The Souk al-Manakh Crash

11.18.19
(PDF DOI: 10.26509/frbc-ec-201920

From 1978 to 1981, Kuwait’s two stock markets, one the conservatively
regulated “official” market and the other the unregulated Souk al-
Manakh, exploded in size, growing to the point where the amount of
capital actively traded exceeded that of every other country in the world
except the United States and Japan. A year later, the system collapsed
in an instant, causing huge real losses to the economy and financial
disruption lasting nearly a decade. This Commentary examines the
emergence of the Souk, the simple financial innovation that evolved to
solve its rapidly increasing need for liquidity and credit, and the
herculean efforts to solve the tangled problems resulting from the
collapse. Two lessons of Kuwait’s crisis are that it is difficult to separate
the banking and unregulated financial sectors and that regulators need
detailed data on the transactions being conducted at all financial
institutions to give them the understanding of the entire network they
must have to maintain financial stability. If Kuwaiti officials had had
transaction-by-transaction data on the trades being made in both the
regulated and unregulated stock markets, then the Kuwaiti crisis and its
aftermath might not have been so severe.

In 1980 Kuwait was the financial center of the Arabian Gulf. At that time, other centers
such as Saudi Arabia, with its broker-based stock market, and Bahrain (which was a
satellite market of Kuwait’s) were not the sophisticated trading centers that Kuwait was.
Kuwait had more trading and more stocks on its markets than any other Gulf country
(Darwiche, 1986). The banking sector was robust, with 10 large banks, and these were
regulated by agencies using modern (for the time) prudential practices (Al-Yahya, 1993).
Kuwait’s stock market, the Boursa, had been established in 1977 on lessons learned from
a steep stock price rise and fall in over-the-counter trading the previous two years.
Regulation of the stock market was based on modern (by 1980s standards) principles of
financial caution and good sense.
However, side by side with the formal banking sector and stock exchange existed a less
regulated market, the Souk al-Manakh,1 where new and innovative stocks, which were
not traded on the Boursa, could be traded in an air-conditioned parking garage that had
been built over the old camel trading market. Regulators had made a prudent effort to
ensure that the banking sector was not too exposed to the risky financial innovation of the
Souk al-Manakh exchange, for example, by prohibiting banks from lending for the
purpose of buying stock on it. Both the Boursa and the Souk al-Manakh were not thinly
traded: The amount of capital actively traded in these markets during this period of high
oil prices was the third-highest in the world, after the United States and Japan, exceeding
even the capital traded on the London markets.2
Yet in August 1982 the entire financial structure collapsed. The collapse was so severe
that nearly every major participant in the financial sector took a hit and so quick that most
participants weren’t sure if they were solvent or what they owned if they were. In
September 1982, the financial authority ordered all debts incurred on trades in the Souk
al-Manakh to be turned over to it so regulators could sort the debts out; in doing so, they
determined the amount of worthless obligations totaled $93 billion (in 1982 US dollars), an
amount equivalent to $90,000 (US) for every Kuwaiti—woman, man, or child. By
comparison, the annual per capita American income at that time was about $14,000. The
disarray of the collapse went on for many months, and some of the disputes that arose
over the distribution of whatever could be recovered from the losses were still in process
when Kuwait was invaded by Iraq eight years later.
In the end, all but one of Kuwait’s banks were technically insolvent (United Nations, 1989).
The reputation of the Boursa was so ruined by the loss in value of its stocks that the
government chose to resurrect the exchange in a brand new building and with a new
name several years later, and the innovative Souk al-Manakh was completely shut down.
The entire Gulf region went into recession.3
Using the Kuwaiti experience as an example, I show how collapses can unfold with
terrifying rapidity, with consequences that last for decades in modern economies with
sophisticated financial structures. I argue that to manage and help prevent such
catastrophes, financial data must be collected at a transaction-by-transaction level of
detail from all financial institutions, in both the traditional financial sector and the shadow
sectors—that is, sectors that operate with little or no regulation though they perform
some of the functions of those that are regulated. Such data collection would have helped
prevent the Kuwaiti crisis by exposing the enormity of the potential financial problems of
the unregulated sector and its connection to both the banking sector and the stock
market. It would have also eased the nation’s recovery from its stock market meltdown, in
that it would have facilitated the fair distribution of the remaining assets from the collapse
so that growth could occur.

Before the Collapse

The Souk al-Manakh essentially started in 1978 as traders met informally to trade stocks
that were not covered by the strict regulatory requirements of Kuwait’s official stock
market, the Boursa. By 1981, nearly 40 stocks of companies in non-Kuwaiti Gulf countries
were trading on the Souk.
Authorities permitted the Souk al-Manakh to form and operate with little regulation
because they viewed it as a place where economic innovation could occur in a way that
was separated from the rest of the financial sector.4 They hoped the Souk could fund
speculative and innovative projects that would attract investment from the entire Gulf
region.
Both the Boursa and the banking sector were heavily regulated following a Kuwaiti stock
market crash in 1977, and the Ministry of Commerce and Industry recognized that the
conservative nature of the regulation could stifle innovation. While the ministry allowed the
Souk al-Manakh to operate, it did introduce rules intended to prevent any interactions
between the unregulated exchange and the regulated sectors. For example, banks were
strictly forbidden from trading on the Souk or from lending for the purpose of purchasing
stocks on it, and issues on the Boursa were not to compete with the stocks issued on the
Souk. New issues on the formal exchange were heavily vetted, and the firms were
required to provide public information about their revenue sources, business model, and
capital structure. The unregulated Souk was allowed to trade only stocks that capitalized
offshore firms, not domestic firms. Neither the formal financial sector nor firms on the
Boursa were permitted to borrow from or provide financing to the Souk. In this way, the
Kuwaitis hoped to reap the benefits of an innovative financial sector while insulating the
conservative financial sectors from any risks introduced in the Souk.
By mid-1982 the Souk had expanded so quickly that new trading technologies evolved to
meet its liquidity and financing needs. Because the banking sector was specifically
prohibited from providing credit for trades on the Souk, a system was required to facilitate
the exchange of future delivery of equity whose price was so rapidly rising. In response,
traders evolved a method of postdating checks. Many of the transactions were forward
contracts.
Figures 1a and 1b graph a hypothetical example that might arise when traders use
postdated checks to pay for a future delivery of an equity share when prices are expected
to rise. The example calls attention to several observations that were salient to the Kuwait
markets at that time. First, a postdated check is a form of credit, and in this case it is
collateralized by the future delivery of a stock. If the expected value of the stock falls, the
probability of a default rises because the value of the collateral has fallen. Second,
although a postdated check is a credit exposure to a trader who accepts it, it is harder to
assess the credit risk. It is an exposure to a trader who may also have issued postdated
checks and therefore is exposed to other traders, who, in turn, are exposed to other
traders and so forth. Unlike a simple loan that a bank might make to a firm, the postdated
checks are “passed on” by a trader who writes a postdated check based on a postdated
check that was passed on to him. Third, a postdated check is not only a form of credit, it
is a form of liquidity. A trader holding a postdated check as an asset can use that same
check to make a new purchase of a future stock delivery or, alternatively, issue a new
postdated check based on his asset. The postdated checks are used for these trades as
cash. Finally, because these postdated checks are issued on the spot by one trader to
another, the expansion of credit, liquidity, and complexity happened incredibly quickly.
The postdated checks were like bills of exchange in that they could be passed on to a
third party at a discount, but they differed in that a bill of exchange is intermediated by a
bank. Because the Souk was pushed out of the regulated sector, the postdated checks
were bilateral contracts written between just the two parties, and the collateral was only
the future delivery of the stock. Because there was no intermediary bank, there was no
institution performing the usual bank functions of monitoring the value of the collateral
and keeping track of those checks passing through its offices. The bilateral nature of the
postdated check also disposed of other intermediaries, such as an exchange or a
clearinghouse that could also have ensured that the exposures were netted, could have
imposed early margin requirements, and could have tracked the explosive amount of risk
within the market.
To go into the details of the example, after the fourth trade, Trader 1 and Trader 2 come
out ahead whether the price of the equity rises or falls because, in addition to canceling
postdated checks, Trader 1 has $15 cash and Trader 2 has $10 cash (figure 1c). As long
as the postdated checks are not defaulted on (as in the case where Trader 1 just hands
back the original postdated check and Trader 2 passes on Trader 3’s postdated check to
Trader 4) neither Trader 1 nor Trader 2 bears any risk. Trader 3 and Trader 4, however,
bear risk: If prices do not rise above $25, Trader 3 will have equity worth less than the
postdated check that could be cashed against it. In addition, Trader 4 runs the risk of a
default on the $30 postdated check.5
Even at an individual transaction level, this example has some complications, although it
is nothing that contract law cannot handle. For example, suppose the stock does not rise
as fast as anticipated or falls in value by the future date. If, in the first trade, Trader 2 fails
to provide the cash in the future for delivery, then he is in default, and one could imagine
a standard credit default procedure wherein Trader 1 goes after Trader 2’s assets,
including the now-due delivery of the stock. If the stock is less in value than previously
thought, then the courts would decide which of Trader 2’s assets could be claimed by
Trader 1. If the trader could not provide enough assets to cover the debt, then standard
bankruptcy procedures could be applied to Trader 2’s assets. Such a trading scenario is
still complicated, and often futures exchanges use formal margin requirements to prevent
large bankruptcy losses. Indeed, the Souk evolved a system in which the postdated
check could be presented early at a discount to mitigate problems of forward default in a
declining market.
At a system level, however, the situation becomes enormously more complex. Although
the postdated checks could be countersigned and passed along to other traders (a
practice that creates its own complications), often the postdated checks were held by
their original receiver, who issued a new check. In this case, the balance sheet for just
these four trades is shown in the figure. If Trader 3 defaults in a falling stock market, the
default might trigger other defaults, and sorting out who owed what to whom would be
very difficult.
The entire network of the system matters more than just the sum of its bilateral
transactions. Trader 3 and Trader 4 are never directly connected through a trade, and yet
they are intimately exposed to each other’s risk. The risk of the Souk was at the level of a
systemic network implied by all of the transactions and not just a matter of large numbers
of traders conducting dangerous trades. On this systemic level, the Souk network was
built from many thousands of such interconnected transactions. Even if all the data of the
transactions had been available to Kuwaiti authorities (they were not), it would have been
very complex to calculate the creditworthiness of the system and how much liquidity had
been created.

At the Time of the Collapse6

Throughout the summer of 1982, most traders were aware that all of Kuwait’s financial
markets were due for a correction. Oil prices had fallen in the spring of that year, and with
the fall in oil, prices on the Boursa and the Souk had fallen, too. Shares on the Souk were
still viewed as overvalued, however, as its prices had risen more than 200 percent from
1980 to 1981, and by the time market trading ceased for the holidays following fasting at
Ramadan, the general consensus was that the overvalued shares would fall in price to a
more reasonable value. Both regulatory authorities and the traders were concerned about
the value of the Souk’s postdated checks. What was not generally known was how
overexposed nearly all traders were to the risk of falling values on the postdated checks,
given that their collateral was shares whose value was declining.
The trigger for the crash occurred after a few traders presented discounted postdated
checks to indebted traders for cash that could not be paid, and authorities announced
that there would be no government support for the postdated checks of the Souk al-
Manakh. The checks had been presented on August 20, and authorities made the
announcement on August 23. One trader recalls the way the crash unfolded, referring to
both the Boursa and the Souk: “Its decline was so discontinuous it cannot be called a
crash. There were simply no bids.”7 The swiftness of the market’s disappearance is the
most terrifying lesson of the Souk al-Manakh. The instant crash took both the authorities
and the market participants by surprise. Many had understood that the market was due
for a correction, but they had been waiting for more information so they could optimally
unravel their positions—a strategy that proved useless. When the crash came, there was
no new information and no time to react because abruptly there were no trades.
Records of the crisis are somewhat sparse for a modern crisis, and accounts sometimes
differ in details. The timeline of table 1 represents my best effort at reconciling various
witness accounts.

Table 1. Timeline of the Souk al-Manakh Collapse

Event Date

First Kuwaiti stock market crash occurs (with loss of almost a quarter 1977
of its value). This causes regulatory prudential reform in Kuwait.

Souk al-Manakh market begins trading. 1978

Souk al-Manakh grows to nearly 40 non-Kuwaiti Gulf stocks. Prices 1980 to

rise over 200 percent on the Gulf stocks and 50 percent on the 1981
Boursa stocks.a The use of postdated checks to pay for Gulf stocks
becomes common practice. By the end of 1981, the capitalization of
the Kuwaiti markets exceeds that of the London markets.

Souk al-Manakh loses 60 percent of its value due to a fall in oil prices May to
and uncertainty over postdated checks, which are due at the end of July 1982
the year.

Several traders present postdated checks that cannot be paid.b The August 20,
Souk al-Manakh experiences extreme volatility but ends slightly up on 1982
the day on rumors of a bailout.

A committee is formed by the Ministry of Commerce and Industry to August 21,

analyze the problem of postdated checks. 1982
“Crash.” The committee announces that there will be no bailout. August
All trading stops. 23, 1982c

Eight dealers of the Souk al-Manakh are arrested. End of

August,
1982

All forward dealing is suspended. September

7, 1982

Due date for all postdated checks with profits prorated accordingly September
and the original rate of return retained. 20, 1982

A small number of postdated checks are settled bilaterally with September

committee help. to October
1982

Dealers of both exchanges placed under house arrest, and capital is October
not allowed to leave Kuwait until all is sorted out. 1982

Date all postdated checks are due to the committee for any form of November
settlement. 1, 1982

Facts about the size of the Souk al-Manakh debt become known as November
the clearinghouse company receives 29,000 postdated checks worth 1982
about $94 billion (US).

Charges brought against 60 dealers on the stock exchanges.d February

1983

The government establishes the Corporation for the Settlement of April 1983
Company Forward Share Transactions.

A linear programming (LP) solution is adopted to determine the debt July to

settlement ratios (DSRs) to clear the debts.e Timeline for the LP September
solution includes the following: 1983

—DSRs are published in the local paper for the largest 18 October
traders. 1983

—DSRs for the largest 254 insolvents without apportionment July 18,
by asset type are made public. 1984

—DSRs for the last traders are determined. August

1985

—Payments to creditors begin. September

 1985

The Souk al-Manakh is closed permanently. Gulf stocks formerly November

traded on this exchange are moved to the newly opened Kuwait 1984
Stock Exchange, which will be housed in a new building.

New Kuwait Stock Exchange building is opened. 1985

Difficult Debt Settlement Programme is launched. August 10,

1986

United Nations reports more than a quarter of the postdated check April 1990f
debts remain unsettled and all commercial banks but one are under
government control.

Invasion of Kuwait by Iraqi forces. August 2,

1990

a. Al-Yahya (1993), p. 32.

b. Al-Yahya (1993), p. 33, relates a trigger from a trader trying to front-run the expected
crash by presenting his postdated checks before the end of Ramadan. However, the
timing of this disagrees with all other accounts of the crash. See footnote 9 in the text.
Babington (1983) is the only account that I have found that dates the events and is
generally consistent with all other accounts.
c. I follow the sequence of events of Babington (1983), pp. 77–78.
d. Epstein (1983), pp. 17–19.
e. Elimam, Girgis, and Kotob (1997), pp 89–106, table 1.
f. United Nations (1989), p. 12.
Sources: Dates from Darwiche (1986) and Pomeranz and Haqiqi (1985). I have also
footnoted citations for specific dates or events.

The Response to the Crash

A wide range of normal safety measures can be irrelevant if the collapse is far reaching
and sudden enough. For example, the presence of a simple margin requirement at the
time of the Souk al-Manakh crash could not have prevented the crash because the
instantaneous lack of a market with which to cash out the short positions meant that the
margin requirement would have been ineffective.
In some ways, the Ministry of Commerce and Industry’s response to the shock (listed in
table 1), as well as the response of other Kuwaiti financial regulatory authorities, was a
model of a modern regulator’s possible response. The response to the initial shakiness in
the market prices in the Souk was an announcement that the Kuwaiti government would
not bail out the markets in order to prevent the extension of risks due to moral hazard
incentives. The Friday before all Souk trading ceased on August 23, all of the ministries in
the cabinet issued a joint resolution. Amid statements that the markets were still “strong
and intact” the ministries also formed an offset committee to review the claims and
settlements of the holders of the defaulted checks and determine the new balances. The
goal of the response at this point was to calm the markets while at the same time to set
up a mechanism to ensure that both the Boursa and the Souk had adequate liquidity to
function. All outstanding postdated checks had to be submitted to a newly formed
committee by November 1, 1982, for some kind of settlement or they would be
invalidated and not redeemable by the counterparty.
Only in November when the checks were submitted—10 weeks after the crash—were the
authorities aware of the enormity of the disaster. It was clear that with unfunded debts
totaling more than five times the GDP of Kuwait and more than the outstanding debt
owed to the IMF by all countries in 1981, the crisis would not be solved by simple bailouts
from the Kuwaiti government or international agencies. At this time, all dealers were
placed under house arrest and not allowed to leave the country. This action was probably
not so much punitive as it was an effort to keep all of the relevant information available.8
Further, in spite of the efforts of the Ministry of Commerce and Industry to isolate the
Boursa and commercial banks from the innovative Souk, the complexity of claims and
counterclaims of the participants had heavily involved the banks in the crash. Banks were
exposed indirectly to the risk of the Souk by their borrowers’ exposures: Many of the
banks’ most important borrowers had written checks for forward delivery in the Souk, and
as a result of the crash, these important bank customers were now unable to meet their
loan payments to the bank until their assets and liabilities could be sorted out. In the end,
only one bank in Kuwait’s robust commercial banking system was solvent. The remaining
banks all had to be bailed out. At the end of 1983 the Central Bank of Kuwait deposited
nearly KD 200 million in the failed banks, roughly 30 percent of the banks’ capital.
Similarly, the Boursa had its own crash with its attendant bankruptcies. Figure 2 shows
stock prices, and while the price drop doesn’t seem bad—the high prices of 1981–1982
are nearly matched by the prices of 1983—the figure vastly understates the Boursa crash
because more than half the volume of stocks traded on the Boursa in 1983 had been
purchased by the Kuwaiti government in an effort to make the price fall gradual. In 1984,
when the program was discontinued, the average yearly price fell to less than 50 percent
of its value of 1982. Further, figure 3 shows how devastating the crash was for the
Boursa. From an actively traded and robust market in 1982 before the crash, the formal
stock exchange essentially stopped actively trading stocks. More than half of the KD 480
million of value in 1983 traded was the government purchases of KD 270 million. When
these measures were removed in 1984, the value of traded shares was 8 percent of what
it had been only three years earlier.
Various branches of the Kuwaiti government, sometimes in collaboration with the Kuwaiti
Chamber of Commerce and Industry, passed a series of strong laws and resolutions from
September 20, 1982, onward to deal with the crisis. Most of the laws, because they dealt
with only one element of the crisis, were ineffective. In April 1983, the Corporation for the
Settlement of Company Forward Share Transactions (the Corporation) was formed to
develop a comprehensive and acceptable distribution for the multitude of claims and
counterclaims to assets throughout the economy. These included not only claims among
the dealers in both the Souk al-Manakh and Boursa, but also in the commercial banking
system and among many of the firms in the entire region.
The Corporation decided to use a mathematical linear programming (LP) solution that
required detailed data from all of the traders.9 Principles were formalized of a “fair” final
division that were implemented using a linear program. For example, the principle that the
assets of a defaulting party had to be divided among the nondefaulting parties in a way
that was proportional to their original state and the principle that stakeholders’ losses
were limited to their original stake in the system became constraints in an optimization
problem.
It took the Corporation and three financial engineers until August 1985 to solve the
problem of what was considered a fair distribution of the assets. The majority of holders
of the massive debt were not compensated until September, more than three years after
the collapse.10 The financial tangle was still a mess even seven years after the crisis. At
the end of 1989, one year before the Iraqi invasion made the tangle irrelevant, all of
Kuwait’s banks but one were still under government supervisory control and more than a
quarter of the obligations of the crash still had not been resolved. For eight years after the
collapse, beneficial potential investments and trades were not conducted because the
ownership of assets that might have been traded or used as collateral was not resolved.

The Collapse of the Souk and Regulatory Information

Collapses based on financial innovation recur throughout history. Innovation often occurs
to finance rapid change, where, at least at the time, it is widely seen as having huge
benefits in providing needed liquidity that outweigh the innovation’s potential costs to
financial stability. Most of the participants in the markets in Kuwait were neither con men
nor stupid. They were aware that the postdated checks they were using carried the
potential for financial instability, and they were hoping that their makeshift liquidity system
would be replaced by something more secure.11 What the Kuwaiti authorities did not
anticipate was the instant collapse of both the nonregulated and regulated sectors and
the severity of its consequences.
The Souk al-Manakh crash emphasizes the value to regulating authorities of detailed
information from all participants in both the traditional and innovative financial sectors.
This financial crisis, like many other crises, derived its destructive power from the
individual connections of dealers and investors. Detailed data would have helped both
before and after the crash, and a lack of such data greatly magnified the damage.
The crash also emphasizes the difficulty (if not impossibility) of isolating the unregulated
financial sector from the regulated sector. The lack of regulation might foster innovation.
However, innovation can proceed while providing detailed information to the authorities
about how the new sector is connected to the conventional sector.
Bilateral data would have alerted the authorities to the immense size of the Souk
exposure and that the more traditional Boursa and commercial banks were neither
isolated from the Souk nor was the exposure trivial. It was a lack of data that also
prevented the Kuwaiti authorities from seeing the risks of financial instability of the
system.
Immediately after the crisis, the authorities spent several months pursuing a policy that
was ineffective because they were unaware of the scale of the crisis or how pervasive it
was throughout the financial system. After trying out several approaches to distributing
the assets of the insolvent dealers and firms to those still solvent, which failed, regulators
finally turned to traders’ knowledge of most of the bilateral exposures in the economy.
Data then had to be collected and entered into a format that could be used in the
computation of an acceptable solution.
Kuwait used policies in fighting the crisis that a modern western authority does not have
access to. Instead of placing all dealers under house arrest as Kuwait did, resolving a
crisis in a western democracy must rely on rapid knowledge of which dealers and
institutions are central to a solution and which data might be important in a complex
reallocation that gets the financial structure back on its feet. Regulatory authorities in
Kuwait were not bound by traditions in English common law that strictly regulate the
provision of information, and yet even their settlement of the reallocation was incomplete
seven years later, delaying a return to normalcy in the financial structure. In a western
democracy, complete data of the history and structure of financial obligations could be
housed in a regulatory authority to prevent collapse if the data held in the private sector
are accidentally or intentionally destroyed. Good data can be required as a condition for
doing business in an innovative financial domestic sector so that in the event of market
corrections or crises, delays resulting from data’s being extradited from foreign entities
can be avoided.

Conclusion
We live in an exciting period of financial innovation, when immense markets in new
derivatives, new markets for collateral, and even new cryptocurrencies are invented with
such a frequency that they often do not even make the front page of the financial news. It
is clear that the potential for welfare gains from new technologies exists, and that
regulating these technologies effectively requires a delicate balance of not stifling their
development while protecting the economy from possible financial instabilities that might
result from them.
In maintaining this balance, the importance of good data is paramount. Regulators of
financial stability in all of the western democracies have made important strides in this.
New information requirements in the United States make it unlikely that any future
collapse in the CDS market would be met with the ignorance about the total size of net
positions that financial regulators faced during the 2008 crisis. Financial authorities at
both the European Central Bank and the Bank of England now have access to
transaction-based records of loans and some derivatives executed by commercial banks.
There are plans to expand that access to include more derivatives, more loans, and more
institutions. Mexico collects daily records of loans from its entire financial sector. There is
new awareness that data on individual transactions are needed for an understanding of
the entire network. However, important markets such as Eurodollar loans remain
somewhat opaque to authorities at a systemic level, which could mask stability risks.
Kuwait’s experience should teach us that information on all important financial markets is
vital to the maintenance of financial stability, before and after a financial collapse.

Footnotes

1. Souk al-Manakh means literally “the market at the resting place for camels,”
derived from the cry Nakh, which a driver says to his camel when he wants it
to rest. It is not al-Manakh, “the weather,” from which we derived the
English word “almanac.” Return
 2. This was a temporary phenomenon, of course, caused by the rapid
expansion of liquidity, described below, the high price of oil in 1980, the
flight of capital due to the fall of the Shah of Iran in 1978, and the Iran–Iraq
war. Return
3. The recession for these economies, which were so dependent on oil exports
and where the government had huge cash reserves, played out differently
than a typical recession in a more complex, developed economy.
Measurement of the extent of the recession caused by the financial collapse
is further complicated by the fact that after the crisis, oil prices fell steeply in
1985. For this reason, I focus on the effects of the collapse on the financial,
as opposed to the real, sector. See Greenwald and Hildenbrand (1983).
However, the US State Department reports that the “financial sector was
badly shaken by the crash, as was the entire economy” (US State
Department, 1994). Return
4. See Darwiche (1986), p. 61, for example. Return
5. The example in figure 1 graphs text in Azzam (1988), although it is explored
in a slightly different way here. Return
6. Information about the crash is somewhat sparse and anecdotal. Some of
this information void is due to the fact that records of transactions and daily
prices on the Souk al-Manakh were not kept. Some of the anecdotes
surrounding the crash differ. The most common trigger related in the
discussions of the crisis is that a “well-known business woman” tried to
cash a postdated check, which brought down the entire system.” This is first
related in Darwiche (1986), p. 88, who cites “verbal information from a
business man…Oct. 1984.” I have rather followed the discussion in
Babington (1983). Return
7. From Veneroso (1998). Also in Business Recorder (2005), p. 3: “There were
simply no bids for many years thereafter.” Return
8. Finance Minister Sheikh Khalifa is quoted as stating, “Even though in my
opinion some people deserve punishment, I cannot have 50 percent of the
business community and private investors going bankrupt and so start a
chain reaction affecting the whole economy.” (Al-Yahya, 1993).Return
9. Elimam, Girgis, and Kotob (1997) describe the technical solution.Return
10. Legitimate claims to the remaining assets were phased in starting in October
1983. Although the payment was not disbursed as cash until two years later,
the claim could have been in principle used as collateral for a transaction for
those dealers for whom an announced distribution was made.Return
11. Indeed, prior historical experience had suggested that they might have been
correct. For example, nineteenth century banks in the United States realized
that interbank checks had a complexity that could be mitigated if the gross
obligations between banks could be netted out, and they created
 institutions such as the New York Clearinghouse Association to handle the
netting out. However, this clearinghouse had decades (and several panics)
to evolve and sort out institutional details so that interbank checks did not
destabilize the entire system. Tallman and Gorton (2018) describe the
institutional evolution of the New York Clearinghouse, including stability
innovations such as clearinghouse loan certificates that are additional to
simple netting of the interbank obligations.Return

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Ben R. Craig
Economic and Policy Advisor​

Ben Craig specializes in the economics of banking and international finance.

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Headlines

11.04.19
Toledo—Conditions Continue to Improve !
Joel Elvery | Julianne Dunn
Economic conditions in the Toledo metro area continue to improve. The
unemployment rate has fallen, and employment levels are holding relatively
steady. The housing market is a particularly bright spot, with rising residential
building permit numbers, growing home prices, and median home values that
exceed their prerecession peak. Read More !
11.04.19
Columbus—Steady Overall Employment Growth !
Mekael Teshome | Sarah Mattson
The Columbus metro area continues to be one of the region’s strongest
performers, with a low unemployment rate that continues to fall even as the
labor force expands, steady employment growth, appreciating home prices,
and low consumer debt and credit card delinquency levels. Read More !

11.04.19
Racial Inequality, Neighborhood Effects, and Moving to
Opportunity !
Dionissi Aliprantis
Moving to Opportunity (MTO) was a housing mobility program designed to
investigate neighborhood effects, the influences of the social and physical
environment on human development and well-being. Some of the results from
MTO have been interpreted as evidence that neighborhood effects are not as
strong as earlier evidence had indicated. This Commentary discusses new
research suggesting that neighborhood effects are, on the contrary, as strong
and policy relevant as suspected before the experiment. This Commentary also
discusses why the interpretation of the MTO data is important: If neighborhood
effects drive outcomes, then addressing racial inequality requires concerted
efforts beyond ending racial discrimination. Read More !

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11.21.19
2019 Financial Stability Conference: Financial Stability: Risks, Resilience, and Policy
The Federal Reserve Bank of Cleveland and the Office of Financial Research will hold the
2019 Financial Stability conference on November 21-22, 2019, in Cleveland, OH.

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