The Economist - USA (2020-06-27)

60 Finance & economics The EconomistJune 27th 2020

1

W

irecard’s successwas once regard-

ed in Germany as rivalling that of sap,

a software-maker and the country’s most

valuable firm. No longer. Felix Hufeld, the

head of BaFin, the financial regulator, was

blunt: the accounting scandal at the pay-

ment-processing firm is a “complete disas-

ter”, and a “shame for Germany”. “We

would have expected such a situation any-

where in the world, but not in Germany,”

said Peter Altmaier, the economy minister.

Mr Altmaier may have unwittingly put his

finger on a key point—that everyone with

influence over the firm, from board mem-

bers to auditors and regulators, seems to

have been complacent. In a darker version

of events, the actions of some may have

been complicit, even criminal.

On June 18th Wirecard’s auditor for the

past decade, ey, said that it could not find

€1.9bn ($2.1bn), amounting to nearly a

quarter of the firm’s balance-sheet, that

was meant to be held in escrow accounts in

the Philippines. Wirecard then withdrew

its results for the last fiscal year and for this

year’s first quarter. Markus Braun, the chief

executive, resigned. On June 22nd Wire-

card admitted that the €1.9bn “probably

does not exist”. By then more than 80% of

its market value had evaporated within

three trading days. Later that day Mr Braun

was arrested on suspicion of using fraudu-

lent accounting techniques to inflate re-

ported revenues. The next day he was re-

leased on bail. On June 25th Wirecard

began insolvency proceedings.

It is a brutal fall from grace for a once-

feted executive. After taking the helm in

2002 Mr Braun transformed the startup

into a pioneer of processing digital pay-

ments, offering its services to porn sites

and online-gambling sites, which other

digital-payment platforms tended to shun.

Over the years Wirecard attracted hun-

dreds of thousands of new merchants, in-

cluding Aldi and Lidl, supermarket chains,

and several airlines. In 2006 it bought a

bank and evolved into a full-service pay-

ment operation. In 2018 it knocked Com-

merzbank out of the dax, causing a sensa-

tion in Germany. “It was an amazing

growth story,” recalls Wolfgang Donie, an

analyst at Norddeutsche Landesbank who,

like many other equity analysts, used to

recommend the stock to his bank’s clients.

By June 18th Donie’s notes to clients were

warning: “hands off Wirecard shares!!!”

Neither equity analysts, asset manag-

ers, auditors nor regulators come out of the

story well. All seem to have ignored numer-

ous red flags. BaFin’s record looks especial-

ly poor. In 2016 short-sellers released a re-

port accusing Wirecard of corruption,

fraud and weak money-laundering con-

trols, which the company denied. In 2019

the Financial Times (ft) published an inves-

tigation into Wirecard’s dubious account-

ing practices. In response BaFin filed a

criminal complaint against twoft journal-

ists and several short-sellers. It also took

the unprecedented step of banning short-

selling against Wirecard, citing risks to the

economy and market stability.

On paper, BaFin is required to regulate

only Wirecard’s banking arm. But it is also

meant to make sure that the boards of firms

listed on the daxare up to the job. The

members of both Wirecard’s management

and its supervisory board lacked the com-

petence to lead a multinational tech firm,

says Bernd Ziesemer, chairman of the Co-

logne School of Journalists. None sat on the

boards of any other firms listed on the dax.

Three of the four members of the manage-

ment board came from Austria, like Mr

Braun, inviting comparisons of board

meetings to aBrettljause, a hearty Austrian

snack break with mates on an Alpine peak.

Germany will need to rethink its piece-

meal regulatory system, particularly if it

wants Frankfurt to lure business from Lon-

don. The bulk of Wirecard’s business, bi-

zarrely, is regulated by the Upper Bavarian

district government, which was woefully

ill-suited to oversee a global fintech firm.

After claiming that the regulators “worked

very hard and did their job”, Olaf Scholz, the

finance minister, has promised to consider

changing the rules. That is surely only the

start of the soul-searching. 7

BERLIN

How a fintech star fooled most of the

people all the time

Wirecard

The demise of a

Wunderkind

I

n january 1970 a group of black econo-

mists wrote a letter to the American Eco-

nomic Association (aea). They criticised

colleagues who ignored discrimination in

the profession and paid no heed to racial

inequality in their own research. Just over

half a century later, similar complaints

have resurfaced. This time the aeaseems

to be listening. On June 5th it issued a state-

ment saying that “we have only begun to

understand racism and its impact on our

profession and our discipline.”

Openness to more diverse groups of

people and ideas should enhance the pro-

fession’s understanding of the world. Bar-

riers to entry are not only unfair, they could

undermine healthy competition in the

marketplace for ideas. And a better grasp

of, say, the huge racial gaps in income and

wealth in America seems essential to a pro-

fession that studies who gets what.

The complaint in 1970 led to attempts to

increase the number of black economists,

and the creation of the National Economic

Association, which supports minorities.

But progress has been disappointing. In

2017-18 just 2% of assistant professors in

prestigious universities were black. Some

departments have never had one.

The killing of George Floyd and the en-

suing protests have led to a flurry of anec-

dotes suggesting that a hostile environ-

ment might be putting some people off the

profession. A survey of economists in 2019

found that 62% of black women and 43% of

black men felt they had experienced racial

or gender discrimination, compared with

6% of white men. An accusation of racist

comments in the classroom led to the sus-

pension of Harald Uhlig, a professor at the

University of Chicago, on June 12th. He was

reinstated on the 22nd after an internal in-

vestigation found no reason to proceed.

All this has renewed calls for more black

economists. By June 24th the Sadie Collec-

tive, a new group trying to encourage more

black women into the subject, had gath-

ered around 2,000 signatures calling for

measures such as more cash for diversity

initiatives. Experienced hands are more

cynical. Rhonda Sharpe of the Women’s In-

stitute for Science, Equity and Race says

that “when individuals change, the profes-

sion will change.”

Another charge against the profession

concerns its study of race. Economists have

not ignored the topic: 3% of working pa-

pers published by the National Bureau of

WASHINGTON, DC

Economists grapple with their race

problem

Race and economics

Gains to

diversification