The fund fraud scandal and MSCI 'Status Concern'

The logic behind the neoliberal wind in the globe, as understood locally, is to manage the 'state like a company' to secure the inflow of fresh foreign currency. This is because, like many late-capitalist countries, there is a foreign trade deficit due to dependence on intermediate goods (at around 70 percent). Terms of trade are declining. Therefore, foreign currency is unfortunately at the heart of the matter. If you continue to pump blood (money) into the veins leading to the heart, your blood pressure will rise after a while, the veins will wear out, and cardiological problems will create issues for the circulatory system. This can affect the entire body, potentially leading to paralysis, starting with the nervous system and then the digestive and respiratory systems.

Such trends also exist in the economy.

The recent inflation of 131 funds belonging to 6 fund companies in violation of the Capital Markets Board (SPK) law has also turned into a phenomenon that increases blood pressure.

Transaction-based market fraud is regulated in the first paragraph of Article 107 (107/1) of the Capital Markets Law No. 6362 (SPK website). According to this regulation, “those who buy or sell, place orders, cancel orders, change orders, or carry out account movements in order to create a false or misleading impression regarding the prices, price changes, supply and demand of capital market instruments” shall be sentenced to imprisonment from 3 to 5 years and a judicial fine from five thousand to ten thousand days, provided that the amount of the judicial fine to be imposed for this crime cannot be less than the benefit obtained from the commission of the crime.”

The rule is in place, provided that the implementation is timely... The social cost becomes heavier as it is delayed. According to The Economist, the total value of the funds for which liquidation decisions were made is 18 billion dollars, and the loss of value in the stock market in the 1 week when the scandal broke out exceeded 30 billion dollars (side effect). Let's dig into the subject a bit by saying that a loss of money at this level has not happened before in the country's history...

“TOO GOOD TO BE TRUE”

Pointing out that the main fund of Tera, an asset management company registered with BIST and approved by the SPK, has risen by over 60 thousand percent in just three years, The Economist emphasizes that Destek Finans Faktoring became Turkey's second-largest publicly traded company with a 7 thousand percent increase in its share price approximately 17 months after its IPO. The magazine evaluates the rise in these 6 mentioned funds as if mocking it, calling it “too good to be true”. This idiom in our language also means “praying for an impossible wish.” In other words, capitalism has its own etiquette, and London does not mince its words, because it also invests money. Even though it is unknown how many of the investors in the recent scandal are foreign investors.

Even if it is at an insignificant level, its contagiousness is a concern, as this is part of the global financial system. Moreover, the world system has experienced various forms of imaginary capital in its own home for more than 300 years and knows it well. The Tulip mania (Netherlands), Black Monday in 1987, the 2000 dot-com bubble, and the Great Depression (1929 US crisis) are just known examples. Also, our space is limited for the Ponzi scandal in the US at the beginning of the 20th century. Let us go down in history as examples that were not learned from, such as the Ponzi scheme in the B. Madoff case in the US before the 2008 crisis. Since these lessons are painful enough for the West, they are included in the literature as undesirable examples.

Since November of last year, officials from the Morgan Stanley Capital International (MSCI) emerging markets index have warned the stock market management in Turkey. It was reported that manipulative, imaginary capital-oriented buying and selling on a share and fund basis should be audited, otherwise the BIST100 index could be downgraded to limited status in the MSCI index, to the level of Tunisia and Romania.

On the other hand, the industry has not been able to meet with imaginary capital due to the “PMI” index, which has been falling for the last 30 months, and the production index, which has been declining for the last 3 months. If the stocks and investment funds in a country's stock market have broken away from the production structure of that country's industry, it means that imaginary capital has come into play.

The “benefit” specified in the law authorizing the SPK can be associated with imaginary money capital speculation. Although this situation is stated in the SPK law, the fact that it is not complied with by both SPK managers and fund managers shows that it cannot be isolated from the political environment. Moreover, there is also responsibility in terms of Borsa İstanbul management.

According to economist Assoc. Prof. Dr. Deniz Şişman, there are the following questions for the Borsa İstanbul board of directors:

“When were the unusual price and volume movements seen in the stock exchange's systems? When did the exchange's surveillance unit start investigating these? Was a notification made to the SPK, and if so, on what date? If the stock exchange management was aware of the investigations, what did it do?”

UNANSWERED QUESTIONS

You cannot answer these questions by saying, “We are in a country with low capital accumulation; while our share of world national income and exports is 1.5 percent, it is 0.25 percent in the capital markets fund. That's why we said 'let anyone pass'.” For two reasons: First, capitalism has its own etiquette; from the outside, as in the MSCI index, they can put you in an out-of-index or borderline position and leave you alone with much less foreign capital. There is a mystery as to why the SPK, which caused the fund fraud to explode with the warning of MSCI index managers (foreign powers), did not think of the strict rules of the August 2026 regulation earlier. Second, in capitalist production relations, a financial inflow (blood) that will take place primarily over the surplus values coming from industry and agriculture is needed; the opposite, that is, to say financial inflow first, requires you to create conditions where the rule of law is fully supreme. Since that is “wishful thinking,” if the surplus value from production cannot be effective despite the high harvest in agriculture due to the decline in industry, financial bubbles result in crisis, fraud, and inflation.

That is exactly what happened.

Despite all this, if it is said, “no matter what, let's pump the blood,” it causes the economy to enter intensive care.

It is unknown whether the economy will enter the 3rd stage in intensive care, but we know that there are 3 stages in intensive care. For example, what needs to be done in the first stage of intensive care is of vital importance. In the 1st stage: There is a serious problem in the economy, but the system continues its basic functions; intervention and monitoring are required. When this monitoring activity cannot be fully performed or occurs with a delay (especially due to incomplete information by the SPK), it is observed that the 2nd stage is reached. In the 2nd stage: problems have “spread significantly to the financial system and investor confidence”; active support is needed in terms of liquidity, funding, or market confidence.

If you are in an inflationary environment while providing this support, it means you are shelving disinflation. Because insufficiency in the 1st stage leads to 2nd stage intensive care, and in 3rd stage intensive care, the problem affects more than one critical organ of the financial system; a simultaneous serious deterioration occurs in the capital market, banking, public finance, and investor confidence. Intensive and continuous intervention is required.

Although the 3rd stage has not yet been reached in the fund fraud incident, there is a possibility of reaching it if effective measures are not taken and imaginary capital speculation is not stifled. Confiscating the assets of fund managers is important for the liquidation process, but initiatives need to be taken regarding the capital smuggled abroad and the assets of the fund managers' relatives. In addition, what needs to be done immediately is the immediate dismissal of the relevant bureaucrats.

The state can eliminate moral hazard by questioning the incomplete information and adverse selection phenomenon of law-makers and those who implement the law.

These concepts have been brought into the literature by economists in the financial field over the last 50 years. If investors have increased prices by trading among themselves in violation of the relevant fund law, which is where the bubble originates, the penalty for this crime should be determined and announced as soon as possible in accordance with the benefit obtained. This issue cannot be solved with an investigation of transactions that took place in the digital environment spread over 6 months. The previous 3-month decision was appropriate. As it is delayed, the interest of domestic and foreign investors in the funds disappears and is reflected sharply in the reserves.

INTENSIVE CARE HASTE

Because in the past 1 week, foreign investors were also affected by the scandal and realized an outflow of 226.7 million dollars in stocks and bonds. When it comes to finance, time is also worth its weight in gold. A public authority that is more careful, fast, and carefully implements regulations is needed to prevent an environment where a small but prosperous minority, who do not know where to direct their savings, will crush small savers. Otherwise, 3rd stage intensive care means the economy is in total danger, and it is already very close. A country experiencing problems with inflation and foreign currency inflow may not be able to handle such a “meltdown.”

The interest rate cut expected on October 10 will contradict both foreign markets and the inflationary environment. The hand of those who say, “What if the fund crisis turns into a currency crisis?” may be strengthened. To avoid this, it is necessary to strictly implement regulations in finance and tax law with maximum attention and not to fall “behind” the market.

So, it turns out the state cannot be managed “like a company.” It turns out that the state is also an organ that must supervise the compliance of all kinds of contracts, especially financial contracts, with the laws.

Otherwise, life reminds us of what is necessary against imaginary capital with phenomena such as the MSCI Index status problem and stock market fund fraud!

Note: Universities are opening next week. Wishing all students and academics a good semester...