Turkey's $20 Billion Fund Collapse Explained

0:00The Turkish financier Emre Tezmen 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, and 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.

0:47Which 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 131 investment funds holding about$20 billion and 455 ,000 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 fund's 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.

1:36So, in this video we will 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 Huang 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 are 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.

2:21So over the course of this video let's try and work out who these malevolent forces might be. It would appear that Emery Tesman was rarely troubled by self-doubt. He told Bloomberg that his ambition was to build the Goldman Sachs of Turkey. We 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 Taibbi of Rolling Stone summed up as a great vampire squid wrapped around the face of humanity. Terra was a lot younger and smaller, but it had recently signed a deal to sponsor a Turkish football club, so that is kind of similar.

3:07Tesman 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 is no problem here, he said. We will 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. Bloomberg found regulatory filings showing that at one point in 2023, Terra's flagship fund had 99 % of its assets in a single stock, shares of its own parent company, Terra.

3:58Most fund managers would consider that a fairly concentrated portfolio. Orkin Saka, 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 fund's purchases, he said, push up affiliated stock prices, which inflates the fund's 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-like.

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6:11They now offer app-based phone numbers too, so you can hand out a Saley number to shops and delivery apps and keep your real one to yourself. To get an exclusive 15 % discount on Saley data plans, download the Saley app and use code boil at checkout 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 a 2002 paper called Leaning for the Tape, Carhartt, Canyell, Musto and Reid showed that some American mutual fund managers buy 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.

6:57The 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. Terra'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. To 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 1500 % in a single year was going to get a lot of attention.

7:45And 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 economists Siri and Tufano showed that investors pile into top-performing funds far more eagerly than they pull money out of bad ones. Terra's brokerage also took companies public. After all, they were trying to be the Goldman Sachs of Turkey. and its fund would then buy their shares. Now a small free float, the portion of a company's shares actually available to trade, isn't that unusual on its own. But when the underwriter's own fund is one of the main buyers of the few shares that do trade, it doesn't take much to move the price.

8:35Take Visny Madnček, a mining company that I'm fairly sure I mispronounced there, which Terra 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 Terra'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 Terra's fund managers 8.9 million lira each, 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.

9:26Then there was Destek Finance Factoring, an invoice factoring company that Terra took public in 2025. Its shares rose more than 4 ,700 percent 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 dollars of his paper fortune, Destek's controlling shareholder was left roughly as rich as the founder of Chobani 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 world.

10:14Anyhow, 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. Mr. 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. Bissak's attack consisted mainly of asking questions on social media, which isn't usually enough to bring down a 20 billion dollar fund industry.

11:11So 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 brokerages borrowing went from 132 million lira 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.

12:06This 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. It's a bit like taking a$10 watch to a pawnbroker 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 Hilmi Gouvenal points out on his substack, 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.

12:57If this sounds familiar, it's because it's similar to what Bill Huang did at Archegos. Huang 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 have looked at the trade say they borrowed against the inflated stocks themselves. When Huang's stocks fell in 2021, his banks made margin calls. When Terra's prices stopped rising, it faced a run from retail savers. Both collapses happened very quickly and economists have a name for why this happens. Brunemeyer and Peterson called it a liquidity spiral.

13:42When 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 are forced to sell, the less anyone wants to pay. And that brings us to our second suspect, and I feel we are maybe getting closer. Bloomberg spoke to Mehmed Kervenki, 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.

14:26So it's possible that the planned, deliberate and organized speculative attack on terror was carried out by a 28-year-old trying to pay for a wedding. But I don't want to jump to conclusions, so we should probably keep searching. If you push the 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? Hilmi Gouvenal, writing on his substack which I will link to in the video description because it is one of the clearest explanations of this whole mess that I found, points to one example, a shipbuilder called Ozada.

15:09According to its June financial statements, Ozada was losing money and had equity of around 4.5 billion lira. By September, its share price had reached 4 ,482 Lira, giving it a market value of about 320 billion Lira, or 71 times book value, which is a lot for any shipbuilder, but especially so for a loss-making shipbuilder. At that point one of Terra's hedge funds owned about 15 % of the company, valued at the September price that's roughly 48 billion Lira 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 OZADA shares.

15:58OZADA has also made its way into Turkish politics. An opposition spokesman alleged that a deputy chair of the ruling AK party bought about 63 million of Osada 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 16th 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 without 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.

16:46To be clear, nobody has said who bought any of those shares. Gouvenal notes that the answer exists since every trade is logged 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 fund's less informed investors. Economists have a name for insiders moving money out at the expense of outside investors. In a 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.

17:35The insider gets the cash and the minority shareholders pay for it. A 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 bag. So how did a machine that was running so smoothly seize up. On August 29th, 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 Himi 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.

18:23They just couldn't buy any more. 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 Unhedged podcast that 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.

19:09In mid-September, Terra 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 16th, Terra said that it too was unable to pay clients who wanted their money back. The football club that Terra had sponsored played its next match without the Terra logo on its shirts, and 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.

19:59Runs like this tend to feed on themselves, and there is a good reason for that. If you have to sell your house in the next hour instead of in the next month, you are going to have to cut the price, however nice the house might be. A fund facing a wave of redemptions has the same problem. It pays the first people out by selling whatever is 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 them money.

20:46So, 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 Terra 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 Unhedged podcast, the problems were something of an open secret.

21:31Quite 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 Pusula. In 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.

22:17The 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 a fine if you get caught is just$199 ,000, the math isn't very complicated. A fine like that is just a small operating expense. Deterrence needs more than just fines. In 2001, the legal scholar Bernard Black analyzed the institutions a country needs to have strong stock markets.

23:04His 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 Terra's financial holding company was run by a former deputy governor of the central bank.

23:57Americans may remember that TerraNOS had two former secretaries of state on its board, Henry Kissinger and George Shultz, 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 MSCI, a foreign index provider based in New York.

24:48The Turkish government has spent years promoting Istanbul as a global financial center, so I imagine they were excited to read MSCI'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 MSCI 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, and S &P Dow Jones has since put Turkey under review for exactly that downgrade.

25:45They 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 when you're trying to build a global financial center. And John Paul Rathbone suggested on the Unhedged podcast that the threat of a downgrade in November was probably what finally pushed the regulator to act. So MSCI 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 that hardly seems fair.

26:30It 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 Akerlof, 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 and the market fills up with lemons. Turkish 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.

27:24According to the FT, 34 companies raised 82.4 billion lira 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 of 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.

28:11None 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 Kornfield, 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.

28:56According 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. A 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 at. Most American savers avoided all of this for a fairly boring reason. Back in 1967 the SEC had forced IOS to stop selling its funds to American.

29:42The institutions in that case did their job. Then there's the example of Bill Huang. His lawyers argued that buying shares on the open market at whatever price the market is offering can't be a legal manipulation. It's an idea legal scholars have debated for decades. A jury in New York disagreed, and in 2024, Huang was convicted of fraud, market manipulation and racketeering, and sentenced to 18 years in prison. He is free on bail while he appeals, and according to Bloomberg, he also has applied for a presidential pardon. So what can the rest of the world take away from all of this? One thing is to be wary of any price that is mostly set by the people who already own large positions in the asset, whether 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.

30:40The 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 stopped 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 markets regulator has given İzbank and the state-run Zirat Bank up to six months to liquidate the 131 frozen funds. But as Hilmi Gouvenal points out, anyone whose sell order was cancelled when the funds were frozen is no longer owed money.

31:31They're simply entitled to their share of whatever the banks managed to raise. And when you try and sell billions of lira of inflated factoring companies and loss-making shipyards all at once, you run into problems. Murat Gulkan, the 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 Pusala Group.

32:14The 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 Emery Tesman's philosophy of finance. I make money, the investor makes 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.

32:57The planned deliberate and organized speculative attack that brought down the Goldman Sachs of Turkey was carried out by sellers. Tesman had built a perfect financial machine. Its only design flaw was that it required an economy in which absolutely nobody ever pressed the 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.

33:35Thank you.