Mnuchin wants an apology; investors flee Wirecard

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Unanswered questions

Wirecard’s stock plunged more than 26% Tuesday “after a special audit reviewing allegations about some of its accounting practices left unanswered questions. ” The German payments company, “which has been celebrated as one of the biggest and fastest-growing European fintech companies, also said it wouldn’t report its already delayed full-year 2019 results on Thursday.”

“The German company has faced questions over aspects of its accounting for several years from hedge funds that bet against the company’s shares as well as from media,” the Wall Street Journal said. “Allegations of falsified transactions in its Singapore division led to an investigation by the Singaporean police’s financial arm, the Commercial Affairs Division, which has yet to complete its probe.”

The six-month special audit by KPMG “could not verify the genuineness of sales and profits from third parties at the heart of whistleblower allegations of accounting fraud,” the Financial Times said. “The KPMG investigation was commissioned by Wirecard’s supervisory board after the Financial Times reported the allegations, which focused on three of the company’s business partners.”

Chris Hohn, manager of the $24 billion Children’s investment fund, an “activist short seller [and] one of Europe’s best known and most successful investors, has called on Wirecard’s supervisory board to fire chief executive Markus Braun after KPMG said it was unable to verify whether large portions of the fintech’s profits were real,” the FT added. “The call adds to the pressure on Thomas Eichelmann, Wirecard chairman, after auditors at KPMG said they faced delays and obstacles while conducting the six-month probe.”

Barclays reports

Barclays said its first quarter net income dropped 42% to £605 million from a year earlier as it raised its provisions for losses to £2.1 billion ($2.6 billion) from £448 million. Wall Street Journal, Financial Times

Wall Street Journal

Apology sought

Treasury Secretary Steven Mnuchin said “large companies that sought coronavirus hardship funds intended for small businesses” should apologize to American taxpayers. “The owners should be apologizing that they took this, not just giving the money back,” he told the Journal. He also “warned that they could face criminal liability if the money isn’t returned.”

Treasury Secretary Steven Mnuchin listens during a Paycheck Protection Program event in the East Room of the White House in Washington April 28, 2020.
Treasury Secretary Steven Mnuchin listens during a Paycheck Protection Program event in the East Room of the White House in Washington April 28, 2020.

He also said the Small Business Administration will do “a full review” of any Paycheck Protection Program loan over $2 million “to determine whether they are eligible to be forgiven under the program.” While Mnuchin “said the law made clear that borrowers, not banks, face criminal liability for making certifications that weren’t true,” he also said the banks, “from a reputational standpoint,” should have “looked at some of these companies and said, ‘Is this the right thing to do?’”

But without cooperation from lenders, the SBA faces “daunting challenges in ensuring the funds are properly spent,” the Journal warns. “The agency normally counts on lenders to audit the small business loans it backs. But to ensure the new PPP loans quickly reached recipients, Congress largely absolved the banks of the time-consuming responsibility of checking for fraud or egregious errors, as long as borrowers provided necessary documentation.”

“The bank doesn’t have a lot of incentive” to investigate, said Richard Prisinzano, a budget expert at the University of Pennsylvania. “They’ll do bare-minimum checks.”

Put to the test

Federal Housing Finance Agency director Mark Calabria’s free-market beliefs are being “put to the test” by the coronavirus crisis. He “is resisting pleas for help from lenders seeking relief as millions of Americans stop payments on their home loans, sending tremors through the $11 trillion mortgage market. He has said he is willing to stand aside even if some of the mortgage lenders fail, and he says there is plenty of capacity to move business out of failing firms and into healthy ones, if necessary.”

“Mr. Calabria says his first priority is to ensure that Fannie Mae and Freddie Mac, the two mortgage-finance giants he oversees that together guarantee more than $5.5 trillion of mortgage loans, are themselves strong enough to withstand the downturn.”

Warning signal

HSBC’s $3 billion provision for credit losses, which cut its first quarter earnings by nearly 60% compared to the year earlier period, could “stand as a warning” for other banks in Europe and the U.S. “in understanding the impact of coronavirus shutdowns.”

“About a third of [the provision] was for Asia, with a $700 million hit from one Singapore company alone. Maybe poor credit procedures were at fault, or maybe it was just bad luck, but it is also possible that the brutal cocktail of Covid-19 shutdowns and ultralow oil prices will go on to catch out more lenders in this way. Like the pattern of Covid-19 cases in China, Asia’s economic experience may offer a glimpse into the future for Europe and the U.S. Above all, HSBC’s results underline the risks associated with concentrated credit exposure for banks that have made much of their newfound focus on big clients.”

Financial Times

Opportune moment

The coronavirus pandemic is speeding up the “disappearance of cash” and boosting the “shift towards digital wallets and currencies,” former National Economic Council director Gary Cohn says in an FT op-ed. “The shift will be disruptive but is clearly a leap in the right direction.”

Open the taps

The European Commission “has offered banks temporary capital relief that it said could boost lending by up to €450 billion this year, arguing the economic damage wrought by the coronavirus crisis justified a ‘targeted’ easing of regulations introduced after the 2008 financial crash. The announcement came as the results of a European Central Bank survey of 144 lenders published on Tuesday showed that demand for loans from European businesses has surged since the coronavirus pandemic started, while banks have moderately tightened their lending criteria.”

No-show jobs

The U.K.’s Financial Conduct Authority “has warned banks not to pressure companies seeking debt finance into paying them unnecessary fees for share issues amid the Covid-19 economic crisis. In an unusually strongly worded letter to the bosses of U.K. lenders,” the country’s financial watchdog said it had “credible reports” that some banks “were abusing their lending relationships with clients to demand lucrative roles on equity capital raisings they would never normally be awarded.”

“According to a person with knowledge of their grievances, company shareholders had questioned why lenders not normally associated with large-scale U.K. share issues, such as HSBC and Santander, had been paid to facilitate them” even when the bank did “little or no work to earn a share of the fees.”

Quotable

“I’m a big fan of the team, but I’m not a big fan of the fact that they took a $4.6 million loan. I think that’s outrageous, and I’m glad they’ve returned it, or they would have had liability.” — Treasury Secretary Steven Mnuchin, commenting on a report that the Los Angeles Lakers took out a Paycheck Protection Program loan before agreeing to return it.

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Paycheck Protection Program Steven Mnuchin SBA Wirecard Digital currencies Gary Cohn Mark Calabria
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