Turkey's Stock Market Lost $128 Billion. The Man Who Ran It Is in Jail.

On Tuesday, a Turkish court jailed Korkmaz Enes Ergun — the head of Borsa Istanbul, the Istanbul stock exchange — on bribery charges, pending trial. He had been detained on Saturday on suspicion of accepting bribes and of membership in what prosecutors call "an organization established to commit crimes." The man whose institution exists to guarantee fair price discovery now stands accused of helping rig it.

It is the most striking arrest yet in a scandal that has been grinding through Turkey's capital markets since mid-September, and it is worth being precise about the scale. A regulator-ordered liquidation has frozen 131 investment funds holding roughly 936 billion lira — about $19.1 billion at the time — belonging to 455,758 investors. Borsa Istanbul has shed some $128 billion in market capitalization in roughly six weeks. The justice minister says investigators have identified 433 suspects, of whom 112 are already jailed pending trial. And MSCI has put Turkey on notice that its emerging-market status itself is now in question.

For emerging market investors, this is no longer a local corruption story. It is a live stress test of the thing EM investing ultimately prices: whether a market's institutions can be trusted to enforce their own rules.

The machine that printed returns

The mechanics, as prosecutors and the regulator describe them, are a feedback loop dressed up as asset management. Investment funds — many sold to ordinary savers — posted astronomically high returns by concentrating their holdings in thinly traded, low-free-float stocks. Prosecutors allege the funds bought shares in little-known companies to inflate their prices; the inflated prices produced spectacular reported returns; the returns attracted new money, which bought more of the same shares. Turkey's justice minister, Akın Gürlek, went further this week: a "comprehensive criminal organization" formed a cartel to "siphon off liquidity from the market by manipulating certain shares," and "rendered the oversight mechanisms ineffective by establishing a system of bribery."

The music stopped in late August, when the Capital Markets Board (CMB) introduced tougher rules aimed at exactly this behavior — curbing manipulation, limiting uncollateralized lending between related parties, and addressing unusual price moves in stocks with low free floats. From the first trading day after the decision, the high-flying funds came under selling pressure. On September 16-17, several funds defaulted outright on investor redemption requests. On September 17, the regulator ordered 131 funds managed by seven portfolio management companies liquidated within six months.

What makes this different from an ordinary fund blowup is who has been implicated since. The probe that began with fund managers has climbed the institutional ladder: the head of the SPK, Turkey's capital markets regulator, was removed by presidential decree in October, days after prosecutors began investigating his predecessor. The deputy finance minister resigned after his son-in-law was jailed in the probe. The CEO of Takasbank, the market's clearinghouse, resigned as the investigation widened, Bloomberg reported. And now the head of the exchange itself is in jail. Gürlek says the suspects include "political figures linked to criminal organizations within our fund market" — a remarkable admission from a government whose lawmakers, together with their nationalist allies, have nonetheless blocked every opposition attempt to open a parliamentary inquiry, most recently on Tuesday. Prosecutors are meanwhile seeking up to 19 years in prison for four journalists who covered the scandal.

Six weeks of carnage

The numbers from the exchange read like a controlled demolition. Borsa Istanbul's total market capitalization fell from 20 trillion lira on September 15 to 13.6 trillion lira at the close on October 30 — a loss of 6.4 trillion lira, or roughly $128 billion, according to data compiled by the Turkish financial daily Ekonomim. The benchmark BIST 100 posted seven consecutive weekly losses for the first time in its history.

Since mid-September, just 12 stocks on the entire exchange have risen. Sixteen companies have lost more than 90% of their value; 135 stocks — roughly a fifth of the market — have fallen by half or more. The sector indexes tell you where the bodies are buried: financial leasing and factoring down 89% since September 15, the IPO index down nearly 70%, the brokerage index down 63%.

The contagion long ago stopped discriminating between the implicated and the innocent. In October alone, supermarket chains Migros and BIM fell 18% and 17%, steelmakers Kardemir and Eregli lost around 18%, and Turkish Airlines dropped 14.5% — companies with no connection to the funds under liquidation. Of the BIST 30's largest names, only defense manufacturer Aselsan and lender Garanti BBVA finished October higher. Even after bouncing 4.1% on Wednesday as global markets rallied, the BIST 100 sits about 17% below its mid-September level — and that is in lira terms, with the currency now trading at 50 to the dollar.

The open question is the one that matters for anyone holding — or eyeing — Turkish assets: what happens when a $19 billion hole, a reserve-burning central bank, and an index provider's patience all collide?

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