Wirecard’s former CEO Markus Braun Tuesday morning turned himself in to Munich prosecutors, who arrested him on “suspicion of false accounting and market manipulation. The prosecutors are accusing Mr. Braun of artificially inflating Wirecard’s balance sheet and the company’s revenue in an attempt to make the company look more attractive for investors and clients,” the Financial Times said. “The prosecutors suspect that Mr. Braun did this in conjunction with others. A spokeswoman for the Munich prosecutors’ office told the FT that the company’s former management board was under investigation.”
Markus Braun, former chief executive officer of Wirecard.
“The collapse in Wirecard’s share price has wiped out hundreds of millions of dollars of paper profits for a group of SoftBank executives and an Abu Dhabi sovereign wealth fund, who earlier stood to gain handsomely from an intricate $1 billion bet on the German payments company’s stock,” the Financial Times reported. “SoftBank Investment Advisers, which manages the group’s $100 billion Vision Fund, last year structured a €900 million investment in Wirecard through a convertible bond, providing a vital vote of confidence in the Aschheim-based company immediately after a series of reports in the Financial Times raised serious doubts about the validity of its accounting.”
Credit Suisse advised SoftBank on the deal and “later packaged up those bonds and resold them to third-party investors,” the Journal said. “The deal, completed in September, buoyed Wirecard’s shaky stock price and was seen as a shot in the arm as accounting allegations dogged the company.
Wirecard’s fall may make it more expensive for European fintech companies to attract financing, the Wall Street Journal says. “To Wirecard’s many critics, the only surprising thing about its implosion is how long it took to come. Why did so many fund managers keep faith even as evidence of accounting irregularities mounted?” the paper asks.
“One reason is that Wirecard was a rare German tech story the country’s establishment desperately wanted to succeed—and mounted unusual efforts to defend, including a temporary ban on short sellers last year. The company also went to great lengths to silence skeptics, including hiring private investigators. A third reason holds an uncomfortable lesson for tech investors more generally: Wirecard’s digital-payments pitch was easy to sell. The sector was already hot, and has been made even hotter by the Covid-19 crisis. This has long been a problem with tech stocks in Europe, where a lot of money chases too few players, and the acceleration of digital trends in the pandemic is only making it worse.”
“The Wirecard affair is the most serious illustration since the ‘Dieselgate’ episode four years ago of the tendency of Germany’s business world to close ranks against criticism,” the FT says. “Officials and corporate bosses treat the raising of legitimate concerns as an assault on German patriotic interests — in Wirecard’s case blaming Anglo-Saxon speculators — not as a reason to probe and question. The case shows, too, how German capitalism favors corporations over shareholders.”
But “Germany is far from alone” in that “regulatory scrutiny of the mushrooming financial technology industry remains deficient. The inherent risks of financial activities are not blunted by enfolding them in a shiny ‘tech company’ wrapper. That is just one of many lessons to be learnt from what is now a multibillion-euro scandal.”
Wall Street Journal
CMBS help
“More than 100 members of Congress are calling on the Trump administration and the Federal Reserve to help struggling … hotels, shopping malls and office buildings that borrow money in the roughly $550 billion market for commercial-mortgage-backed securities.” The bipartisan group “expects to deliver a letter to Treasury Secretary Steven Mnuchin and Fed Chairman Jerome Powell on Tuesday asking them to set up a lending facility to support these borrowers through the current stretch.”
“The troubles stand in contrast to other types of debt such as home mortgages, where borrowers have been able to pause payments for as much as a year as part of the more than $2 trillion stimulus package signed in March.”
Savings glut
Three months of lockdown has crushed worldwide consumer demand but “savings are rising in an unprecedented manner. That now seems likely to have long-lasting effects on financial markets, depressing interest rates for years and creating a beggar-thy-neighbor effect for the international economy. The accumulation of savings will undoubtedly slow sharply as purchases that were simply impossible during full lockdowns are completed. But only a fraction would have to remain to keep savings at historic highs.”
Financial Times
The great reopening
Bank executives “describe different strategies on everything from how to move staff to and from the office, to supplying personal protective equipment, managing how employees move around in the office and rotating teams” as they move to reopen in the wake of the coronavirus pandemic.
One more try
Mark Johnson, the former currencies trading chief at HSBC, “has asked the U.S. Supreme Court to review his criminal conviction for wire fraud in a last-gasp attempt to overturn his two-year prison sentence and clear his name, after his appeal was rejected late last year. Johnson was found guilty in 2017 by a New York court of defrauding Cairn Energy, a Scottish oil company that hired HSBC to convert $3.5 billion into sterling in 2011.”
Johnson “has always protested his innocence, and various industry bodies have stepped in to defend his actions, but in September 2019 the U.S. 2nd Circuit Court of Appeals said it found sufficient evidence to uphold the guilty verdict. Now, his legal team is pinning hopes on the slim chance that the US Supreme Court grants a review of Johnson’s case.”
New York Times
Square deal?
“Thousands of small enterprises that use Square to process their credit card transactions — including plumbers, legal consultants and construction firms — have complained that the company recently began holding back 20 to 30% of the money they collected from customers.” The firms said “Square was unfairly keeping money from them at an economically vulnerable time to protect its own bottom line. That had thrown their small businesses into financial difficulties, they added, forcing them to lay off employees, cut expansion plans, take out loans and miss mortgage payments.”
“Square asserted the right to hang on to the money for the next four months. Square told them that it was doing this to protect against risky transactions or customers who demanded their money back. But several affected businesses provided documents to The New York Times showing they had not had any returns or risk flags.”
Elsewhere
Focus on profits
“European banks need to be able to attract fresh capital and investors, in turn, need clarity on banks’ future dividend payments following a temporary freeze triggered by COVID-19,” Jean Pierre Mustier, the CEO of UniCredit, Italy’s largest bank, said Monday. “Mustier, who chairs the European Banking Federation, said U.S. authorities were aware of this issue and paid close attention to U.S. banks’ profitability,” Reuters reported. “But in Europe, Mustier said, the focus was more on banks’ capital.”
The Cleveland-based bank is projecting steady growth in net interest income even as credit losses remain manageable. But Chairman and CEO Chris Gorman also said that he thinks a recession is likely.
The first-quarter increase involved commercial real estate loans, including some problematic multifamily loans and an office credit, but none of the criticized loans were to consumers, officials at the Dallas company say. Further CRE deterioration is anticipated.
The Detroit-based company is exploring ways to make more consumer auto loans without running afoul of stricter capital standards that are expected from the Federal Reserve. Possible approaches include more securitizations and the use of credit risk transfers.
The House Financial Services Committee also sent to the full House two bipartisan bills, including one that would prevent large banks from opting out of having to recognize Accumulated Other Comprehensive Income in regulatory capital.
Charge-offs and nonperforming loans rose at the Georgia bank in the first quarter. But it blamed the problem on one large client and said the matter has been resolved.
Amid healthy first-quarter loan growth and improving credit quality, Discover Financial Services slashed its profits by $800 million to offset remediation costs from a 16-year period when it overcharged certain merchants.
