Wirecard: The Emperor's New Clothes
By Dr. Andrea Galli
The German company Wirecard, a cashless payment service provider from Aschheim near Munich, listed in the DAX, claimed to have in the balance two billion Euros in cash. But now the EY's auditors say there is no cash. It never existed. Did the German Wirecard boast a huge, and certainly fake, liquidity to attract investors and creditors? Where should the money be? Not in Bavaria, where it is based, but in some banks in the Philippines confirmed Wirecard.
In the meantime, the Philippines' central bank affirms the money never existed on the islands. Documents presented to auditors confirming such accounts are forgeries. The company's stock value dropped by more than 70% in two days. Ex-Wirecard boss Markus Braun has surrendered to the police. The Minister of Economics, Peter Altmaier, warned of a loss of image for Germany as a business location and called for a quick investigation.
Many investors in recent years had expressed doubts about Wirecard's accounts. But Bafin, the financial regulator in Germany, had always defended the company. They were even threatening legal action against short sellers and journalists who dared to question the regularity of Wirecard's accounts.
Now it's Bafin who is facing accusations of investors, as well as the system of German regulators and law enforcement, that is judged as being too complacent in defending Germany's interests. The company never made a profit, and we are facing the biggest financial scam in Germany, and Bafin appears to be a banana republic regulator.
For years, Wirecard had been the subject of doubts for some investors, analysts, and some journalists on the real growth of turnover and profits. Some also doubted the existence of a real legal customer base behind Wirecard, in particular in the emerging markets like Asia and the Middle East. But most saw Wirecard as the magical growth of a Fintech active company in the cashless digital universe, the pride of German financial modernity having replaced Commerzbank in the Dax30 index.
Wirecard was perpetual, akin to "The Emperor's New Clothes". Even a pretty obvious fraud can go on for a long time if the organizers are ruthless enough. The first signs that the dress did not exist are from 2008. For example, in 2016, an activist short seller group called Zatarra warned about a massive scam and money laundering schema perpetrated by Wirecard in a report.
The German authorities bypassed Zatarra and persecuted the authors of the report. Furthermore, Wirecard aggressively went against all people who wrote negative comments on its business legality, including journalists of the Financial Times. It used lawyers, PR specialists, investment marketing agencies, paid journalists, social media trolls, social media bots, private detectives, and hackers to discredit and intimidate any critical voice.
But 99% of professional investors and analysts don't care about these things even if you tell them as long as they can make money, and they made money by funding a bubble.
Most of the German press demonized short-sellers and accused them of stock manipulation. And most of the German media solemnly declared that Wirecard was the Olympus of cashless payments. A lighthouse of fintech wisdom in Europe. The marketing slogan of Wirecard is "reinventing payments." Perhaps Wirecard, in its interpretation of cashless payments, reinvented the idea of "cashless."
But every company's future hangs in the balance. Because the Wirecard creditor banks, after the news of the scam, must decide soon whether to keep the existing credit lines of up to EUR 1.75 billion. The risk is to accelerate the company's default, but the alternative, to maintain a company that could prove to be a scam, involves the crime of fraudulent bankruptcy.
Wirecard's creditor banks do not want to drop the DAX group, or at least in the short term. "Nobody has any interest in terminating the loans," writes the Frankfurter Allgemeine Sonntagszeitung, citing the financial institutions involved. "Everyone now wants to stabilize the thing in the short term." Wirecard's environment said that the group, which is in desperate distress, needs a "leap of faith" from the banks. Additionally, some voices asked for state support.
Before the banks, the international rating agencies could trigger the default, which, until now, judged Wirecard as investment grade. Moody's rating agency has already pointed out that it may lower its credit rating to junk level.