Charts & Numbers

During December the market confessed three important facts. The first is that the Kuwait Investment Authority (KIA) will not provide the optimism needed to restore confidence in the market. The second is that investment banks will fail in succession amid the greatest government intervention since souk almanakh. Finally that oil prices will no longer be controlled by the oil cartel, OPEC.

Investment Banks Collapse

During this crisis many speculators believed that investment companies would not fare well, but none could fathom the utter failure of Global Investment House (Global) or The Investment Dar (TID).  This is labeled as another of the December surprises that would rattle the local economy once more following the collapse of Gulf Bank of Kuwait a few weeks earlier.

On December 16^th, Fitch downgraded Global five notches down to C, in other words Global went from “investment grade” to  “junk.” Global was downgraded because of its default on a payment to WestLB. That was a shock to investors in the market. Investors were not expecting Global to default. Although a few weeks earlier, we heard in the market about TID defaults and the possibility of Global’s  default, still it was hard to believe to see these two gigantic investment banks failing.

The Investment Dar, as of December 25^th, had to cancel its repo deal with Commercial Bank of Kuwait (CBK). TID, a week earlier, completed a repurchase agreement transaction with CBK on which it had sold its ownership in Boubyan Bank to CBK in order to repurchase it 3 years later. The deal was supposed to go around the negative pledge* they had on their debts. As expected the debt holders were not pleased with the deal. According to Al-Qabas newspaper on December 26^th, Al-Noor Investment Company sent a letter to the central bank objecting the deal, and informing the regulator of the filing of a bankruptcy suit against TID.

Apparently TID was defaulting on Murabaha deals with Al-Noor Investment Company, as well as other undeclared companies and money market funds. TID was expected to have a good balance sheet. TID’s assets were also expected to be more liquid and of higher quality. This was an illusion. It turns out most of their assets were unquoted equities that no one could accurately value in today’s market.

Global and TID’s failure happened only because both companies used the same business model. Many analysts, a few months ago, would argue that Global is better than TID, or vice-versa. While today all analysts agree that Global and TID are exactly the same. Simply, both companies borrowed short-term to finance long-term projects that are illiquid and over valued.

In December the market confessed that even the biggest investment banks are vulnerable to these conditions. Not a single investment firm could survive without government support in today’s crisis. Although, I sincerely wish for the continuance of Global and TID, it will be the government who decides which companies will exist in the future.

 *Negative pledge means that all assets on the balance sheet are pledged to the debt holders equally, no asset can be collateralized unless current loans are closed.