The “locusts” were the canaries in the coal mine (again): Hedge fund short-sellers vindicated as Wirecard blow-up jolts Germany

Thief making of with a sack of stolen money

There is precious little to celebrate in the precipitous collapse of Wirecard, the German payments group whose shares have lost 90 per cent in a matter of days amid what now appears to be incontrovertible evidence of a massive and sustained fraud involving at least EUR2 billion of ‘missing’ cash.

But it's also hard not to feel a slight sense of schadenfreude at the way in which the rapidly escalating scandal has erupted, given Germany’s deep-seated antipathy to hedge funds and the repeated efforts over the years by the country’s authorities to malign and ostracise hedge fund managers. 

For corporate Germany, the revelation that what had been trumpeted as one of the country’s few supposedly world-class success stories in the technology/e-commerce space was little more than a giant con is clearly a source of shame, as Deutsche Bank CEO Christian Sewing has put it.

For investors with some of Germany’s leading asset management groups – not least Deutsche’s own partially independent subsidiary DWS, which incredibly was still buying shares in Wirecard, almost defiantly so, as recently as the end of March – it is nothing less than a disaster, with their savings and pensions being decimated by fund managers whose recent actions amount to sheer reckless folly.

For the financial market supervisors – most of all BaFin, which even banned short-selling of Wirecard shares at one point (the first and only time it has imposed a shorting ban for an individual company), and which appeared to be more interested in looking into supposed market manipulation on the part of journalists and short-sellers rather than the allegations against the company – it is simply a disgrace, giving further ammunition to those who believe that the fundamentally anti-markets culture in Frankfurt makes it an almost comically unsuitable home for Europe’s central bank. 

But, amidst all the shock and angst, there is one group of people who have been wholly vindicated by this sorry saga: the hedge fund short-sellers, vilified by German politicians as “locusts” in the not-too-distant past, and whose attempts to flag up suspected wrong-doing fell on predictably deaf ears.

Along with some of the financial media – notably the FT – that have also played an important part in pursuing and exposing this fraud, the hedge funds that shorted Wirecard (publicly and bravely) put their money and reputations on the line, exposing themselves to all manner of egregious responses involving physical surveillance, intimidation, threats, and ritual bad-mouthing. Bullying, in short.

Once again, just as happened in the run-up to the 2007-2008 global financial crisis, hedge funds were the canaries in the coal mine – the early warning sign of disaster ahead. Once again, just as happened 12 years ago, the authorities turned a blind eye. 

The result: tens of billions of euros of shareholder equity wiped out partly as a result of apathy and arrogance on the part of the authorities, and an unwillingness to consider the possibility that what many hedge funds were saying just might have been worthy of more than half-hearted probing.

But no, that would have been rocking the boat. Far easier to sit back and wait until millions of people had lost their shirts. And even though the hedge funds have been proved emphatically right on this occasion – as many managers in the crash also were – you can bet your bottom dollar that this will not be the last time that similar warnings go unheeded.

The Wirecard scandal will leave a lasting stain on the reputation of Germany’s business elite. But the UK authorities would be ill-advised to overlook their own shortcomings in this regard as well.

Astonishingly, the new governor of the Bank of England Andrew Bailey – formerly head of the Financial Conduct Authority (the UK regulator which was fast asleep at the wheel while Woodford Investment Management crashed and burned, destroying the livelihoods of so many investors) – was only a few weeks ago voicing his view that short-selling is somehow morally wrong. “Just stop” was his helpful, insightful message.

How can anyone in such a position think or say that? Are shares only meant to go up? Are markets not supposed to play a fundamental role in terms of efficient price discovery and capital allocation, and sorting out the good companies from the bad? Can fund managers and analysts not potentially be of assistance to the authorities in identifying and rooting out misbehaviour and malfeasance?

Just last week the head of the UK’s Trades Union Congress was quick to seize on the news of a recent spike in short-selling of UK companies, decrying the fact that hedge funds were “raking in billions”. Understandable enough from the TUC, I guess  – although a little short-sighted and counter-intuitive given the extent to which so many of their members’ pensions are managed by hedge funds these days. 

But from the Bank of England itself – the famed exponent of the “raised eyebrow” in times of old? Heaven help us. When will these people wake up? Dislike hedge funds if you must. But for pity’s sake, stop dismissing and demonising them. It just makes you look so very dumb.