these investments incur losses due to the faltering word financial markets, the bank will also find it difficult to maintain the capital required. This will mean that the bank will have to be recapitalized either by issuing additional capital via the public market [capital increase] or seek additional capital from the Central Bank or Kuwaiti government. GBK will then have to seek the losses from the counter party legally and battle it out in the courts for many years to come. If it fails to recapitalize then the bank will have to consider filing for bankruptcy.
2. Counter party accepts losses and makes payment: Depending on the financial health of the respective company, this will have a material effect on the company’s balance sheet. I have gathered a list of the names with exposure but will follow up this post with more specific analysis on each company as the names become public. In any case, there will be a general de-leveraging of institutions as well as individuals in line with what is already happening across the globe. We will see asset prices falling and I would not be surprised to see individuals and corporates filing for bankruptcy.

I would not rush to pull my money out of Gulf Bank but I would greatly reduce my exposure to the bank. I currently have an account with National Bank of Kuwait [NBK] , Gulf Bank, and Burgan Bank. I will be looking to reduce my assets in Gulf Bank and Burgan Bank and increasing my NBK account and open an account with Commercial Bank of Kuwait.

I am not an advocate of rumors that promote harm to a company or its employees. However, as information becomes public it is imperative that it is analyzed and distributed to ensure people in need of such information make their decisions accordingly. As mentioned before, I will follow up this post will some more analysis as more information comes to light.

Please note that certain information has been abbreviated to ensure this blog is not held accountable for any slander charges. If anyone wishes to obtain further information or would like to discuss the issue further please post your comments below or email me.

[1] Bloomberg

[2] Kuwait Stock Exchange

[3] Central Bank of Kuwait

Tags: al-muzaini, banks, Central Bank of Kuwait, credit crisis, gulf bank, kuwait