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An unusual investment in stricken German digital payments firm Wirecard that was structured last year by executives at SoftBank’s Vision Fund helped the company to fend off doubts about its viability for over 12 months, until an apparent €1.9 billion accounting fraud emerged in June.

Wirecard has since lost most of a listed stock value that was once over €20 billion – a failure that was accurately described by Felix Hufeld, the head of German financial regulator BaFin, as “a complete disaster”.

Last year’s €900 million structured equity trade was put together by SoftBank’s Akshay Naheta, a former Deutsche Bank proprietary dealer, along with Rajeev Misra, Naheta’s one-time superior at Deutsche and the current head of the $100 billion SoftBank Vision Fund.

It involved an investment in Wirecard in April 2019 that effectively served as a public endorsement of the payments firm when it was under attack from short-sellers.

It was positioned as a vote of confidence similar to Warren Buffett’s investments in Goldman Sachs and Bank of America when their shares were languishing in 2008 and 2011.

Like Buffett’s trades, the investment in Wirecard left plenty of upside for the SoftBank Vision Fund executives, who put their own money in the deal alongside other investors including Abu Dhabi’s sovereign wealth fund Mubadala.

SVF declined to comment for this story.

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Rajeev Misra, head of SoftBank Vision Fund

Evaporation

The sale in September 2019 of €900 million of convertible bonds via Credit Suisse completed the inoculation of the SoftBank executives from credit exposure to Wirecard while retaining their equity upside.

Apparently hefty paper profits for the executives from the trade when Wirecard’s stock bounced back in 2019 have now evaporated on the discovery of fraud at the firm.

There have also been actual losses for equity investors who bought listed stock after the April 2019 cash infusion. Other losers include debt investors in a €500 million corporate bond issued by Wirecard last September via Crédit Agricole, Deutsche and ING, which was trading below 30 cents in the euro in late June.

Even the German establishment that is so often defensive about potential malpractice by its corporate champions now seems to accept that the Wirecard debacle should prompt self-examination and meaningful reform 

This bond didn’t just help to establish Wirecard’s supposed viability, it also served as a credit reference for the deal the SoftBank Vision Fund executives used to complete their offloading of risk.

That complex final trade was structured as €900 million of notes that were exchangeable into Wirecard, with convertible debt serving as the collateral.

The end investors found by Credit Suisse for this hybrid debt and equity exposure face even greater losses than the corporate bond investors, as the issue was quoted at around 12 cents in the euro by late June.

Credit Suisse declined to comment for this story.

And the German corporate establishment – or Germany Inc as it is often known – has suffered another intangible but substantial blow to its credibility.

The Deutsche veterans who put together SoftBank’s structured investment in Wirecard weren’t aware of fraud at the fintech firm.

Parallels

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Akshay Naheta,
SoftBank

Naheta even issued a widely mocked Tweet expressing outrage at a lack of competence and responsibility by Wirecard’s accounting firm EY when the alleged fraud emerged.

But the ability of the former bankers to structure a trade that gave them personal upside to a risky deal with no real downside has parallels to the 20-year experiment in leveraged investment banking that eventually left confidence in Deutsche so low that its stock is now at roughly 30% of its nominal asset value.

In an odd mirroring, the total returns for Deutsche shareholders during this period were slightly less than 30% of the bonuses paid out to bankers over the same timescale.

The experiment began when Edson Mitchell was hired in 1995 to build investment banking scale at Deutsche, and effectively ended in 2015, when Mitchell’s former protege Anshu Jain was forced out of his position as co-chief executive of the bank.

Misra, a close friend and ally of Jain’s, had already made a well-timed exit from Deutsche in 2008, just ahead of the global financial crisis that followed the bankruptcy of Lehman Brothers.

Misra’s last two years at Deutsche marked the peak of the bonus payments to investment banking staff, which were close to €5 billion for each of the financial years of 2006 and 2007.

Co-investment opportunities were common for senior Deutsche staff in that era; Misra and other senior managers in the global markets unit run by Jain at the time were the biggest beneficiaries of this bonus bonanza, and had the opportunity to profit from co-investments providing asymmetrical exposure, just as a select few at SoftBank were able to with last year’s Wirecard transaction.

When Deutsche eventually suffered from a loss of confidence and a collapse in its share price, regulators at BaFin were widely blamed for slowing the pace of multiple investigations into dubious trading practices at the firm – and were assumed to be acting on their instinct to protect the reputation of Germany Inc.

This pattern seems to have been repeated with the Wirecard scandal.

When media reports led by the Financial Times highlighted apparent inconsistencies in Wirecard’s accounting last year, BaFin reacted by banning short sales in Wirecard shares and investigating the sources of journalists.

Regulatory foot-dragging in Germany isn’t confined to examination of financial services firms such as Deutsche and Wirecard.

Examination

The Volkswagen emissions test cheating scandal that eventually became known as Dieselgate also featured investigations that were initially driven by regulators from outside Germany, for example.

But even the German establishment that is so often defensive about potential malpractice by its corporate champions now seems to accept that the Wirecard debacle should prompt self-examination and meaningful reform.

Economy minister Peter Altmaier has called for an investigation to ensure that nothing similar occurs in the future to undermine confidence in the German banking system, and BaFin head Hufeld was summoned to testify before politicians on July 1.

Germany Inc was always been suspicious of the London-based bankers who extracted so much value from Deutsche while saddling the firm with risky long-term exposure, much of it in the form of derivatives contracts.

Representatives of the establishment failed to take any meaningful steps to act upon this suspicion, however.

The same insiders who failed to investigate another supposed national corporate champion will no doubt feel especially appalled when they reflect that a trade by former Deutsche employees effectively helped to extend the life of Wirecard and compound the embarrassment of its eventual failure.

It is enough to bring on a feeling of weltschmerz, or world weariness, among representatives of Germany Inc – who are all too aware that foreigners will now be indulging in the more familiar borrowed sensation of schadenfreude.

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