Commentary on Political Economy

Monday, 22 June 2020

We have often argued that Germany is the sick man of Europe at least in part because its ruling elites (political, industrial, financial) have never relented and expurgated themselves from the perversely deleterious practices of Nazi totalitarianism (autarky, mercantilism) in which they were culpably and contemptibly complicit (apologies for the alliteration). So here is further proof of what we have argued:

Why was Frankfurt so blind for so long about Wirecard? 

Germany’s financial establishment too often views harsh criticism of corporations as an affront 

Over the past two years, Wirecard has been a rollercoaster; at least, that was the metaphor widely used in many German newspaper reports, investor forums and analyst presentations. Good news drove up the fintech group’s share price; bad news pushed it down. But last week the funfair stopped abruptly when auditors warned that €1.9bn was missing from Wirecard’s accounts. Many riders on the rollercoaster, not having taken seriously reports which suggested that a large portion of the company’s revenue and profits did not exist, suddenly found themselves without seat belts. Some fund managers such as Deutsche Bank’s DWS, normally known for being risk averse, watched as their holdings of the stock plummeted in value. Many small investors, usually aggressive defenders of Wirecard on Twitter, fell silent. And the German press, which had mostly observed the critical reporting passively, started using the strongest words to condemn the company. The case raises a disturbing question for Frankfurt’s financial community. Why did so many institutions fail to take into account what the Financial Times had reported might be going on there? One reason sticks out.

Many saw the reports as an “attack” invented, or at least co-sponsored, by shady Anglo-Saxon speculators and “locusts”. This premodern idea of capital markets — long-term investors are good; short-sellers are bad — is common amid the German public but also among large parts of Frankfurt’s financial community. Over the weekend, Tim Albrecht, manager of DWS’s flagship Deutsche fund, lamented that Anglo-Saxon short-sellers were Wirecard's only winners, and everyone else had lost. But hasn’t the truth also won? Recommended FT InvestigationsWirecard: spotlight on a leading European fintech Wirecard’s suspect accounting practices revealed BaFin, Germany’s financial markets watchdog, failed particularly miserably as an institution. For too long, it found all kinds of bureaucratic excuses to avoid looking into Wirecard seriously. When it finally did, BaFin’s regulators did not target company management but rather the journalists behind the critical reports and also unnamed hedge funds. Conspiracy theorists went ballistic when BaFin suspended Wirecard short selling last year, and then filed a criminal complaint against two British journalists. German corporate culture is still dominated by actors who favour corporations over their shareholders, and thus regard criticism as an affront. BaFin not only amplified the home bias against Anglo-Saxon short-sellers; it used parts of the German press to attack them. In BaFin’s early days, there was a practice whereby selected information was given to chosen journalists when the institution sought to present itself as a heroic fighter against evil financiers or foreigners intriguing against Germany’s financial great and good.

The ghost of this practice lingers in BaFin’s corridors and too many local journalists still take as truth what they hear there. BaFin bureaucrats were also offended when the first reports were published about potential irregularities at Wirecard. A huge scandal under their noses? Unthinkable. Since many German media lacked either the expertise or means to dive deep into such a global and complicated story, they were delighted when German investment funds or BaFin, or sometimes both, offered them an occasional Wirecard “scoop”. Politicians meanwhile found the whole affair too specialised to pay much attention. So it basically remained a lopsided fight, until last week. Only a few German journalists, mostly from smaller outlets, supported the critical reporting. No major financial institution publicly questioned Wirecard. Smarter funds meanwhile divested their holdings; dumber ones stayed in. One thing is sure, however. Future journalism students will read the affair as a telling case study. I know I am one teacher who will encourage them to do so.

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