The Use of Linear Programming in Disentangling the Bankruptcies of Al-Manakh Stock Market Crash

Abstract

A highly speculative parallel stock market, called Souk al-Manakh, emerged in Kuwait in 1980–81. Due to the absence of checks and balances, the default of one trader led to the collapse of al-Manakh in 1982. This triggered a major financial national crisis as debts arising from the crash reached a staggering US $94 billion, or more than four times Kuwait's GDP. The crash precipitated an economic recession, business failures, and more bankruptcies among traders. It was impossible for the government or the courts to untangle traders, one at a time, due to then simultaneous dependence on, and entanglement with, each other. We designed a linear programming model to disentangle the bankruptcies of al-Manakh's insolvents. It identified solvent from insolvent traders, determined their debt settlement ratios, and set a fair and equitable distribution of debtors' mixed assets to their respective creditors. We demonstrate the special properties of the LP model and its relationship to a system of linear equations through a numerical example. We also present the legal, financial, and economic controversies that arose during the course of resolving the stock market crash, which lasted about four years.