These people are insane

Investors appeared to welcome signs of progress in efforts to investigate Wirecard the shares rose by €2.72, or almost 19 per cent, to €17.16 yesterday.

It isn’t that someone nicked the money. It’s that it never existed. The company has been – well, so is my opinion for all that’s worth – lying all along. The trade, the traffic, the margins and the profits never existed. In order to make it seem like they did there has to be a balancing item – you know, where the hell is this cash? Which is what the €1.9 billion was.

There is therefore no value in the company. Not because the cash has gone but because it was never there.

22 thoughts on “These people are insane”

  1. People have been buying into Hertz, despite its chapter 11 status. It’s hard to imagine why. Madness of crowds?

  2. Professor Murphy suspects this to be a vast tax avoidance scheme and would like to know if the missing billions have been subject to taxation and, if not, why not

  3. @Diogenes
    While the majority of companies never emerge from Chapter 11, some do. The point of it is to allow time for a restructuring of the business. Maybe (I haven’t checked and have no specific knowledge) Hertz have a cunning plan?

  4. Yeah, but – the old equity holders only get anything of the NewCo if the bond holders all got paid off. Which is unlikely, otherwise why Chapter 11 in the firstplace?

  5. Meanwhile in Germany:

    KPMG comes to the conclusion that there are arguments against Wirecard’s accounting of escrow accounts as cash or cash equivalents in the investigation period 2016-2018. In KPMG’s view, there are arguments that the funds in the escrow accounts could be other financial assets. However, there is room for interpretation and discretion

    An interesting look at European financial regulations
    https://www.realclearmarkets.com/articles/2020/06/24/wirecard_no_end_to_stock_frauds_in_china_and_europe_497137.html

  6. @Chris Miller, would you buy shares in a company, the bulk of whose debt is secured on its vehicle fleet, with the additional security that if its value reduces below a certain level, it has to pony up the deficit in cash? I don’t know much about second hand cars but I assume that their values are not rising at the moment. Hertz went for chapter 11 to protect their cash. I am not sure it is a good time to be in the car hire business. But I guess it comes down to your attitude to risk.

  7. Aren’t investors there to keep things going in bad times so that they can make money in the good?

    I mean, no one seriously believes we won’t have demand for flights and hire cars at some point in the relatively foreseeable future, but big and stable profit earners are going to the wall because of three months negative cashflow?

    It’s this kind of shit that gives capitalism a bad name.

  8. Good point, Kerl in Deutschland, but it depends if Hertz was otherwise stable or merely disguising its shaky foundations by using all its cashflow to just roll over debt.

  9. Not so much really. Hertz the company will be there. Just owned by a different set of capitalists. The last lot thought they could run it on a capital light model. And part of that was borrowing through SPV companies to fund the fleet. When the value of that collapsed – about 20% as used cars fell in value – they didn’t have the capital to pay the SPVs the amount of collateral that should be there to pacify the bondholders. That was the actual trigger.

    This is Chapter 11 recall – reorganisation, it’s not Chapter 7, liquidation. So, Hertz will continue. The bondholders and other creditors will become equity holders. And next time around they might not be quite so light on the working capital requirements.

    What’s really happened here is that one set of capitalists has lost money ‘cuz they did an oopsie. Can’t see that being a major problem.

  10. “Aren’t investors there to keep things going in bad times so that they can make money in the good?”

    Not really. How many of the investors when Hertz first floated are still on the books? So we are talking about people who either want to gamble on share price rises or live off the dividends. Massive uncertainty about the future shape of the company means that existing shareholders find it difficult to sell their shares for what you might want to think of as their intrinsic worth. For example, Carl Icahn:

    From wiki – On May 26, 2020, Icahn, 84, sold his entire 55.3 million shares of Hertz Global for 72 cents a share, according to a regulatory filing. His holding represented about 39 percent of the company’s stock. Hertz Global Holdings Inc., the rental-car company, had filed for bankruptcy the previous week. This roughly six-year bet lost Icahn almost $1.6 billion.

    On the other hand, just think of the debt-holders. Are you of the view that they should not get their money back? It looks as if Hertz geared up way too much. By all means, blame the debtholders for imprudence but there are 2 sides to any deal. Hertz knew that if throughput died. they would struggle but they did not envisage a viral attack

  11. Bloke in North Dorset

    “ By all means, blame the debtholders for imprudence but there are 2 sides to any deal. Hertz knew that if throughput died. they would struggle but they did not envisage a viral attack”

    Hindsight bias alert ..

    But shouldn’t a company the size of Hertz have been looking at that problem? It’s not like pandemics haven’t been discussed and we have seen them recently. Very serious people have been warning it’s not if but when. What would it have cost Hertz, and any number of global companies, to take insurance for these events? It’s not like they’re Black Swan events.

  12. @Diogenes
    No, I wouldn’t buy those shares. But that has nothing to do with their being in Chapter 11.

  13. The Meissen Bison

    BiND (@21h22) That’s an interesting point but when failure is less a consequence of covid and more a consequence of politicians’ reaction to covid perhaps one should re-evaluate what constitutes political risk.

    Could it be that Swedish car rental firms (or Hertz Sweden) did better than those in other countries?

    Could it be that Boris Johnson riding high in the polls and with a big majority in parliament presented a risk to UK business on account of being poorly qualified for the office he holds? Should Dominic Cummings now be allowed to play havoc with planning regulations given that he is nowhere near as clever as he thinks he is, has no background in planning matters and that his ability to antagonise other people is not really all that useful in any sphere?

    Political risk used to require an evaluation of the stability and bona fides of a counterparty in a different jurisdiction but it now must include an evaluation of the inanity and incompetence of governments that would previously have been thought stable and favourable for the engagements of businesses under their aegis. This appears no longer to hold.

  14. @Chris Miller explain. You asserted that chapter 11 was not a reason to infer the lack of a going concern. If you had other reasons for not investing, the powers that be will surely grab you. And why be contrarian just for the sake of it? We endure it with john77, are you declaring senility?

  15. FT Front page today:

    Wirecard Founder Markus Braun Arrested for Fraudulent Accounting; Released on Euro 5 million bail

  16. I agree BiND. The directors who offloaded that debt should be asked questions, not by mrEcks, but someone rational.

  17. @ Tim,
    the bondholders have lost money, too – otherwise Hertz wouldn’t be insolvent: they (or at least the senior tranche of debt) are getting the company for less than the book value of their debt otherwise they could not demand it. So several categories of capitalist have lost out – the equity holders have lost 100% and probably the junior debt has also lost 100%, the senior bondholders have lost something less than 100%

  18. @ Diogenes
    I am not contrarian for the sake of it – just pendantic – and I am not senile. I do admit to being older than Chris Miller but that is not yet a crime.

  19. Bloke in North Dorset

    TMB,

    “ BiND (@21h22) That’s an interesting point but when failure is less a consequence of covid and more a consequence of politicians’ reaction to covid perhaps one should re-evaluate what constitutes political risk.‘

    Good point, but isn’t it the job of risk departments to look at all risks and their consequences and take account of the unknown unknowns?

    It’s reasonable not to allow for governments locking down economies, I don’t think that’s ever been publicly discussed that I’m aware of, but it I think reasonable for them to consider that a pandemic would have global economic consequences and look for business continuity insurance. Whether the insurance companies would payout in these circumstances is a different matter, but at least they would have done their jobs.

  20. @Diogenes
    You’re being uncharacteristically thick.

    I never “asserted that chapter 11 was not a reason to infer the lack of a going concern” – clearly any business in Chapter 11 has significant problems, and for the majority of such cases they turn out to be insuperable. But I merely pointed out that there have been instances where Chapter 11 has resulted in a successful outcome. So your original proposition that anyone buying into a business in Chapter 11 must be mad is too simplistic.

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