Wirecard's collapse hurts Fintech & Crypto start-ups, like Lehman and Enron burned the economy

Hi Fintech futurists --

This week, we consider the impact of financial infrastructure collapse and who really gets hurt through the lens of Wirecard, Enron, and Lehman Brothers. Yes, there are investors in the entity that will lose value. But there are also clients and counterparties of Wirecard, like Curve, Revolut, and Crypto.com. In the case of Lehman, there was a $40 trillion derivatives notional amount that took twenty years to wind down. We also consider the most recent $500,000 hacking in DeFi of an automated market maker to see if there are common threads to be drawn between the two worlds.

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Long Take

Let's take a walk down memory lane.

First Enron. Most innovative company to work for. Smartest guys in the room. Allegedly $100 billion of revenue in the year 2000.

What did these guys do wrong?

Well, they put billions of dollars of liabilities off the company's balance sheet, hid them while inflating profits, misled public investors, and traded on insider information. $70 million insider trading proceeds for the CEO, for example. The world's biggest accounting firm at the time, Arthur Andersen, gave this accounting treatment a hall pass. Once the fraud was uncovered and executives jailed, the accounting firm permanently lost its reputation, split into component parts, and rebranded as Accenture.

Lehman Brothers. I'd rather not put them in this bucket, or paint with the broad brush of malfeasance -- there was not fraud in the way of Enron. But there's still nothing like seeing Dick Fuld and the praise for Lehman's growing business on magazine covers.

Being hailed as an innovative hero about to give Goldman Sachs a run for its money isn't a credit rating. It's media spin. You don't really know what risks are being taken, by whom, and at what magnitude. Despite being public, you don't know if a firm is fixing LIBOR rates, marking up IPOs for early investors in a multi level marketing scheme, hiding assets to cook up your statements, or saying auction rate securities are cash equivalents. You don't know that everyone else in the industry is doing the same thing too.

Which of course brings us to today --

Wirecard.

What made Wirecard tick is that it -- reportedly -- made up fictional trustee counterparties across Asia that kept $2 billion of revenue proceeds on its behalf, due to the company's "innovative" structure. These trustees were supposedly "necessary" because Wirecard was doing payments processing in jurisdictions where it was not licensed, and partnered with third party financial institutions. Sounds like super valuable, innovative open-banking to me! The FT has tried to break this story repeatedly and investors tried to short-sell the company, only to be barred on occasion. Wirecard fought back with lawsuits and accounting support from Ernst & Young, which is now trying to swim out of the Arthur Andersen waters.

Now lets be clear. There are thousands of good people that worked at Wirecard, at Lehman Brothers, at Enron. I worked at Lehman, and you're reading this -- so at the least you are complicit now! Most if not all rank-and-file employees don't know about the shenanigans. They think they are working at the greatest company in the world. But leadership, leadership knows about the shenanigans because leadership creates, enables, and benefits from the shenanigans.

The Foundation

There is no point in finger wagging, and I have no deep insight into the fraud that you couldn't just pick up in the Financial Times or a Google search. This is broadly a tragedy, born from the recursive greed of human nature.

But we can still say something useful. What I regret is that many other companies relied on Wirecard, and are now left with a junk piece of core payments infrastructure in their stack. You might be excited about Curve powering Samsung Pay, wrapping multiple bank accounts into a proximity payment experience you can manage with an app. You might like that a Fintech application is competing with Apple Pay and Google Pay, creating a novel competitive threat to the tech monopolies.

But Curve is temporarily frozen as the FCA performs investigations into the Wirecard UK subsidiary. In addition to Curve, companies like Revolut, Pockit, U Account, McLear Ring, Crypto.com, Anna Money, CardOneMoney, Payoneer, Morses Club, Boon, and Holvi have been impacted.

With its higher risk tolerance, Wirecard was a path for crypto-native companies to build ramps into the banking world. While JP Morgan has announced that it will bank crypto companies, a faster moving payments firm is still needed to power up commerce on blockchain. Crypto.com is one such example client, which now has to refund all of its pre-paid card clients.

And if you were to do some finger-wagging, let's be clear that this is not the fault of a crypto-native economy trying to use large public third-party services. The fault for all these users being exposed to financial risk lies with Wirecard, and the audit process of EY, on whose representations everyone relied.

Implications for Open Banking

This Lehman thing is still not wound down.

The company had 1.2 million derivative contractions with a notional value of $40 trillion. Here is a 4 page excerpt of the long-dated liabilities and notes from the bankruptcy processt, of which there were 49 such pages. The lawyers and consultants pulling apart this mammoth beast have earned several billion dollars in fees.

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