Confidence in German Capital Markets Has Been Shattered


When Wirecard AG’s former boss Markus Braun was taken from his Bavarian prison last week to give testimony to a German parliamentary enquiry, he declined to answer almost all questions about the payment-processing group’s sudden collapse.

Dressed in his trademark black turtleneck sweater, he did read a prepared statement which generously exonerated politicians, financial authorities and auditors for not spotting the epic fraud. “I can’t understand why external regulators should be held responsible for failures here,” he said.

Braun has good reason to play nice with German authorities: After 1.9 billion euros ($2.3 billion) of Wirecard cash balances disappeared (they may never have existed), prosecutors are investigating whether he knew that profits were fabricated and that prettified accounts were used to obtain billions of euros in funding. He denies wrongdoing.

Investors who lost their shirts when Wirecard collapsed will be less forgiving of Germany. Confidence in the country’s capital markets has been shattered by the affair, which exposed alarming gaps in its regulatory and accounting oversight. Germany’s opposition politicians can be commended for insisting on a rigorous parliamentary inquiry, but there’s little sign that top officials are ready to accept blame.

Regrettably, the detective work was left to courageous financial journalists at the Financial Times, whom Germany tried to hinder by investigating claims that they’d conspired with short sellers. German financial regulator BaFin also banned investors from shorting Wirecard stock, even though hedge fund instincts were proved correct. Wirecard’s chief operating officer, Jan Marsalek, believed by Germany authorities to be an informant for Austria’s spy agency, has eluded Berlin’s efforts to find him.

Germany’s latest effort to make amends — an overhaul of the rules governing admission to the country’s blue-chip Dax share index — is a step in the right direction.

Companies that fail to promptly issue audited financial statements will be swiftly booted from the index, which is being expanded from 30 to 40 constituents. They’ll be required to have an independent audit committee. Wirecard’s supervisory board didn’t establish an audit committee until 2019.  

Meanwhile, Berlin is preparing an overhaul of BaFin’s powers. Bizarrely, Wirecard didn’t fall under the finance regulator’s oversight (except for its banking arm) because it was considered a technology company. Dozens of BaFin employees traded Wirecard stock while the company was facing questions about its accounting. There’s no suggestion they acted on insider information, but this was a cavalier attitude toward conflicts of interest. BaFin staff will be banned from trading securities in the companies it oversees. It’s incredible that it was ever allowed. 

Germany’s  accounting watchdog, FREP, which lacked the resources to conduct a forensic investigation of Wirecard, will have its contract cancelled, with BaFin gaining greater powers on forensic audits.

BaFin’s president, Felix Hufeld, has largely ducked responsibility for Wirecard and pointed the finger instead at auditor, EY, whose staff appear at Germany’s parliamentary inquiry this week. (Like Braun, they’re expected to remain largely silent.) In a long report on Wirecard this month, the European Securities and Markets Authority said BaFin lacks independence from its government.

All of this tells me that Germany hasn’t fully come to terms with what happened, and international investors will continue to regard its financial regulators as docile and toothless.

The country has form. A decade ago, Volkswagen AG briefly became the world’s most valuable company when Porsche revealed it had cornered the market in its parent company’s shares using financial derivatives that it wasn’t obliged to reveal under German rules. This brought about a massive squeeze on short sellers and inflicted billions of dollars of losses on hedge funds, after a Bernstein analyst exposed what Porsche was probably up to. Investors remain bitter to this day.

On Wirecard, financial journalists did Germany’s supervisory work for it. Dan McCrum and his FT colleague Stefania Palma have been nominated for the Federal Cross of Merit, Germany’s highest civilian honor, but there’s been no apology from BaFin. My guess is it may never arrive.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

©2020 Bloomberg L.P.

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