Wirecard CEO arrested; fintech financing may get costly

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Wirecard fallout

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.
Markus Braun, former chief executive officer of Wirecard.

“Mr. Braun’s arrest is the latest rapid-fire blow for the company at the center of what appears to be Europe’s largest fraud in years,” the Wall Street Journal said. The New York Times also covered the arrest.

Reuters had earlier reported that German prosecutors were considering issuing arrest warrants against Braun and Jan Marsalek, Wirecard's former chief operating officer.

“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.”

“If Covid can bring us something it’s ... to make sure that the [European bank] regulator ... thinks also of how to position banks to attract more capital,” he said. “We need to have this shift towards the issue of how to make banks profitable ... so that they can finance the European economy.”

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