Turkish dismay

Rob Armstrong (0:00)

Nothing teaches us more about how markets really work than a market scandal. And in Turkey, they have an absolute banger going in a market and an economy that is already under pressure. Today on the show, how do you say, pump and dump in Turkish?

This is Unhedged, the finance and markets podcast from the Financial Times, and I am Rob Armstrong, coming to you from the clammy FT studios in New York, New York. Joining me today is one of my favorite colleagues, JP Rathbone, who has either worked on or led, I think, every foreign desk the FT operates. Am I exaggerating, JP?

John Paul Rathbone (0:46)

Let's just leave that exaggeration and enjoy it.

Rob Armstrong (0:51)

No, but really, you've run Africa, Latin America, now you're in Turkey. You're basically the British Empire. You have most of the surface of the planet covered, I would say.

John Paul Rathbone (1:00)

No, no, it was Latin America. That's where I cut my teeth. Not Africa.

Rob Armstrong (1:03)

Oh, not Africa. Okay. Well, just walk me through this very colorful scandal in the Turkish stock market.

John Paul Rathbone (1:14)

Yes, of course. So the envelope, to understand the stories, is a classic pump and dump scheme run by SPIVs. And you go back about two years, and there are two...

Rob Armstrong (1:24)

I have to stop you on behalf of our American listeners. SPIV.

Give me a working definition of the word SPIV, JP.

John Paul Rathbone (1:34)

A guy who opens his coat and says, I got a whole load of watches. Do you want one?

Rob Armstrong (1:40)

Okay. So we have a pump and dump run by SPIVs. Go on.

John Paul Rathbone (1:44)

So go back about two years, and there are two main investment funds in this sorry tale. One is called Terra and the other is called Pusula.

And they establish closed-end funds with limited subscribers, and they start their magic, which basically involves buying each other's shares and coordinating to buy the shares of other small liquid companies. And we get concentrated buying. Share price zooms up, their own net asset value increases, and what a wonderful performance that is. Retail investors jump on board thinking, woo-hoo, this is amazing, and we're talking like 43,000% returns over three years.

The bubble pops all of a sudden, and everyone is thinking, whoa, where did this come from? Why did it happen? Who is responsible? Who can we blame? And how can I get my money back? And that in a nutshell is what's happened.

Rob Armstrong (2:42)

Yeah, it sounds very familiar. It's slight echoes of Bernie Madoff here in the United States, a fund product where the returns seemed almost too good to be true and turned out to be too good to be true.

But in this case, the performance numbers we're talking about really sound too good to be true, hundreds of percent returns. Didn't this look too fantastical to be real from the outset?

John Paul Rathbone (3:11)

Yeah, absolutely, which is why everyone in the business knew it was too fantastical to be real. But if you're just a punter in an economy such as Turkey and there's been very high inflation for the past three, four years, I mean, we're talking, it's down to 30% at the moment, and that's viewed as a triumph. So there's lots of instability, plus you've got macroeconomy in the dumps, your pay packet is being eroded by inflation, and you're desperate to make ends meet. If you're a small guy or small woman, you get, oh my god, 600% return, that'll solve my rental bill, all my school fees or whatever it is.

So that's the kind of money that I understand has gone into this, because what's noteworthy about this, although it's all been all over the press last week, the kind of detail that you'd expect to see in reporting in most countries is sort of absent here.

Rob Armstrong (4:08)

I'm really struck by the open secret aspect of this. John Paul, I mean, just reading your reporting, back in June, we had a warning from MSCI talking about recurring instances of possible coordinated trading behavior, which turns out to be what happened. We had the Minister of Finance saying last November that the government knew manipulation was taking place and was talking about regulating things.

Last week, the Justice Minister said criminal market manipulation should not go unanswered. So how can it be that officials and big names in markets are saying, this stinks, but it just keeps happening?

John Paul Rathbone (4:57)

This is one of these cases where everyone in the know knew it was happening and everyone outside thought it was rubbish and rubbish those thoughts. So you've got certain members of the press here, which is largely state-controlled, saying it's fantastic.