Turkey's $20 Billion Fund Collapse Explained

0:00This episode is brought to you by Nordstrom. For 125 years, Nordstrom has been part of your story. The stylists who found the perfect outfit for your big interview. The first pair of walking shoes for your one-year-old. The tomato soup you shared with your sister at the cafe. These are the moments that make Nordstrom. Nordstrom. Bigger a small. We're here for all of it. Celebrating 125 years with new moments still add. Discover it all in Nordstrom stores and at Nordstrom.com. The Turkish financier Emre Tesman did not believe that anyone could control the stock market. He told Bloomberg this back in April saying, you cannot control anything 100% in a market. If that were the case, prices would only go up. Now that is a great point. But for the better part of three years, prices at Terra, his financial group, did only go up. Its flagship investment fund reported a return of more than 66,000% over three years.

1:03And that's considered really good performance. Terra, a brokerage firm with around 130 employees, was at times worth more than the global investment bank Lazard, which employs several thousand people, which seems a bit strange, but possibly his 130 employees were just way more productive than the slackers at Lazard. Then about five months after that interview, everything fell apart. Turkey's capital markets regulator ordered the liquidation of 130 one investment funds, holding about 20 billion dollars and 455 thousand people found that their savings were locked inside. Turkey's Justice Minister has since described the whole thing as a Ponzi-like scheme, which is never a good sign. And when a funds returns depend on a steady stream of new money coming in, its collapse is going to raise the question of who exactly was buying at the top.

2:06So in this video, we'll look at how the alleged scheme worked, why some Turkish money market funds, the product people treat like cash, ended up holding the bag, what Bill Wang and Bernie Kornfield have to do with any of this, and what lessons the rest of the world might want to take away. Mostly though, we're going to try to solve a mystery. As his funds collapsed, Tesman posted a statement on social media, blaming the whole thing on a planned, deliberate, and organized speculative attack by notorious malevolent forces, the worst kind of malevolent forces. That is a serious allegation, and I think we should take it seriously. So over the course of this video, let's try and work out who these malevolent forces might be. It would appear that Emory Tesman was rarely troubled by self-doubt. He told Bloomberg that his ambition was to build the Goldman Sachs of Turkey.

3:07We should note that Goldman Sachs took more than 150 years to build, surviving several financial panics, and grew to employ tens of thousands of people while building the reputation that Matt Taibi of Rolling Stone summed up as a great vampire squid wrapped around the face of humanity. Terror was a lot younger and smaller, but it had recently signed a deal to sponsor a Turkish football club, so that's kind of similar. Tesman had a straightforward view of finance, too. I make money, the investor makes money, he told one interviewer, and what does the state lose? There's no problem here, he said. We'll have to come back to that question, though. So how did the Goldman Sachs of Turkey manage to so comprehensively outperform the actual Goldman Sachs? Well, if you want a stock price to go up, you need buyers, and if you run an investment fund, the most convenient buyer you can find is, of course, yourself using your customers' money.

4:14Bloomberg found regulatory filing showing that at one point in 2023, Terror's flagship fund had 99% of its assets in a single stock, shares of its own parent company, Terror. Most fund managers would consider that a fairly concentrated portfolio. Orkansaka, a lecturer at City St. George's University of London, described how this works to Bloomberg back in April long before any of it had fallen apart. The funds purchases, he said, push up affiliated stock prices, which inflates the funds net asset value, which makes the fund management business appear more valuable, which elevates the parent company's earnings, and its stock price. As he put it, this loop is self-reinforcing by construction. That's a very academic way of describing a perpetual motion machine. Turkey's Justice Minister later went with the less academic description of Ponzi Lie.

5:17This episode is brought to you by Nordstrom. For 125 years, Nordstrom has been part of your story, the stylist who found the perfect outfit for your big interview, the first pair of walking shoes for your one-year-old, the tomato soup you shared with your sister at the cafe. These are the moments that make Nordstrom, Nordstrom, bigger, small. We're here for all of it, celebrating 125 years with new moments still add. Discover it all in Nordstrom stores and at Nordstrom.com. Before I dig into how terror kept that machine running, let me tell you about this week's video sponsor, Sally. Mobile roaming is one of the last industries still run on the hotel mini bar pricing model. The product is perfectly fine, but the price is revealed later, and it's always considerably more expensive than you expected. You land somewhere, check a map, send a few emails, and a month later you discover that finding directions to your hotel cost about as much as the hotel did.

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7:20To get an exclusive 15% discount on Sally data plans, download the Sally app and use code BoilACheckout, or click the link in the description. So anyhow, a mild version of this sort of thing happens everywhere. Academics call it portfolio pumping. In the 2002 paper called Leaning for the Tape, Carhartt Canyon Musto and Reed showed that some American mutual fund managers by extra shares of stocks that they already own at the very end of the quarter, nudging up the closing prices their performance is measured on. The prices then drift back down the following day. The American version is worth a few basis points of performance a few times a year, in time for the quarterly rankings maybe. Terror's fund was buying the shares of its own affiliated companies all year long, and it reported 66,000% returns, which just shows you what you can achieve with a bit of determination.

8:23To keep a machine like this running, you need a steady supply of new money, and in Turkey that wasn't very hard to find. Inflation had averaged about 50% a year for three years, eating away at people's savings, so a fund reporting more than a thousand five hundred percent in a single year was going to get a lot of attention. And with inflation at 50% a year, a big number on a fund statement probably seems a bit less crazy than it would somewhere else. Back in 1998, the economist Siri and Tufano showed that investors piled into top performing funds far more eagerly than they pulled money out of bad ones. Terror's brokerage also took a company's public after all they were trying to be the Goldman Sacks of Turkey, and its fund would then buy their shares. Now, a small free float, the portion of our company shares actually available to trade,

9:23isn't that unusual on its own. But when the underwriter's own fund is one of the main buyers of the few shares to do trade, it doesn't take much to move the price. Take Visni Maddencheck, a mining company that I'm fairly sure I mispronounced there, which terror took public in February 2025, putting 21% of its shares in public hands. By the end of July, the stock was up more than 2,100%. That same month, Terror's Fund and brokerage sold the shares that they had bought in the IPO. In August, the stock fell 75%. The capital markets board fined two of Terror's fund managers, 8.9 million Lira, which is about $199,000, for creating a misleading perception on the price, supply, and demand of the shares. Keep the size of that fine in mind, we're going to come back to it later.

10:26Then, there was DesTech Finance Factoring, an invoice factoring company that terror took public in 2025. It shares rose more than 4,700%, making it Turkey's third largest listed company. Even after the market turmoil started, it was still trading at about 132 times earnings. JP Morgan trades at about 15. And after the crash wiped out about $4 billion of his paper fortune, DesTech's controlling shareholder was left roughly as rich as the founder of Chubani Yogurt. Invoice factoring is a perfectly respectable business, but it doesn't usually produce Greek yogurt levels of wealth. It's usually just Greek yogurt that produces that kind of wealth. Anyhow, back to our search for the notorious malevolent forces. Our first suspect is Ramazan Basak, the former head of Masak, Turkey's financial crimes agency.

11:28Mr. Basak says that he repeatedly warned the authorities about suspicious transactions, and that his warnings were ignored. According to the FT, he was detained in April for disseminating misleading information in two social media posts, one of which questioned whether a fund could really have returned 10,128%. Which I suppose makes sense if people start doubting 10,000% returns, where does it end? Still, Mr. Basak's attack consisted mainly of asking questions on social media, which isn't usually enough to bring down a $20 billion fund industry. So we'll have to keep looking. How did Terra pay for all of this? A fund that keeps buying its own affiliated stocks needs a steady supply of cash, and so Terra borrowed a lot of it. According to Bloomberg, its brokerage's borrowing went from a $132 million

12:29Lira at the end of 2024 to $59.8 billion Lira a year later. That's about 450 times as much in just one year. And a convenient place to find cash like this is in a money market fund. People think of money market funds as more or less the same as bank accounts. They're supposed to hold boring, safe, liquid things and earn an interest rate. But Bloomberg reports that some of the firms at the center of this were lending money and taking hugely inflated stocks as collateral. This type of loan is known as reverse repo, where the fund makes a loan taking securities as collateral, which it can sell if the borrower doesn't pay it back. That should be very safe, as long as the collateral is good. But in this case, the collateral was pumped up shares in the thinly traded companies that the affiliated funds were busy buying.

13:30It's a bit like taking a $10 watch to a pawn broker, explaining that it's actually worth $10,000 because you just sold one to yourself for that price an hour ago and walking out with a $9,000 loan. And as Helmi Guvanoff points out on his sub-stack, the money market funds booked these loans at face value, so their prices stayed perfectly stable right up until the collateral had to be sold. If this sounds familiar, it's because it's similar to what Bill Wang did at Arquigos. Wang used swaps from global banks to build enormous leverage positions in stocks like ViacomCBS. The Turkish funds did their borrowing at home, and financial experts who've looked at the trade say they borrowed against the inflated stocks themselves. When Wang stocks fell in 2021, his banks made margin calls. When terrorist prices stopped rising, it faced a run from retail savers.

14:32Both collapses happened very quickly, and economists have a name for why this happens. Bruno Mayer and Peterson called it a liquidity spiral. When prices fall, the collateral is worth less, so you can borrow less, which forces you to sell, which pushes prices down further, and the faster you're forced to sell, the less anyone wants to pay. And that brings us to our second suspect, and I feel we're maybe getting closer. Bloomberg spoke to Mehmed Kervanki, a 28-year-old who had put his savings into a high-flying Turkish stock fund to help pay for his upcoming wedding. Two weeks later, he was frantically hitting the sell button on his phone's trading app. Another investor, a 30-year-old trader, had put in the gold he received as wedding gifts, hoping to use it towards a deposit on a home. So it's possible that the planned, deliberate, and organized speculative attack on terror

15:32was carried out by a 28-year-old trying to pay for a wedding, but I don't want to jump to conclusion, so we should probably keep searching. If you push to stock up a few thousand percent, you only really make money if you can sell it at the high, and to sell at the top, you need someone who's willing to buy at the top, which is really the core question here, who was buying. Help me goof an all writing on his sub-stack, which I'll link to in the video description, because it's one of the clearest explanations of this whole mess that I found. Points to one example, a shipbuilder called Ozzada. According to its June financial statements, Ozzada was losing money and had equity of around 4.5 billion Lera. By September, its share price had reached 4,482 Lera, giving it a market value of about 320 billion Lera, or 71 times book value, which is a lot for any shipbuilder, but especially so for a loss-making shipbuilder.

16:35At that point, one of Terror's hedge funds owned about 15% of the company, valued at the September price, that's roughly 48 billion Lera of investors money in, a single loss-making shipyard. Turkey's capital markets regulator has since filed criminal complaints against 11 people over trading in Ozzada shares. Ozzada has also made its way into Turkish politics, and opposition spokesman alleged that the deputy chair of the ruling AK Party bought about 63 million Lera of Ozzada shares in April and sold them in September for about 1.34 billion. He said the sales were completed before the turmoil hit the stock market on September 16, and he made similar claims about the trading of her husband. Bloomberg notes that none of this has been independently confirmed. She stepped down from her party, post saying that she wanted the claims clarified

17:36without leaving any room for doubt. She hasn't been charged with anything, and neither she nor her husband were among the 11 people named by the regulator. To be clear, nobody has said who bought any of those shares. Guvanol notes that the answer exists since every trade is locked day by day, but his broader point is the more important one. When a fund is one of the biggest buyers of an inflated stock, it can become the exit door for anyone selling at the top, and the people paying for that exit are the funds less informed investors. Economists have a name for insiders moving money out at the expense of outside investors. In the 2000 paper, a group of researchers, including the Nobel laureate Simon Johnson, called it tunneling, the classic example is a controlling shareholder selling something to their own company at an inflated price. The insider gets the cash, and the minority shareholders pay for it.

18:40A fund can work the same way. If it pays an inflated price for shares, the seller walks away with real money, and the fund's investors are left holding the back. So, how did a machine that was running so smoothly seize up? On August 29, the Capital Markets Board, Turkey's security regulator, introduced a new rule, capping how much of a company's free float a single fund could hold. And as Hemi Gouvenal points out, the rule was surprisingly gentle. Funds that were already over the limit were given until 2029 to comply. So no one had to dump their shares right away. They just couldn't buy anymore. And a system that depends on someone buying every single day has a problem when the buying stops. So that brings us to our third suspect for the malevolent forces, the regulator. John Paul Rathbone of the FT said on the Unhage podcast

19:43that the regulator had described some of these fund prices as fictitious in an internal memo back in December. It then spent eight months tightening things around the edges. And when the big rule finally arrived, all it did was stop funds from adding to their positions, which it turns out was enough. With nobody left to keep buying, the prices had nothing holding them up. In mid-September, Tara announced that it was buying Pusala, another fund manager. The next day, Pusala said it couldn't meet redemption requests. This was not reassuring. Investors pulled about $4.7 billion out of Turkish investment funds in just over two weeks. And on September 16, Tara said that it too was unable to pay clients who wanted their money back. The football club that Tara had sponsored played its next match without the Terra logo on its shirts.

20:46And the club's own shares lost about a third of their value that week. Now, I would have expected the lack of writing on their shirts to be viewed positively, but I guess they probably needed the sponsorship money. Runs like this tend to feed on themselves, and there's a good reason for that. If you have to sell your house in the next hour instead of in the next month, you're going to have to cut the price, however nice the house might be. A fund facing a wave of redemption has the same problem. It pays the first people out by selling whatever's easiest to sell. And the people who stay are left owning the thinly traded stocks, which can only be sold in a hurry at a discount. A well-known 2010 study of American mutual funds found exactly this. Funds holding illiquid assets see much bigger outflows after bad news, because investors understand that waiting costs the money.

21:46So, the people rushing for the exit that week were actually just being shrewd. The ones who waited were the ones who ended up paying for the discount. For the people who didn't get out on time, the results have been devastating. One investor told Bloomberg that he had moved 2.4 billion into two terror equity funds at the end of August. My nerves are wrecked, he said, I can't sleep. And as an entrepreneur who lost 90% of his investment in Pusala funds put it, these were all regulator-approved funds. How did this go on for so long then? Well, as Robert Armstrong put it on the FT's Unhage podcast, the problems were something of an open secret. Quite a lot of people could see what was going on. In February 2025, Istanbul's chief prosecutor wrote to the capital markets regulator asking it to look into unusual share trading by the chairman of Pusala.

22:47In November 2025, Turkey's finance minister publicly stated that the government knew stock price manipulation was taking place through certain funds. In June 2026, MSCI warned about recurring instances of possible coordinated trading behavior. And yet, the big rule change didn't come until the end of August. Part of the reason this went on for so long may be that getting caught just wasn't very expensive. The economist Gary Becker, who later won a Nobel Prize, argued back in 1968 that criminals approach crime much like the way businessmen approach any other business decision. They weighed the expected gains against the chance of getting caught multiplied by the penalty. If stock market manipulation can make you hundreds of millions of dollars, and to find if you get caught is just $199,000, the math isn't very complicated.

23:48A fine like that is just a small operating expense. The Terrence needs more than just fines. In 2001, the legal scholar Bernard Black analyzed the institutions a country needs to have strong stock markets. His list includes an honest regulator, independent courts, auditors that can be held liable, and a free press. Turkey has all of these things on paper. In practice, as the economist has noted, officials were slow to act on the warnings. The former financial crimes official we met earlier says that he was detained twice after raising concerns about terror and terror threatened to sue reporters and social media users who accused it of wrongdoing. When people don't trust the institutions, they often then rely on connections instead. As the FT noted, the boards of companies caught up in this scandal included a former ambassador to the OECD and a university rector, and terrorist financial holding company

24:53was run by a former deputy governor of the central bank. Americans may remember that Theranos had two former secretaries of state on its board, Henry Kissinger and George Schultz, which was comforting to investors, even if neither of them had any background in science or blood testing. In a famous 2001 paper, the economist Raymond Fisman put a number on this sort of thing. He looked at Indonesia under Suardo and found that whenever rumors spread about Suardo's health, the stocks of companies closely connected to him fell much further than those of less well-connected firms. Connections can be very valuable for as long as they last. Our fourth suspect for the notorious malevolent forces has to be MSCIA, foreign index provider based in New York. The Turkish government has spent years promoting Istanbul as a global financial center,

25:55so I imagine they were excited to read MSCIA's June 2026 market classification review. It opened with good news for Bulgaria, which is being promoted up to frontier market status, and closed with a reminder that Greece is being promoted to developed market status. In between, it warned Turkey and Indonesia about coordinated trading activity on their stock markets. Turkey was told that MSCIA may launch a consultation on the appropriate treatment for Turkey, which is possibly not a great review. As the economist read it, Turkey was being warned that it might pass Bulgaria on the way down. An S&P Dow Jones has since put Turkey under review, for exactly that downgrade. They point out that frontier status would put Turkey in the same category as much smaller markets like Tunisia and Romania. This isn't really what you want to hear

26:57when you're trying to build a global financial center. And John Paul Rathbone suggested on the Unhedge podcast that the threat of a downgrade in November was probably what finally pushed the regulator to act. So MSCIA may have set the whole thing in motion, although calling a press release a speculative attack does seem a bit of a stretch. Still, we should probably keep them on our list of suspects. The alternative would be to start looking at the people who were running the funds. And this episode is brought to you by Nordstrom. For 125 years, Nordstrom has been part of your story, the stylist who found the perfect outfit for your big interview, the first pair of walking shoes for your one-year-old, the tomato soup you shared with your sister at the cafe. These are the moments that make Nordstrom. Nordstrom. Bigger small. We're here for all of it, celebrating 125 years with new moments still add. Discover it all in Nordstrom stores and at Nordstrom.com.

27:59Starting a business can seem like a daunting task, unless you have a partner like Shopify. They have the tools you need to start and grow your business. From designing a website, to marketing, to selling, and beyond, Shopify can help with everything you need. There's a reason millions of companies like Mattel, Hines, and Allbirds continue to trust and use them. With Shopify on your site, turn your big business idea into... Sign up for your $1 per month trial at Shopify.com slash special offer. That hardly seems fair. It would be easy to assume that a scandal like this only affects the people who lost money in the funds, but unfortunately the damage spreads a lot further than that. Back in 1970, the economist George Aikkerloff, who later won a Nobel prize, explained why dishonesty is so harmful, using the market for used cars as an example. When buyers can't tell the good cars from the bad ones, the lemons, as he called them, they'll only pay an average price for a used car, so the owners of good cars stop selling,

29:05and the market fills up with lemons. Turkey's stocks now have a market for lemons problem. Turkey's finance minister has been trying to get companies to raise money on the stock market, rather than relying on expensive bank loans, and it was working. According to the FT, 34 companies raised 82.4 billion liras through IPOs in the first eight months of this year, far more than in all of 2025. But if investors can't tell which small companies are good businesses, and which are propped up by a friendly fund, they'll either stay away from the stock market altogether, or demand a discount on all of them. Honest companies end up paying a higher cost to capital in this situation. The scandal also hits Turkish asset managers, a recent working paper found that money was already leaving independent fund managers with no connection to the scandal and heading for funds owned by banks.

30:10None of this is uniquely Turkish, of course. Financial history is mostly just different people discovering the same trick a few decades apart and calling it innovation. In the 1960s, Bernie Cornfield, who happened to have been born in Istanbul, built investors overseas services into one of the biggest fund businesses in the world, selling funds door to door across Europe. His famous recruiting line was, do you sincerely want to be rich? A question which I imagine most people answer, I sincerely do. One of his funds owned oil and gas exploration permits in the Canadian Arctic, which it had bought from an oil man named John King. According to a later US court ruling in December 1969, King arranged the sale of a small slice of his own group's Arctic permits at a much higher price. And that same night, a Friday, the fund used that price to revalue its entire holding upwards.

31:13A few weeks later, the fund effectively reimbursed King by selling him an identical slice on the same terms. It was the same trick, a tiny trade, a big revaluation, and a price that nobody could actually sell out. Most American savers avoided all of this for fairly boring reason. Back in 1967, the SEC had forced iOS to stop selling its funds to American. The institutions in that case did their job. Then, those the example of Bill Wang. His lawyers argued that buying shares on the open market at whatever price the market is offering can't be illegal manipulation. It's an idea legal scholars have debated for decades. A jury in New York disagreed, and in 2024 Wang was convicted of fraud, market manipulation, and racketeering, and sentenced to 18 years in prison. He's free on bail while he appeals, and according to Bloomberg, he also is applied for a presidential

32:17party. So what can the rest of the world take away from all of this? Well, one thing is to be wary of any price that's mostly set by the people who already own large positions in the asset, whereas it's a company that keeps raising money to buy more of the same thing, or a hot new stock where only a few percent of the shares ever trade. The price on the screen can tell you very little in these cases about what the asset would be worth if it traded freely in a deep liquid market. And when bad actors can pump stocks without paying much of a price, honest businesses eventually stop trying to compete. So where do things stand now? According to Turkey's Justice Minister, 217 suspects have been targeted in the probe so far, and 56 people have been jailed pending trial. The capital market's regulator has given ISBANK and the state runs ZIRATBANK up to six months to liquidate the 131 frozen funds. But as Hilmi Guvinal points out, anyone who sell order was

33:26cancelled when the funds were frozen is no longer owed money. They're simply entitled to their share of whatever the banks manage to raise. And when you try and sell billions of lira of inflated factoring companies and lost making shipyards all at once, you run into problems. Marat Gulkandah's CEO of OMG Capital Advisors estimates that the assets would fetch pennies on the dollar. So who is now stepping in as the buyer of last resort? Well, the Turkish sovereign wealth fund has reportedly been buying blue chip stocks to prevent the wider market from crashing. A state-owned Islamic bank is in talks to take over two savings finance companies from the Pusalla Group. The Deposit Insurance Fund is set to receive any assets the courts decide are the proceeds of crime. And the country's vice president has been put in charge of the council overseeing the whole liquidation. Which brings us back to Emory Tessmann's philosophy of finance. I make money, the investor

34:33makes money, and what does the state lose? It appears that the state is now about to find out. It also brings us to the end of our search for the notorious malevolent forces. After ruling out whistleblowers regulators, New York index providers, and 28 year olds trying to pay for a wedding, we finally have our answer. The plant delivered an organized speculative attack that brought down the Goldman Sachs of Turkey was carried out by sellers. Tessmann had built a perfect financial machine. Its only design flow was that it required an economy in which absolutely nobody ever pressed a sell button. Thanks for listening to the podcast, which is entirely supported by viewers like you on Patreon. If you'd like to support the podcast, you can sign up using the link in the video description. Have a great week and talk to you again soon. Bye!