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Before the review: yes, I did spell copyright as copywrite in the entirety of Monday’s newsletter. No, I have no idea why I have a weird mental block on that word. Apologies for the error.
Money Men by Dan McCrum is an older book, about a year and a half now, telling the story of the Wirecard fraud. Wirecard, a German payments firm, leveraged fake clients and transactions and the unwillingness of German authorities to question a successful German technology firm to briefly become one of the largest European companies. The book itself is a touch a confusing. McCrum tells the readers a lot of details, but the story never quite synthesizes into an entirely coherent whole — in part, I think, because some of the central people were never caught and held to account. Nevertheless, the book is a fun fascinating read as much for what it says between the lines as for the main story. McCrum is a good storyteller. The book is never boring, well-paced with an eye for interesting detail. The takeaways, though, are less about fraud and more about the systematic issues lurking at the edges of the story that McCrum never quite highlights.
First, while American justice may be slow, I would still largely take it over European. At least one time, the German court system effectively seemed to take a bribe to make a criminal case go away — not against Wirecard, mind you, but against reporters. The British reporters lived in abject fear of their lawyers and libel lawsuits — being able to squash even the truth is much, much too easy in the British system.
Second, there exists an entire world of private espionage that needs to be stamped out immediately. When Wirecard found itself being investigated, they hired shady private firms to spy on the reporters and short-sellers and their families, leak misleading or false material about them, try to trap them in compromising situations, and apparently even hack into their computers. Much of this is apparently legal and what isn’t legal is apparently rarely prosecuted. Journalists and activists find themselves the target of these intimidation tactics and none of it should be legal.
Finally, and most central to the book, are the short sellers. Short sellers are traders who bet that a stock is going to go down when most people think it is going to go up. It is risky, because the risk is almost unlimited, but the rewards can be similarly outsized. McCrum tried to paint these people as heroes in the story, as lone voices of reason against the arrayed insanity of the financial world’s groupthink. And there is more than some truth to picture. Ultimately, these people were correct. But the picture is more complicated than McCrum lets on.
McCrum tries to portray them, I think, as at least partially responsible for the downfall of Wirecard. He intimates that without the reports of short sellers, he would not have been as dedicated to the story as he was, or least would not have started digging. But the short sellers really never provided useful information. With one exception, the notion that customers did not exist, which frankly, the reporters and auditors should have followed up themselves, the short sellers were wrong in the details of their public accusations. The information that led to Wirecard’s fall came from a group of whistleblowers inside the company itself, something that McCrum does acknowledge. There is no universe in which McCrum is handed that material and this story does not play out the same way. That information, combined with an audit run by an honest firm, are what brought Wirecard’s crimes to light. Not short sellers.
And short sellers are very problematic. McCrum doesn’t come out and say this, but many of the ones we meet in the book come across as, at least, incentivized to be less than honest. And they are — if their reporting drives a stock price down, even temporarily, they can make a ton of money. The dangers of that seem pretty obvious. They are the downside version of stock buybacks — if you scratch their surface, they seem to exist entirely to manipulate stock prices to the determinant of the general public.
The argument for short sellers is that they keep companies honest. And after seeing how group think, lax regulation, and poor auditing incentives kept Wirecard afloat that is a not entirely unreasonable argument. However, again, short sellers had essentially no material effect on Wirecard’s downfall. The whistleblower information and the honest auditors did, and those would have existed with or without short sellers. As is the case with stock buybacks, it seems that there is no real benefit to short selling and significant risks of price manipulation. After reading this book, you cannot but help think that banning short selling, on balance, would likely make the stock markets less dishonest than they are today.
Money Men is worth a read. It is a fun story well told that has buried in its subtext some interesting points about how the world of money and law really work that I wish McCrum had spent more of his time on. It would have made for a more complete, fascinating story.
