A few thoughts on Wirecard

A few thoughts on Wirecard
21 June 2020

It's been the #1 story in financial circles since news broke on Thursday. The recent developments at Wirecard are breathtaking for more reasons than I can even begin to mention.

The media is overflowing with reports, and I asked myself whether I needed to add any more to it.

However, there is one outstanding article from a fellow blogger that I can't resist pointing you towards. If you are interested in the Wirecard subject at all, you HAVE to read the article published by Value and Opportunity:

Wirecard - the "German Enron" & and a very personal history 2008-2020

In my view, it's the best article about Wirecard published on the Internet this week – bar none. It stands alongside the reporting of the Financial Times, the investigative work of which led to uncovering this entire affair in the first place. It's also the most relevant article for private investors, not the least because of the general lessons that it draws at the end.

Here are my three key takeaways from the Wirecard scandal:

1. The most predicted corporate scandal in German history

In German small- and mid-cap circles, it's been an open secret for over a decade that something fishy was going on at the company.

The author of Value and Opportunity started to write about this as far back as 2008. Subsequently, he was intimidated by the company, which is why he ceased his reporting.

I heard of events that went far beyond merely threatening critics with lawsuits. These were rumours, but they came from sources I'd usually consider well-informed and reliable. Ever since, Wirecard has been a subject that I would not have touched with a ten-foot barge pole, primarily out of concerns for my physical safety.

There are many in the financial services industry who – in one way or another – have seen this coming. A well-placed friend in the financial services industry emailed me yesterday: "I did veto my employees from any dealings with Wirecard as far back as 2013."

Still, Wirecard has continued for over a decade, it became a DAX30 member, and high-profile fund managers elevated the company into the financial Olymp of highly-valued Germany by building significant, disclosable stakes. At its peak, Wirecard was worth a cool EUR 25bn. Even then, it was probably not much more than a hollow house of cards.

It's a great case study of how something can be visible in plain sight, yet be ignored entirely by markets – until it isn't ignored anymore.

2. The unbelievable (but not surprising) role of BaFin and Deutschland AG

It will be interesting to see how the German financial regulator, BaFin, will be affected by all this.

When the Financial Times started its investigative reporting, BaFin reacted by banning short-selling of Wirecard stock and unleashing the German criminal police on the FT journalists. There were also plenty of German mainstream media outlets that portrayed the Anglo-Saxon newspaper and the predominantly UK and US-based short-sellers as the baddies who wanted to have their wicked ways with an innocent German company.

Why is that not surprising?

Check back to my recent article about Agfa-Gevaert, where I wrote extensively about the origin of Germany's company law in the Nazi era.

German corporate law, and the entire ecosystem that exists around it, has a sharper focus on protecting companies, their managers, and the national interest rather than putting the interests of shareholders first. As such, it's quite distinct from the Anglo approach to capital markets, where the shareholder is the supreme power.

If you didn't grow up in Germany or haven't done extensive business there, it is hard to understand how the country's corporate establishment can circle the waggons to protect its own (up to, and including, the involvement of courts and judges). The infamous Deutschland AG has been disintegrating and changing since the early 1990s, but to some extent, it does live on. A profoundly ingrained culture doesn't change overnight, even after legal reforms take place.

Scandals can happen anywhere, and no financial market is protected against criminality (the US had Enron, and the UK had Northern Rock – to name just a few). However, for a regulator to take the side of a company that many market observers already strongly suspected was up to no good, has few precedents. The government unleashing its criminal police to deal with an investigative reporter who works for a global newspaper was a spectacular own goal.

It does tell you something about investing in companies in Germany and other European countries, where governance standards and protection mechanisms for investors are simply different from what they are elsewhere. If you know of these risks, you can deal with them in a suitable way (or even benefit from them!). If you don't, you have a higher risk of getting caught up in nasty surprises.

3. We have probably just seen the beginning

My suspicion and expectation for the next few weeks and months are that we have only just seen the tip of the iceberg.

Now that the floodgates have broken, an avalanche of people is likely to speak out. The author of Value and Opportunity got his article out in the space of a mere 24h, but imagine how many more people will be out there who will now be considering to share their own experiences. There is probably a decade's worth of "juicy" revelations coming our way – and I have picked this word on purpose.

Think of Wirecard as an elephant that has suffered from nonstop constipation for a decade, and it has just been served a few buckets of laxatives.

I wouldn't be surprised if we saw some truly nasty stuff come out – no pun intended.

Lessons to be learned for investors

I did draft a few points for this section but then decided that I can't keep up with the clarity of the lessons in the Value and Opportunity article. Instead of plagiarising them, please check out the blog.

How will it all continue, and is the stock worth taking a punt on?

Rumours now have it that someone is preparing a potential bid of EUR 15 per share. Also, Wirecard has hired a specialist firm to help develop a sustainable approach to its funding. I don't have a crystal ball, and these are fast-moving events; however, I would not be surprised at all if the company ended up being worth zero very quickly. It's impossible to predict, although further scandalous revelations are almost guaranteed.

With all that in mind, I'd use Wirecard as a case to learn from rather than a potential investment (unless you are a day trader looking for hyper-volatile stocks).

Maybe a movie will come out of it, similar to "Enron: The Smartest Guys in the Room". I'd be sure to watch it. It's kind of satisfying when after a decade of hearing about these things, matters are finally rising to the surface.

Outside of the entertainment value, though, it's probably better if you didn't go anywhere near this stock.

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