Traders in Kuwait call them "paper stocks", shares of companies with little intrinsic worth and no purpose other than plying the rumour mill for quick profits on the country's chaotic market. Every weekday, scores of traders lounge on red seats on the sprawling Kuwait Stock Exchange floor, looking up at glowing screens that ring the room, some of them buying and selling shares of these empty hulks of companies.
"Paper stocks have no operational profit or anything," says Ahmad Qasem, a broker who works in an office near the floor. "They just do day trading." As Kuwait strives to modernise regulations and attract foreign investment to help reverse the market's recent slide, the question of what will happen to these companies, and how the market's entrenched status as a freewheeling and unregulated nexus of speculation will change, has become critical.
Not only in Kuwait but across the Gulf, the same attitudes that made the paper companies flourish - reasons as much historical as they are economic - form an important part of the challenge of participating more fully in the global financial system and latching on to a recovery from the downturn. Much has been said about the need to attract large foreign institutions to the Gulf by strengthening regulations and ending the reign of individual speculators. That, however, would mean unravelling a decades-old status quo.
For now, though, many companies in Kuwait still play the circular paper-stock game: they raise money by selling shares to the public, then put much of the proceeds back into the market on which they are listed, including in their own shares and those of companies owned by executives and board members. Naser al Nafisi, the general manager of the Al Joman Center for Economic Consultancy, says there are about 30 of these companies in Kuwait. "They are real estate companies, but there is no real estate, food companies but there is no food," he says. "They should be delisted because they are not adding value to the economy. They're not sticking to their objectives, and usually they have no staff because one person can run the company, because it's a paper company. It's quite shameful to Kuwait's economy that we have these companies."
Analysts and investors believe a number of these paper companies will fail in the coming years, the victims of their own excess. Many borrowed millions of dinars from banks to finance share purchases, and the value of those portfolios has declined sharply since the middle of 2008, a period during which Kuwaiti stocks have declined in value by 52 per cent. As loans mature and banks ask for their money back, the thinking is that some of these companies will not be able to raise enough cash by selling their holdings, leading to bankruptcy and leaving a trail of financial destruction in their wake.
Much attention lately has also focused on Kuwait's multitude of investment companies and the troubles they have faced. Almost 50 are listed on the stock exchange and some are also expected to go out of business this year. Two of Kuwait's largest investment firms, The Investment Dar and Global Investment House, have been forced into debt restructurings after they could not secure refinancing from banks amid declines in asset values. Global came to a US$1.7 billion (Dh6.24bn) restructuring pact with creditors last year, and The Investment Dar, which owns half of the high-end car maker Aston Martin, yesterday started legal action to enforce its $3.5bn planned debt restructuring.
Yet the problems in Kuwait run much deeper than just the paper companies and investment houses. There is a general malaise among traders and investors who see the market as an unhealthy, untamed organism. People in Kuwait complain that the market, which has no independent regulator, is rife with insider trading, plagued with schemes to entice unwitting investors and fed by false rumours that often make it into local newspapers.
"There are rumours put out there on purpose, false rumours, there's a lot of that," Mr Qasem says. "You might hear a rumour and then the opposite rumour five minutes later. People are just gambling." Part of the proposed solution has been better regulation. The country's parliament recently passed a law establishing a Capital Markets Authority (CMA) that would bring an independent regulator to Kuwait for the first time in its 48-year history. The hope is that the CMA will help rid the system of paper companies and end a long tradition of trading on inside information about deals and company earnings.
However, it may be some time before the CMA can truly be effective in bringing normalcy and oversight to Kuwait. "Most companies here in Kuwait were family companies that were transformed into public companies," said a Kuwaiti blogger who helps run a popular site called alphadinar.com, where he goes by the name of Saud. "If I knew something about the market, for example earnings coming up or a new contract, I would go to my family and say 'this is my earnings, this is my deal', and you see movement in the stock. Most people don't see this as a wrong thing because they don't understand it. The major thing is that there's no one who prevents people from doing such things, and there's no source to educate people and say this is not good for the capital markets."
One possible illustration of the effect of that lack of knowledge has been the case of Khazem al Braikan, a Kuwaiti businessman who died last year in an apparent suicide after the Securities and Exchange Commission in the US sued him over false stories he allegedly planted in local newspapers about bids for American companies. While activities such as that most probably would have gone unnoticed in Kuwait, playing the stock-operating game in well regulated foreign markets is more carefully watched and often harshly punished.
Yet the CMA in Kuwait remains on the drawing board, and it is not seen as a panacea for the kind of trading that has dominated there at least since the Souk al Manakh was set up in the 1970s. The Souk al Manakh was a parallel market for foreign stocks set up in a disused parking garage, and Kuwaitis bid up stocks listed there into a bubble so large and speculative that it became the third-biggest in the world by capitalisation, behind only Tokyo and New York. When the market crashed in 1982, it brought down the entire banking system with it.
One advocate of the CMA, who asked that his name not be used because of the political sensitivity of the issue, said the bill that was passed did not measure up to other versions that had been presented in the past six years, a span over which Kuwait's parliament has been dissolved and reformed numerous times. "The draft law that they passed has many problems, and they will see many problems when they try to implement this," he said, but added that the new CMA would effectively "restrain the market".
Others, however, are more optimistic. Daniel Kaye, an economist at the National Bank of Kuwait, said the CMA was clearly a step in the right direction, even if it was only an incremental one. email@example.com