Closing Stock Market SummaryThe S&P 500 (+0.8%) and Nasdaq Composite (+1.4%) rallied to fresh record highs on Tuesday, with the Nasdaq getting an added boost from the momentum in the mega-caps and growth stocks. The wealth spread around to the Russell 2000 (+1.1%) and Dow Jones Industrial Average (+0.8%), too.
Today's key moves were Apple (AAPL 134.18, +5.14, +4.0%) rising 4% after JPMorgan raised its price target on the stock to $150 from $115, and Zoom Video (ZM 457.69, +132.59, +40.8%) surging 40% after it crushed Q2 earnings expectations.
Apple was a major factor in today's index gains given its 7.3% weight in the S&P 500, while Zoom provided the fuel for other growth stocks like Netflix (NFLX 556.55, +26.99, +5.1%) and DocuSign (DOCU 268.80, +45.80, +20.5%). Another supporting factor was the ISM Manufacturing Index for August increasing to 56.0% (Briefing.com consensus 54.5%) from 54.2% in July.
The manufacturing data helped lift the S&P 500 materials (+2.8%) and industrials (+1.0%) sectors into positive territory with the information technology (+1.9%), communication services (+1.0%), and consumer discretionary (+1.1%) sectors. Each advanced at least 1.0%.
Conversely, the utilities (-1.1%), health care (-1.0%), and utilities (-0.9%) sectors underperformed and declined around 1.0%.
Recapping some other mega-cap moves, Walmart (WMT 147.59, +8.74, +6.3%) climbed 6% after officially introducing its Walmart+ membership program. Tesla (TSLA 475.05, -23.27, -4.7%), however, was a notable holdout after the company disclosed plans to sell up to $5 billion in stock.
U.S. Treasuries ended the day higher after reclaiming overnight losses. The 2-yr yield declined two basis points to 0.11%, and the 10-yr yield declined two basis points to 0.67%. The U.S. Dollar Index increased 0.2% to 92.34 after being down 0.4% in the morning. WTI crude futures increased 0.3%, or $0.14, to $42.76/bbl.
Reviewing Tuesday's economic data:
- The ISM Manufacturing Index for August increased to 56.0% (consensus 54.5%) from 54.2% in July. The dividing line between expansion and contraction is 50.0%. The August reading is the highest level for the index since January 2019.
- The key takeaway from the report is that it is a reflection of an encouraging rebound in manufacturing activity following the sharp contraction seen in April and May.
- Total construction spending increased 0.1% m/m in July (consensus +1.0%) on the heels of an upwardly revised 0.5% decline (from -0.7%) in June. Total private construction spending rose 0.6% and total public construction spending fell 1.3%.
Looking ahead, investors will receive the ADP Employment Change Report for August, the Fed's Beige Book, Factory Orders for July, and the weekly MBA Mortgage Applications Index, and auto and truck sales for August on Wednesday.
- Nasdaq Composite +33.1% YTD
- S&P 500 +9.2% YTD
- Dow Jones Industrial Average +0.4% YTD
- Russell 2000 -5.4% YTD
Apple's Market Cap Surpasses The Entire Russell 2000 Due To "Option Insanity"
On Monday, in a tweet that went viral, we showed that the market cap of Apple was on the verge of overtaking the entire Russell 2000 index of small-cap companies.
Well it's now official, and as of Tuesday's 4.3% jump in AAPL stock price largely on the back of the latest upgrade from Bank of America, which raised its price target to $140 post-split citing an even greater multiple expansion as the catalyst (because there is nothing else really)...
... which helped propel Apple's market cap to $2.3 trillion, Apple's market cap is now greater than the entire Russell 2000 for the first time ever.
The next chart shows the historical transformation of Apple as not only the biggest company in the world, but also the one company which now has the biggest impact on pretty much anything market-related.
We previously discussed the unprecedented negative put-call skew, which we said will keep pushing AAPL even higher due to the layered gamma which is creating an upward feedback loop, and sure enough this is still the case.
And since nothing else has changed and we already showed what is going on from a delta- and gamma-hedging perspective...
... we will give the last word to the Bear-Traps report which describes the "Insanity" in Apple Options:
The convexity skew picture on big-name equities like Apple $AAPL has gone parabolically stupid. Let’s keep this simple and draw a conclusion.
- Apple $AAPL Stock near $130
- Jan $180 Strike Calls costs $4
- Jan $80 Strike Puts costs $1
*Both options are $50 out of the money, approx data, BUT it is nearly 3x more expensive to buy upside risk in AAPL equity. What does this mean?
Apple closed near $130, while the cost of speculative upside calls is weighted heavily against the buyer. Someone must have reached out to Buffett today because he can make a fortune in selling $AAPL upside calls. Let us explain.
Highly unusual activity, we have a higher stock price in Apple AAPL with a much higher cost of equity upside. Equity vol usually explodes higher in market crashes, NOT bull markets. As you can see above, in normal Apple equity bull markets – see all of 2019 – AAPL implied vol has been CHEAP!
In our institutional client chat on Bloomberg, a hedge fund put on this trade and we are sharing it with permission.
Think of the January 2021 expiration. The client bought the $200 call and sold the $250 call, 1 x 4, and got paid $3.50 to put the trade on.Apple was worth $1.5T at the end of July and today she stands tall at $2.2T. In order for the client to lose money* at January expiration, the stock has to breach $270 ($129 today), which would put the company’s market capitalization very close to $5T, by January 2021, that is a little over four months away.*The mark to market in the short run can be extremely painful though – if Apple equity soars another 10-20% (Apple is up 50% since late July), that is indeed the catch. AAPL is trading nearly 65% above its 200-day moving average vs. 42% in February’s great bull run.
There are a handful of quant funds pushing around a few stocks (with high impact on QQQ, NDX, SPY) in the options markets. The dealers are getting very nervous. Last 15 days – Imaging being a large market maker in Apple and Tesla equity options. You make a market, bid – offer, you get lifted and lifted over and over again by buyers to the point where you have raised the price of calls vs puts to multi-year extremes. How short is the Street gamma? VERY.
When call vs. put skew gets this extreme it can be a solid leading risk indicator.
The True Costs Of Zombie Companies And Easy Money
Recent data published by Yardeni Research Inc., Bank for International Settlements (BIS), the Institute of International Finance (IIF), and in the Federal Reserve Bank of St. Louis Economic Data (FRED) database offers an insight into the true extent of central banking practices before and during the covid-19 pandemic.
The wide-ranging implications of this can be seen through several critical dimensions. But first we must understand the destructive nature of central banking.
If we accept the main premise of central banking, that the central bank is the lender of last resort, it follows that in this last resort event the central bank must have a pool of wealth to lend from. After all, in order to lend to someone, you have to own something of value. In this situation, the central bank prints money, which, to that extent, is where it derives its pool of assets for lending from, taking from people via inflation. Paradoxically, the central bank therefore lends to banks by stealing from the people, whereas the banks are then expected to loan that money back to people. This theft is, however, subtle, not seen as a direct tax or immediate confiscation, but through the destruction of real savings and purchasing power.
From the beginning of this year to June, the total assets of major central banks (the Fed, ECB, BOJ, PBOC) have jumped by a near $6 trillion. This rapid ascent is likely going to continue as the year progresses. Similarly, in Q1 of this year, global debt rose to $258 trillion, representing an all-time high of 392 percent of GDP. Households, businesses, and governments are taking on more debt in hopes of offsetting the acute economic pains of the crisis. But the false sedative of debt will soon dissipate, revealing the true pain behind all these distractions. Make no mistake, what is being done by governments and enabled by central banks is akin to paying credit card debt with more credit cards.
This data should alarm you and the immediate question should be, Who’s going to pay for it, and who benefits? In the bizarre world of negative interest rates, however, that question becomes all the more complicated.
Artificially low interest rates have enabled the longest bull run in US history (2009–20). Cheap borrowing has propped up unprofitable zombie corporations which rely on loans to pay back loans. In conjunction with quantitative easing efforts, the S&P 500 has not only recovered since the covid March meltdown but surpassed its all-time high.
Low interest rates have historically made it cheaper to mortgage a house, finance a car, and pay for student debt—in the long term, however, it has made all of these more expensive. By enabling cheap borrowing to finance spending, particularly on assets such as housing and in the equities market, central banks have infused those markets with artificial demand which in turn causes prices to skyrocket.
By indirectly monetizing and devaluing the real value of debt, central banks have cut the brake wires off government spending.
Its no coincidence that the moment the Fed started to unwind its balance sheet in 2018 markets went berserk. When the Fed shrank its assets by just around 6 percent between early 2018 and February 2019, the market plummeted by twice that.
The most recent market faltering in March was a very real indicator of upcoming economic trouble. It was all covered up by the Fed, however, which bought $500 billion in Treasury securities and $200 billion in mortgage-backed securities to provide so called “emergency liquidity.”
In effect, the Fed’s actions diverted scarce resources from productive sectors to monetize government debt, inflate a chaotic asset bubble, and send the bill to everyone else. Importantly, this has created an environment of haves and have-nots. So, although so-called conservative politicians are scratching their heads about the popular rise of socialism, should we really be that surprised?
The true mark of economic recovery should not be measured nominally in dollars and cents, but in terms real interest rates. When markets, not bureaucrats and central bankers, set interest rates, markets equilibrate, allowing for productive and allocative efficiency. The true sign of a growing and healthy economy should instead be a positive real interest rate set by market forces.
Positive real interest rates indicate that investments/savings are yielding positive returns and thus creating wealth. This means that people, businesses, and governments are rewarded for saving. In the world of negative interest rates, the opposite is true.
When real interest rates are negative, they create distortions in markets. Consider that between March 23 and the day I write this (August 8), nearly every popular US asset has inflated. Equities such as the NASDAQ and S&P 500 have risen by 61 percent and 50 percent respectively, bitcoin by 81 percent, and gold by 36 percent. Through the manipulation and debasement of currency, however, this asset inflation should be a warning signal to everyone not that their assets are necessarily worth more, but their dollars worth less.
This asset inflation coincided with a sharp M2 money supply increase (roughly 20 percent year over year).
Nonetheless, when real interest rates are negative, bubbles are to be expected. Since the covid crisis, ten-year inflation-indexed bond yields have crashed, falling even below –1 percent.
Unsurprisingly, these rates have dropped so low not particularly because their yield is negative (although they did dip below that level slightly in March), but because inflation is higher than the yields.
This is something that the traditional CPI (Consumer Price Index) will fail to capture. Using irrelevant baskets of consumer goods such as air travel, nightclubs, and hotels among other things paints a false picture. Of course, now more than ever there is more money chasing fewer goods, with many businesses being closed and stimulus checks coming in. The recent sharp increase in the money supply will therefore drive real inflation even higher and real interest rates lower.
Real negative rates serve to accelerate global indebtedness and solidify zombification. As the balance sheets of central banks grow, so does the indirect subsidization of inefficient corporations. By taking out corporate loans at a real interest rate of below zero, zombie corporations manage to have their lender of circumstance actually pay them for taking on debt. By keeping inefficient players in the marketplace, innovative entrepreneurs are blocked from creating wealth and market barriers to entry are raised through a slow and steady engulfment of scarce resources, furthering an unprecedented inequality of wealth via central bank–induced monopolization.
In 2019 the BIS determined that over 10 percent of the publicly traded firms of fourteen developed countries were zombies. My assessment is that by the end of this crisis that statistic will be much higher. In the US, the number is nearly 20 percent according to Deutsche Bank Securities.
When borrowing money is so cheap (in fact, they pay you!) zombification is an inevitable process. Analyzing quarterly data from 1998 to 2020, 8 percent of the variance of corporate debt levels as a percentage of equity can be directly attributed to changes in M2 levels. Utilizing regression analysis, the null hypothesis of this relationship (that the variables are unrelated) has a p-value of 0.0000 and a t-score of 588, or in other words there is an almost 100 percent chance that the relationship between these two variables is statistically significant.1
Japan is the historical home of zombies and is still suffering from the peak of its crisis in the eighties. As of 2018, Japanese corporations had taken out $4.59 trillion in loans, the highest amount since 1997. Japan’s myriad economic problems not only include the zombification of its companies but also of its people, as they face the challenges of an aging population. As its balance sheet surpasses 100 percent of GDP, the BOJ is essentially doubling down on past failed policies.
Source: Edward Yardeni and Mali Quintana, Central Banks: Monthly Balance Sheets (Yardeni Research Inc., Aug. 27, 2020), figure 5.
Keeping inefficient zombie corporations may boost short-term employment by avoiding the general turnover of firm market share; however, in the long term they massively drain resources and block future employers out of the marketplace. The BIS writes:
Specifically, the estimation results suggest that a 1 percentage point increase in the narrow zombie share in a sector lowers the capital expenditure (capex) rate of non-zombie firms by around 1 percentage point, a 17% reduction relative to the mean investment rate. Similarly, employment growth is 0.26 percentage points lower, an 8% reduction. However, under both definitions we find that non-zombie companies invest more and have higher employment growth.
Following the 2008 crisis a radical experiment of depressed and even negative interest rates was employed by the Fed, BOC (Bank of Canada), ECB (European Central Bank), and other central banks. Now, however, the resources that were previously available to fight recessions have been totally depleted combating the last recession. Fighting debt with debt is irresponsible and unfair to future generations—clearly fiscal and monetary restraint is needed.
The interplay between rising debt levels, negative real interest rates, and zombification should concern us all—especially in the context of global lockdowns. But it should not be capitalism which we blame for this crisis. Quite the contrary, in fact; we should blame central banking and its destructive economic capabilities.
Bill De Blasio Says NYC Indoor Dining May Not Happen Until June 2021
Not satisfied with watching from the sidelines as his city descends into a war zone, Mayor Bill de Blasio seems to be doing everything he can to drive citizens and business owners out of the city. His latest idea came on Monday, when de Blasio said he may not open indoor dining in the city until a vaccine for Covid is released. This means that indoor dining in the nation's most popular city may not happen during 2020, despite the fact that outdoor dining is going to be far more difficult to continue heading into the winter months.
We're sure this will be the most "popular" idea with restaurant owners since Philadelphia's Mayor was spotted dining indoors in Maryland while keeping Philadelphia-area restaurants shut down for indoor dining. The news, obviously, could be crippling to business owners.
de Blasio has backed a June 1, 2021 re-open date, despite many other major U.S. cities all setting up to re-open heading into the fall. He said Monday: “We do expect — and pray for and expect — a vaccine in the spring that will allow us to get more back to normal, but I will absolutely tell you, we’re going to keep looking for that situation where we can push down the virus enough where we would have more ability to address indoor dining.”
Meanwhile, the city is posting its lowest infection rate in months at 0.59%. Across the river in New Jersey, restaurants are setting up to reopen for indoor dining at 25% capacity starting Friday (in addition to open outdoor seating). Almost every other region in New York has also reopened for some type of indoor dining.
But de Blasio isn't convinced: "Is there a way where we can do something safely with indoor dining? So far we have not had that moment, honestly. It’s going to take a huge step forward to get to that point and that’s the truth."
Meanwhile, NYC residents are also taking "giant steps" as they flee the city in droves.
Bankrupt Intelsat Buys Gogo In-Flight Wi-Fi Business for $400 Million
Deal is being funded by a $1 billion bankruptcy loan that Intelsat is using for its chapter 11 restructuring
Satellite operator Intelsat SA continues to expand despite filing for bankruptcy earlier this year to address billions of dollars in debt, agreeing to purchase the in-flight broadband business of Gogo Inc. for $400 million.
The acquisition announced Monday is being funded in part by the $1 billion bankruptcy loan Intelsat is using during its chapter 11 proceedings, the companies said. Intelsat said it has support from lenders funding its chapter 11, a group of investors that includes Apollo Global Management LLC, Fidelity Management & Research and BlackRock Inc.
Intelsat, based in McLean, Va., is a major satellite operator and one of the largest providers of broadband service to airline and cruise-ship customers. Although consumer travel has declined significantly this year because of the coronavirus pandemic, Intelsat Chief Executive Stephen Spengler said consumer demand for in-flight connectivity is expected to continue to grow over the next decade. Gogo is available on more than 3,200 aircraft, Intelsat said in court papers.
The fact the company can execute the acquisition during a financial restructuring in chapter 11 “speaks to the strength of our underlying business, our vision for the future, the commitment of key Intelsat stakeholders,” Mr. Spengler said.
The transaction is expected to close before the end of the first quarter of 2021, subject to regulatory approvals and customary closing conditions, Intelsat said.
Intelsat’s acquisition of Chicago-based Gogo’s in-flight business will expand its consumer offerings. Commercial airlines are increasingly using the quality of their in-flight internet service to differentiate themselves from competitors, Steven Zelin, a partner at PJT Partners LP, which has been retained by Intelsat, said in a declaration.
Intelsat filed for bankruptcy protection in May, weighed down by $14.5 billion in debt and about $1.13 billion in annual debt service payments. The company has said the restructuring is likely to significantly reduce its debt load.
Aside from addressing its balance sheet, the chapter 11 filing was also intended to help Intelsat take advantage of a planned auction of a swath of spectrum currently being used by satellite operators that the Federal Communications Commission wants to be repurposed for 5G networks.
Why Warren Buffett is gambling on Japan’s distinctive dealmakers
Changes in culture may be needed in a sector but one marked overdue for re-evaluation
Japan’s sogo sosha — or general trading houses — have a distinctive culture, fierce competitive streak and a horror of being compared to their rivals.
One of them is the world’s biggest handler of endangered bluefin tuna; another had its management system forged in a Siberian prison. One has just installed garden swing-chairs to help its executives think; another was responsible for one of history’s worst trading scandals. A fifth has Botticelli’s La Bella Simonetta hanging outside its boardroom.
But as of this week, the five biggest — Mitsubishi, Mitsui, Itochu, Marubeni and Sumitomo — have something in common: Warren Buffett as a shareholder.
The entry of the world’s most famous investor on to the shareholder registers of the trading houses has prompted questions over the exact nature of a sector whose business model — somewhere between private equity funds, arbitrageurs, venture capitalists and asset managers — defies easy description.
As investors in Tokyo digested the news of the $6bn bet, some wonder whether Mr Buffett, whose conglomerate, Berkshire Hathaway, has taken a 5 per cent stake in each of the trading houses, has suddenly found kindred spirits in a market he has, until now, barely touched. “Berkshire Hathaway is actually similar to a trading house,” said JPMorgan analyst Tatsuya Kikkawa.
Others suspect Mr Buffett may come to regret his choice and has taken a plunge into a quintet of companies whose foibles he has not grasped and whose shortcomings he cannot hope to address.
Japan’s trading companies — part swashbuckling adventurers, part establishment bedrock — are the original globalisers of Japan. Their interests extend worldwide from snowboards, silk scarves and souvenir banana cakes to hydroelectric megaprojects, chemical plants and oil exploration.
Through their involvement in every sector, via thousands of subsidiaries and affiliates — as well as their pick of the nation’s graduates — they are the backbone of the Japanese economy. Several, particularly Mitsubishi and Mitsui, have been around in one form or another since the 19th century.
Their role — from securing commodities for a resource-poor country, to project finance and venture investment — has evolved significantly over time. But one defining feature has endured: they are relentless dealmakers.
Between them, the five trading houses have spent more than $50bn over the past five years in cross-border deals, according to Dealogic. For large swaths of the financial services sector, both in Japan and beyond, they are key clients: sources, said one M&A banker in Tokyo, of a constant stream of deals and demanding of permanent attention.
Not all of those are successful, and some high-profile commodity deals have led to large writedowns. But they are palpably different in their approach from the rest of corporate Japan.
Ken Lebrun, a partner at law firm Davis Polk in Tokyo, said: “Doing deals is their business. They are always readjusting their portfolio and they are able to do that without too much emotional baggage. Selling a business is not seen as a failure, but just as part of what they do.”
For fund managers that have spent years instructing their clients that Japanese companies were due for a great re-evaluation, Mr Buffett’s move looks like vindication. Tokyo’s stock market, where roughly half of all listed companies are trading below book value, has for years been pushed by brokers as a paradise for value investors — with the trading houses particular laggards.
But to others, including those who have worked inside the trading houses, Berkshire’s wager was a huge surprise.
Based on some metrics, the case is compelling. With the exception of Itochu, the four firms are trading below book value following a brutal sell-off at the height of the pandemic. And despite the disruption wrought by coronavirus, both Mitsubishi and Sumitomo are forecasting a healthy dividend payout and four out of the five expect to remain profitable.
“The fact that Warren Buffett chose to buy them speaks highly of his confidence in their corporate governance and business acumen,” said John Vail, chief strategist at Nikko Asset Management.
Beyond the valuation and a bet on a recovery in global commodity prices, Berkshire’s investment is a gamble, say analysts. Mr Buffett is betting, they say, that becoming a shareholder will give Berkshire access to a trove of quality assets the Japanese groups have bought — sometimes at peak prices — that appear to blend well with its own diverse portfolio that has recently increased its exposure to the energy sector.
Instead of plucking a winner from the trading houses, which generate a fifth of their net profit from commodities, investing in the entire sector gives Berkshire a wider selection of the different assets each owns.
Itochu, which has been most aggressive in expanding its non-resource businesses, such as food and apparel, owns Dole Food’s global packaged foods and Asian fresh produce businesses while Marubeni has recently sharpened its focus on automotive parts sales business in the US. Mitsui’s bet on healthcare has resulted in investments in Malaysia’s IHH Healthcare and Singapore-based DaVita Care, a subsidiary of Berkshire-backed dialysis clinic operator DaVita in the US.
Many of these assets have some crossover and opportunities for collaboration with Berkshire’s expansive portfolio that ranges from iPhone maker Apple, car insurance company Geico, oil producer Occidental Petroleum, food producer Kraft Heinz to ice cream chain Dairy Queen.
JPMorgan’s Mr Kikkawa says investing in the five major players is a smart call that plays into the very nature of the Japanese groups, which despite their varying strengths, compete fiercely by chasing after similar deals. With each of the companies saying there was no previous contact from Berkshire, top executives will be rushing to build a relationship with Mr Buffett’s group and competing to impress with proposals for investment synergies.
“It will fuel rivalry among the CEOs and they will scramble to clinch a flagship deal with Berkshire. As a result, only the best assets will be presented to Berkshire by each of the trading houses,” Mr Kikkawa said.
Jeremy White, a partner at the law firm Baker McKenzie in Tokyo who has worked extensively with trading companies, said that while Mr Buffett’s latest investment appeared to fall short of his famous insistence on backing simple business models, the Japanese groups were united by their endless appetite for deals.
“Yes, the business of trading houses looks complicated because the deals they are doing are complicated. But it’s not like Enron where there is lots of financial engineering behind the scenes,” said Mr White. “When you realise that these companies are basically collections of dealmakers constantly making deals, it’s actually quite straightforward,” he added.
Still, former executives at trading houses say the hardest challenge will be achieving potential synergies between the firms and other parts of Berkshire’s sprawling portfolio. Standing in the way are rigid corporate cultures, conservative managements, and complex politics between the trading houses and the thousands of subsidiaries they operate.
One former executive at Mitsubishi said trading houses are armed with rich resources, intelligence and talent to create value from their investments. “But the CEOs must perform better by making use of those intangible assets, hopefully with positive pressure from Buffett,” he said.
Jason Ollison, principal of Asialantic Global Advisors and a former senior director at Sumitomo, says drastic changes in corporate culture would be needed to meet the promise trading houses have as integrated conglomerates.
“Warren Buffett’s mantra is that the companies he invests in should be simple, transparent and well run. The trading houses are challenged when it comes to operating in that manner,” Mr Ollison said.
German parliament to open full inquiry into Wirecard collapse
Decision comes as MPs question why regulators failed to detect huge corporate fraud
The German parliament is to hold a full inquiry into the collapse of the disgraced payments company Wirecard, in a move that will keep the affair at the top of the political agenda well into a critical election year.
A full parliamentary committee of inquiry was needed “to clear up an accounting scandal which has no precedent in Germany’s post-war history”, said Lisa Paus, finance spokeswoman for the opposition Green party. “We owe it to the investors and citizens of this country.”
MPs decided to push for a full investigation after concluding that a series of special hearings before the Bundestag finance committee had left critical questions about the authorities’ role in Wirecard’s collapse unanswered.
“The image we’ve been presented with over the past two months is of a government that just pushes the blame on to other people,” said Florian Toncar, an MP for the liberal Free Democrats (FDP).
Wirecard collapsed into insolvency on June 25 after admitting that about €1.9bn in cash was missing from its accounts. Former chief executive Markus Braun, who denies allegations of fraud and embezzlement, and three other former top managers are in custody, accused of running a criminal racket that defrauded creditors of €3.2bn. Jan Marsalek, the former chief operating officer, is on the run.
MPs will want to know when exactly the German government first knew about irregularities at Wirecard and whether it could have done more to prevent the fraud, which has badly damaged the country’s reputation as a financial centre and exposed profound weaknesses in its system of financial regulation.
Many opposition lawmakers believe the authorities were more focused on protecting a company seen as one of Germany’s few tech superstars than in properly investigating alleged fraud at the group.
The shockwaves of the Wirecard affair have reverberated to the top of German politics. MPs have questioned why Angela Merkel lobbied for the company during an official trip to China last year when reports of suspicious activity at the payments provider had been circulating for months.
Critics of Germany's financial markets watchdog BaFin have also asked why it responded to reports in the Financial Times last year about accounting irregularities at Wirecard by filing a criminal complaint against the FT journalists involved. In addition, BaFin has been hurt by the disclosure last month that its employees were trading Wirecard shares in the months before the company declared insolvency, raising questions about potential conflicts of interest.
“There are still open questions which concern the chancellor’s lobbying for Wirecard in China, the role of the financial watchdog and of the law enforcement authorities and the regional government in Bavaria,” said Fabio De Masi, an MP for the hard-left party Die Linke. “An investigative committee is unavoidable.”
The decision to set up the committee means that political debate over Wirecard could dominate Ms Merkel’s final months in power. Bundestag elections next year will mark the end of her tenure after 16 years as chancellor.
A parliamentary probe could also prove embarrassing for finance minister Olaf Scholz, who is the Social Democrats’ candidate for chancellor next year. His ministry oversees BaFin as well as the Financial Intelligence Unit, Germany’s anti-money laundering agency, which, like BaFin, stands accused of ignoring countless warning signs at Wirecard. In testimony to the Bundestag finance ministry, Mr Scholz had placed much of the blame on auditors at EY, who had given the company a clean bill of health over the course of a decade.
Opposition MPs from the FDP, Die Linke and the rightwing populist Alternative for Germany had long been demanding a parliamentary inquiry. But it was not until the Greens backed their demand that they had enough votes to prevail. A quarter of the Bundestag’s 709 MPs must give their assent for a full inquiry to proceed.
The investigative committee into Wirecard will be under the cosh, however. It must wrap up its work by next summer, ahead of the Bundestag election. “It will be a Herculean task,” said Ms Paus.
Ms Merkel’s bloc, the CDU/CSU, was originally sceptical about a parliamentary probe: but some Christian Democrats — aware of its potential to harm Mr Scholz’s electoral chances — now support the idea. “In the case of Wirecard, the control mechanisms failed, so that the [company’s] machinations came to light far too late,” said Matthias Hauer, a CDU MP. “As the CDU and CSU we will continue to push for a full political review.”