How Deutsche Bank Helped Con The Public Into Believing In Wirecard

And now DB is set to become one of the biggest beneficiaries of its collapse.

More reporting on the Wirecard situation has emerged over the long weekend in the US, and none of it is flattering.

As a court-appointed administrator begins the process of managing what’s left of Wirecard through the insolvency process, while doing the best the government can to compensate shareholders who were deceived by the onetime fintech darling, WSJ reports that the (now former) COO, Jan Marsalek, has disappeared, with many suspecting that the longtime COO – who probably knows where many of the bodies are buried – has gone on the run as German prosecutors seek to question him.

His motives aren’t too difficult to discern: With CEO Markus Braun out on bail, it’s likely that Marsalek, who’s suspected of playing a critical role in maintaining the company’s complex shell game with the “Asian third-parties” which helped Wirecard conceal its accounting fraud, even from the auditors who apparently never bothered to actually check these accounts.

When the FT reported last year that most of Wirecard’s actual profits were generated by its opaque Asian businesses, the company denied it, with CEO Markus Braun insisting this was “simply not true”.  But once again, it appears the FT reporters were spot-on, as an appendix to to KPMG’s damning third-party report obtained exclusively by the FT purports to show.

Per the FT, Wirecard’s core business in Europe and the Americas has been lossmaking for years, which means the only Wirecard subsidiaries worth any money are those tied to the company’s most opaque operations, which might make it more difficult to sell the business lines that aren’t impacted by the fraud, and which still have value (theoretically, at least).

Some background: German payments group collapsed into insolvency last month after revealing that €1.9 billion ($2.1 billion) in cash in its accounts actually “didn’t exist”, exposing the “highly profitable” payments company and lender as a fraud.

According to its EY-audited financial reports, between 2016 and 2018 Wirecard generated operating margins of around 22% and almost doubled annual earnings before interest and taxes to €439 million. However, these profits appear to have existed largely on paper, according to the section of the KMPG report (which has already been made public, though the appendix has not) obtained by the FT. The businesses in question are WC’s payments business in Europe and Asia, and its credit card business in Europe and North America. Not only were these businesses lossmaking, but they’ve become increasingly money-losing in recent years.

During this time, Wirecard contended that its opaque Asian business more than offset these losses. But now it appears that 2/3rds of that businesses profits were completely imaginary. The company’s activities outside Asia haven’t actually generated a profit since 2016.

Wirecard’s court-appointed administrator Michael Jaffé is facing a difficult task as he tries to manage the sale of a few profitable business lines in WC’s banking and payments businesses. As more damning information comes to light, a sale of Wirecard’s subsidiaries needs to happen within weeks or they will lose any remaining value. “Wirecard has very few physical assets, and the risk is that many of its clients will switch to rivals soon,” said an anonymous source quoted by the FT. That source also claimed that the legal claims against Wirecard’s former management and its auditor (EY)  said one of the people, adding that Wirecard’s legal claims against its former management and its accountant may be more valuable than its remaining operating business.

Several buyers have expressed interest, including – most notably – Deutsche Bank, which maintains it is best positioned to integrate Wirecard’s legit businesses into its existing operations.

In an extraordinary example of how banks can sometimes abuse the “Chinese Wall” that’s supposed to exist between the stock analysts and the investment bankers, Deutsche Bank, over the course of a year, hedged all of its loan exposure (some $300 million in loans to both Wirecard and its (now former) chief executive, Markus Braun) to Wirecard. Meanwhile, its independent investment-management unit (DWS) piled into Wirecard’s shares, and DB’s analysts issued at least one “buy” rating on the DAX component’s shares.

As Wirecard’s shares eclipsed those of Germany financial champions like Deutsche Bank and Commerzbank (which WDI would later replace as a component of the DAX), the financial establishment in the country went from treating Wirecard like a pariah or a novelty (the company got its start providing payments infrastructure to adult entertainment sites and other shadier corners of the Internet) to a true national champion.

One of DB’s most egregious decisions involving Wirecard was hiring Andreas Loetscher, the Ernst & Young partner who oversaw several audits of Wirecard’s results, as chief accounting officer. Loetscher is now under investigation by German authorities.

https://www.zerohedge.com/geopolitical/how-deutsche-bank-helped-con-public-believing-wirecard