FTX and an old blog post

A long time ago I wrote a blog post about rehypothecation with brokers. It is - unsurprisingly - relevant again.

In some sense crypto provides fast-track learning as to why we have banking and broker regulation in the first place.

The 1934 Securities Exchange Act and all that

When you sign up to a margin account in almost all cases you pledge your securities to the broker with the ability for them to repledge. 

The reason to broker-dealer must be able to repledge is that it needs to finance the loans to you – and to reduce the cost of that financing it needs to offer collateral. 

So, when I take my million dollars worth of securities to the broker and borrow 100K on my margin account it looks like I have pledged a million dollars to a broker who might be questionable in order to get 100 thousand worth of financing.

There is one word for this.  Dumb.  They can – on face of it – take your assets and pledge them to finance their risky business.

If you do not believe it is dumb have a look at my post on Opes Prime, a small broker-dealer that went down in Australia taking something near a billion in client assets with it.  It involved organised crime, guys that killed hitmen and all sorts of other colourful characters.  There ain’t no way I would want to lend my securities to these guys and wind up an unsecured creditor.

The US had huge problems with broker-dealers in the 1930s.  They folded and lots of people lost their entire fortune by not understanding their credit arrangements. 

Enter the US Securities Exchange Act of 1934.  This is one piece of depression era legislation that survives and thank the Good Lord for that.

What the broker dealer act does is (a) ring fence the US broker dealer and (b) limit the amount that the broker dealer can borrow against your securities and the amount of collateral it may take. 

I am hardly a lawyer – so take the bush lawyer caveat – but the way it works is that the broker dealer may not borrow against your securities to finance their own business, only client business.  So Lehman Brothers US broker dealer could take collateral of securities and if they had 100 million out on client margin loans the most that they could raise using client securities is 100 million and not a brass razoo more.   This is really important because it meant that client assets were not used to finance Lehman’s disastrous commercial real estate and other businesses. 

Moreover when you deposit a million dollars at the broker dealer and give them the right to repledge those securities they can only rehypothecate 140 percent of your outstanding balances.

If you have 1 million deposited and you have 100 thousand borrowed then only 140 thousand can be rehypothecated and the rest must sit in a segregated client account.  [If your broker wants to steal from the segregated client account there are precious few defences – but…]  You can not contract out of this requirement. 

So (provided the broker is not acting criminally) you should get the bulk of your money back if the broker dealer fails.  And provided the capital requirements are adequate (and they mostly are) the broker dealer won’t fail.  Even the Drexel Burnham Broker Dealer did not fail.

Goldman Sachs claims that they can determine the capital requirements of their broker dealer intra-day.  I have no proof of this claim – but in this age of computers that is plausible.

The result.  Whilst Lehman brothers went bust Lehman US broker dealer did not.  This pretty well saved the US hedge fund industry. 

Europe however was a different story.  Lehman Europe failed – and the clients of the European broker dealer (read a good proportion of the London hedge fund community) are now queuing as unsecured creditors of Lehman.  Many funds have folded.  Far more have been nicked.  Whilst the US hedge fund business is currently looking dazed, confused and a little problematic the UK business is on life support. 

In some sense this is the end of the City of London.

I am on record as saying the UK took Maggie Thatcher to heart and deregulated financial activity to such an extent that the whole UK market worked without capital.  That was of course inordinately attractive in a boom where having capital was just a cost.  That attractiveness was one of the reasons why the London market grew and grew – and why UK banks wound up being amongst the biggest in the world.

But now with the biggest bank in the world by balance sheet (Royal Bank of Scotland) effectively nationalised and the and a large part of the UK hedge fund community lying with open veins it looks a little stupid.

This puts in a different light the 8 billion dollars that Lehman London transferred to the US when it was failing.  I stand open to correction – but I would guess that the money was obtained from client accounts from the European/London broker dealer.  It is certainly being investigated by Lehman clients.   This is a scandal of the first order allowed by an insane lassis faire approach to financial regulation. 

So here is a plea for US Depression style financial regulation.  Some of it (such as the Broker Dealer regulation) was well thought out and should be duplicated.   (Some of it was less sensible…)  

If I have a plea to my home country (Australia) after the Opes Prime debacle – a copy of the US 1934 Act would be a good start. 

As for London – I am sorry, but it is a wreck.  Maggie Thatcher you stand condemned.

 

John Hempton (originally in 2008 - but repeated in 2022 because history rhymes)

An old story in modern times. Duncan Mavin's pretty darn good book on Greensill

 One of the stories of the financial crisis is that the bankers that ran big institutions, who had billions entrusted to them, and who projected the air of masters of the universe were in fact buffoons incompetent at anything other than organising their own bonus.

The air came out of financial markets when you realised you just can't trust anything they say. And most importantly you could not trust that you were getting your money back.

As an equity guy this has bugged me all my life. Genius is a bull market - and when the market is down hard you finally get to see who is the buffoon. In bear markets the buffoonery surely gets exposed. Mark-to-liquid-market is a tough but honest scorecard. One cycle and I know for sure who were the buffoons.

Fixed income seems more complicated than equities. It sometimes involves impenetrable math. And backing the air of difficulty is the simple fact that lots of this stuff isn't quoted - and when it is the spread is wide.

The more unquoted the stuff is of course - the more it is subject to the illusion that goes with fixed income - that some people are just especially good at "banking" - banking being the art of lending money out and getting it back again.

This illusion that the fixed income guys are smarter has always grated at me - as I am faced with what I sometimes think are a bunch of empty suits with fancy jargon.

Pyramid of Lies - Duncan Mavin's great book on the Greensill Capital debacle - tells us - as if we need to be told - that the illusion of omniscient bankers is just an illusion - and that dross masquerading as financial innovation continues well after the financial crisis. 

Greensill is a story straight from the 2008 playbook. But it actually happened in 2016 to 2020. Yeah bad loans were made. Yes the bankers - or in the case the shadow bankers - liked to fly around the world in Gulfstream 650s. But what story illuminates is how the illusion is constructed by a consummate salesmanship and the reflected glory of major political figures. 

The political figures amaze me. This picture of Lex Greensill and David Cameron glamping in the Saudi Desert whilst trying to charm MBS is a truly great image:

But I like this one more - Lex with Julie Bishop - the woman who could-have/should-have been Australian Prime Minister selling her very positive image at Davos for a few of Lex's dollars:

Yeah - Lex was a salesman - and yes - there was no "there" there. The business model was a bunch of corporate subprime loans gathering some yield mixed with a bunch of very low risk low margin loans (originating from companies like Henkel) in the pool just to make it look safe.

It is the same illusion is familiar from the 2008 playbook. Ultra-safe over-collateralised mortgages were conflated with cash-out-refinances from borrowers who needed cash because they couldn't afford the repayments. Somehow the patina of the safe mortgages was transferred to the crap.

In the mortgage crisis we discovered losses were deferred. Whenever someone couldn't pay there was a cash-out refi to allow them to become current.

With Lex too - the dodgy credits had their credit extended indefinitely. 

A rolling loan gathers no loss. Not in 2005. And not in 2017. 

What however is really interesting is how GAM and later Credit Suisse completely fell for the charms of Lex Greensill.

I work on the assumption that in financial markets everyone has an incentive to sell me their bullshit - from crappy mining projects to shares in Valeant or Enron. If I work out it is crap then I short it. And if I actually decide it is pretty good it goes on my list of possible longs. But my default assumption is that people want to sell me their crap.

I figure if you manage over a billion dollars - and I do - then a lot of people want to be your friend - and most of them you should not befriend.

The same default assumption should apply to bankers and fixed income managers. More so because the fixed income crowd directly lend out vast sums of money on a promise to repay. On Wall Street if I decide I do not like a stock I can sell it. But bankers are often stuck with a loan that can't be repaid and can't be sold.

But instead what you see at GAM and Credit Suisse are asset gathering businesses - determined to get more and more funds under management and more fees - and hence more bonuses - and where due diligence isn't something that you have to do - rather it is something you have to market.

Almost nobody comes off well in this story. Daniel Sheard - a whistleblower at GAM comes off as a person of the highest integrity. Looking at his LinkedIn suggests he no longer works in finance - someone should give him a job.

But GAM comes across as a bonus driven culture that was not worthy of the tens of billions of dollars/pounds/euros and francs entrusted into it. The stock price reflects that now. 

Credit Suisse also comes across as "accident prone" where "accident prone" means marketing machine where due diligence is a marketing function. 

And the insurance companies - well they come across badly too.

I recommend Duncan's book. Really - buy it. The audiobook is great too - and Mr Mavin is good to listen to.

But it is an old story set in very recent times. Financial innovation is often bad credit made to look good. People are driven by image and the trappings of wealth, status and power. And the gate-keepers - fixed income asset managers responsible for billions, regulators paid to keep a watch on this - are often empty suits. They appear protective - but they are not.

John 

The Wirecard Book

Dan McCrum - the Financial Times journalist - has released a blockbuster finance book - the story of Wirecard.

The book is called Money Men: A Hot Startup, A Billion Dollar Fraud, A Fight for the Truth. 

Wirecard is - I think - the biggest fraud by dollar value and scale ever conducted in Europe.

Whatever: just buy the book. It is really good fun. I do not agree with all of Dan's perspectives - or even some of the analysis - but it is a great story about bad accounting, worse sell side analysts and completely awful regulators.

It is also a story of Libyan and Austrian secret agents, guys who run night clubs, pornographers and fraud. Oh, and guys who turn up in Syria with the very best body armour money can buy only to be told by the cool heads that that body armour marks them as a high-value target and the snipers would shoot them dead so they better leave it behind.

Dan also tells a story about how he looked - for work - at several thousand porn sites - and how he even spent some of the Financial Times money using a credit card to buy porn.

And yes - this was a perfectly legitimate work activity. Not like when the SEC did it. 

It is above all a story about how surprising (and often nasty) the world is.

Some background

I once thought of Wirecard as a simple fraud. This was about 2009-2013. What I saw was a payments processor with three red flags:

a. it was a reverse merger into a totally bullshit EASDAQ listed company. 

b. It did "high risk" payments in the Philippines and other places, and

c. The accounts did not quite make sense.

I did one check - described below - and found that the acquisitions did not make sense.

High Risk Payments

High risk payments are payments that normal banks do not want to process. Some come with administrative troubles (eg lots of high cost charge backs). Some are likely magnets for stolen credit cards. Some come with the risk you will find yourself on the wrong side of a DOJ indictment.

Examples include:

• Porn sites that get your credit card and then systematically loot it by putting a recurring charge on. These obviously come with chargeback risk.
• Clearing money for online casinos - especially in jurisdictions such as the US where online gambling is illegal. 

Even the porn sites, though legal, can get you into bad trouble. Nobody has found a foolproof way for instance to use a computer to separate legal pornography with actors over the age of 18 from child abuse material. 

If a financial institution is found to clear payments for child abuse material and that is discovered by the DOJ then the CEO is unlikely to have a good day at the office. (Example - look what happened to Westpac - a large Australian bank - when it accidentally cleared a handful of payments involving child exploitation...)

The number one sin in the Visa/Mastercard network if you clear payments is mislabelling a payment. To take an extreme example - if you cleared payments for a porn site in Central Luzon and labelled it as a flower shop in London you may reasonably be thought of hiding something.

Anyway Wirecard did this. And yes - for work - I spent enough time looking at bad porn sites to work this out - and then I stopped - because I did not want to go there. 

I also found out - via online gambling chat boards - that Wirecard cleared payments for online casinos. 

That was enough hanging around bad websites for me. I never proved comprehensively that Wirecard did child abuse material - and I did not want to. Well actually I would have loved to have nailed the company - but I did not want to go down that rabbit hole. 

But whatever - I thought there was enough to get them into really bad trouble. 

Putting this business in a public company did not make sense

The idea of embedding high risk payments in a public company did not make sense to me. 

There were two main reasons.

• public companies have more scrutiny and if you are doing that sort of thing it is best to be under-the-radar,
• If you are someone who is clearing high risk payments you are taking a real risk of prison - and in exchange you are getting paid really well - the cut is high. But there is no logical reason you would take all this risk and share the profits - but not the risk - with distant shareholders.

Bluntly being a mafioso is highly profitable and highly risky. You don't want to put it in a public company have lots of scrutiny and share the profits but not the risks with say CALPERS. Calpers do not deserve that.

But the accounts showed big profits

Back in 2014 the accounts showed quite a bit of cash generation - a margin considerably higher than I would expect.

It also showed acquisitions in markets that you might do high risk processing in - notably Dubai and South East Asia.

The acquired companies were also clearly very profitable - much more profitable than a simple merchant acquiring business should be. So - at best - they were other high risk processors.

Now the owners of high-risk processors are - for the reasons outlined above - likely to be mafioso. And lots and lots of money was being paid for them.

So I had two theories.

a). The profits were fake and the fake profits were used to by rubbery acquisitions or 

b). You were going to find a lot of organised crime at the bottom of this.

To some degree I found both - and stopped looking. Why stir that hornets nest? 

That said we did quietly look a little.

A trip to Jakarta

A friend of mine (now publicly disclosed to be Alex Turnbull) visited a company that Wirecard had acquired in Jakarta. Alex speaks the language. He winds up at a non-descript office up a dusty road full of what look like illegal enterprises controlled by the Indonesian military. There was no way this was worth what Wirecard claimed was paid for it.

We stopped looking. But we were pretty sure there was a lot of fraud here - and the company would blow up.

Alas it did not blow up. The stock went up and up some more.

In frustration I told other short sellers. And I told Dan McCrum.

I stopped looking at Wirecard - but maintained the short for years figuring that it would blow up eventually.

Long standing and big frauds

Sino Forest was a major fraud with billions of market capitalisation and billions of debt which ostensibly processed 30 million tonnes of woodchips per year. It was the bluest of Chinese blue chips.

It was very hard to see it was a fraud and it fooled lots of highly reputable fund managers.

However if you go back to the beginning it was pretty obviously a fraud. It owned a large amount of forest - but in the late 1990s the annual reports showed no property plant and equipment other than forests. The company did not own a truck, or a chainsaw, or a fire lookout tower. It was a blatantly obvious scam.

As time went on the scam got better and better - and eventually it took a really savvy operator (in this case Carson Block) to spot the fraud. 

Well Wirecard was that on steroids. The people running Wirecard became seriously competent and experienced fraudsters. And they were not afraid to break laws and spend money in the investigation of their fraud.

In their last year they spent almost 50 million euro on lawyers to obstruct investigation, spies to follow their critics, even high-class hookers in Mayfair wine bars to entrap critical journalists. (I also think they broke into one critics house, installed a camera to spy on the computer and used that information to track other critics - though Dan does not take that line and even doubts the house was broken into.)

Against 50 million per annum in expenses, and a cluster of world class crooks was a small team of journalists led by Dan McCrum and Paul Murphy at the Financial Times.

It was a roughly even fight. And boy was it a brawl.

You learn that your conversation with a night-club owner might be bugged, and that the Financial Times is incompetent at filming something with a camera hidden in the button of a female journalist.

You find out that German regulators are stupid enough to criminally charge English journalists for telling the truth. (They also - but not in the book - blamed the Wirecard stories on an Anglo-Jewish conspiracy rather than on Austro-German dishonesty. It is a bad look when German regulators falsely accuse Jews of running global financial conspiracies.)

You learn that there are "shops" where thousands of fictional companies are manufactured in England, with people recruited from the local pub to be named as directors. And they front for porn companies and online casinos. And you learn the tricks journalists used to uncover this network. 

You find yourself in the company of Russian agents, and people who clear money to pay mercenaries in Africa. 

It is all amusingly improbable and real. Like a good spy novel except that it is true.

But the laughter turns to angst when someone (who happens to be a friend of mine) had her internet disabled at work, the local security cameras disabled and then was assaulted as a warning. That made it real.

This book is fun. But it is funny, strange and scary at the same time.

Just buy it.

John

PS. As advice for short-sellers: if you ever get this entrapped in a story like this you are doing it wrong. There are lots of ways to make money in the market - and being chased by ex-Libyan agents and guys who (plausibly) have the formula for Novichok is one of the ways to make money - but it is not a very good one.

As a journalist however this is exactly the way to do things. This is the rollicking story of a lifetime. A journalist if they are lucky gets one story only half this good in their career.

PPS. People will ask where I disagree with Dan McCrum. Well I will give one example. Dan comments disapprovingly of Fraser Perring when Fraser was accused of market manipulation by South African regulators. His tone seemed to say that was a definitive judgement on Fraser's character. This was discombobulating at the end of a book where German regulators had falsely criminally charged the author with market manipulation. At the end of this it story it should have at least occurred to Dan that the South African regulators (and not Fraser) might have been wrong.  (Disclosure: I think the South African regulators are wrong here.)

PPPS. I looked at my files. I did not save a single Wirecard Annual Report after 2014 - though I had them all from 2003 onwards. I had worked out it was a fraud and was just waiting for the denouement. This book explains why it took so long.

Swedish Match: how not to behave when you are kissed on the dick by a rainbow

There are confirmed rumours that Swedish Match, a Swedish company focussed on oral nicotine delivery (snus, chewing tobacco and most importantly "modern oral") is in advanced merger talks with Philip Morris.

I am furious.

Swedish Match is about a ten percent position for my fund - and a core holding. We own about 1 percent of the company. 

The management lucked-in when they came up with what is in my opinion the best nicotine product ever invented and hence founded the whole category of "modern oral". The product gives maximum nicotine hit (think supercharged coffee) with substantially lower health risks. It is however extremely addictive.

As a dirty capitalist out to make money for my clients this is a nirvana. A product that attacks an enormous brand-loyal and addictive market with a superior product. 

Oh, and did I mention the product has strongish patent protections?

This is the stock in the portfolio I have the most hope for the future.

Here is the Swedish Match shipment volumes for Zyn from the last results presentation.

It is a pretty good growth stock and the runway is tremendous.

And it is massively cash generating.

Okay, that is all wonderful. But the management is not. 

I do not normally want to talk negatively about the management of one of my core investments, but this time I am furious.

To be blunt the management might be kindly called dull plodders.

When riding this Zyn tiger they proudly talked about their capital management because all their plants were running at 100 percent capacity. Sure they couldn't supply (hence addict) all the customers who wanted their product, but look at that capital management...

But the plodding management do not stop there. Swedish Match own the biggest lighter and match business in the world. It is not much of a business, returns are merely okay, and volume falls every year because most match volume is driven by (ever falling) cigarette consumption.

But hey, this business has a distribution channel into almost everywhere in the world where cigarettes are sold. Pair that with a decent vape product and you would immediately have one of the world's biggest vape business. I wrote about that opportunity here.

Anyway this utterly unimaginative management team look like they are just going to take the bid from Philip Morris and I am disgusted.

I gave a florid quote to the Wall Street Journal expressing my feelings:

The management team are uninspiring utility execs whose dick got kissed by a rainbow. They are busy selling the rainbow.

They should all be fired for considering this deal.

We own 15.1 million shares.

Anyway, if there is a bid there should be an overbid. I think you can make a PE deal work to 175 (deal looks to be about 100).

And to help you out I have attached a note I wrote a few years ago explaining our Swedish Match position. Enjoy.

And if other angry shareholders want to talk my DMs are open on twitter.

John

Swedish Match takeover rumours

There is an article just out that Swedish Match is in advanced merger talks with Philip Morris at a price of about USD15 billion.

At Bronte we own 15.1 million shares in Swedish Match - or about 1 percent of the company.

We believe the future for Swedish Match is considerably better than the price reflected and we are not happy with this offer.

We will consider our future actions.

John Hempton

Mr Big Wells gets popped by the SEC but somehow escapes criminal charges.

On Friday 14 August 2009, that is more than twelve years ago, I wrote a little blog post about a fraudulent oil company run by Mr. Massimiliano (Max) Pozzoni. The name translated from Italian roughly as "Mr Big Wells".

You can find that blog post here. 

I was sure it was a fraud because they claimed in press releases that renowned petroleum engineer Dr. Daulat Mamora had consulted for them. This was an easy check - I emailed the Good Doctor, and he replied that he had never heard of the company. 

I sent those details to the SEC to test how fast they would react.

I posited that Mr Big Wells was likely a fictional person - but my blessed readers did find the real Max Pozzoni. 

The blog post was titled: Mr Big Wells and the new faster SEC. 

I guess they have demonstrated their speed because - after more than twelve years UK-resident Ronald Bauer and various combinations of his associates, Craig James Auringer, Adam Christopher Kambeitz, Alon Friedlander, Massimiliano ("Max") Pozzoni, Daniel Mark Ferris, Petar Dmitrov Mihaylov, and David Sidoo face civil charges.

Yes, Massimiliano ("Max") Pozzoni has been charged by the new faster SEC.

Parallel criminal charges have been filed, but only against Bauer, Auringer, Ferris, and Mihaylov.

Mr Big Wells has escaped criminal charges.

It appears that the SEC is faster than the Justice Department.

Praise be the new faster SEC.

John

How not to apply for a job - L'Oreal edition

I accepted an invite on LinkedIn from a finance student at an Australian University.

Nothing unusual about that.

Said finance student then decided to pitch me a short idea in this case in the hope of getting an internship.

Again nothing unusual. Indeed this is how about a third of our employees joined us.

Just that this one was funny. So here goes.

Finance Student (FS): John, you gotta give me an interview. I have the short to end all shorts!

Me - John Hempton (JH): lets chat, though there are plenty at the moment

FS: Okay great John. The ticker is EPA:OR - L’Oreal. Truly a terrible company.

JH: ha ha. What makes you think that?

FS: John, are you pulling my leg? Surely it is obvious. If you are being serious I can explain.

JH: Please do. What phone number?

JH (later): I am expecting to call you. What number?

FS: John, I only have one shot at this so please give me some time to put my thoughts/thesis together. I will be in touch early next week if that’s okay?

JH: Okay. But I genuinely suspect that you are mad.

The big area of disappointment at L'Oréal is the hair dye business over the past fifteen years.

So I guess explaining what the business is and how it went wrong is a key.

FS: I think after you hear my explanation you will truly realise what a disaster of a company this is. Perhaps even elements of fraud going on.

JH: I am intrigued.

But the hurdle here is high. Company has generated 2-3 billion of free cash per year for a very long time. The business smells very profitable.

You are betting against female vanity - and that is not normally a good bet.

FS: John, sorry, I’m pitching this idea to Jim Chanos from Kynikos in the coming days, are you familiar with him and his fund? Unfortunately this means I won’t have time to pitch it to you, but let’s circle back if he doesn’t go for it.

JH: I know Jim well, but I am deeply skeptical. I am almost certain you are wrong.

Give me 15 minutes as a pitch if you want. If you can get past that it will help with Jim.

If you can convince me I will be deeply surprised

FS: Look, John. Let me have a chat to Jim about this first. I don’t want you front running him and soaking up all the alpha in the trade. If he gives it the green light, I will speak with you first. The last thing yourself, Jim and I would want is a ‘Herbalife-eque’ activist campaign happening on any of either 3 of us hold as result of bad-blood.

Will be in touch.

One thing I must say though, John - I have had MANY girlfriends, all of whom use hair products. I am also a European native, so I am afraid I am beginning with a head start on this one.

JH: I am European and I have had girlfriends might be the height of arrogance...

FS: John, I understand you may be upset... but that doesn’t mean I am wrong

JH: No. But you have already proved that you know nothing about the business. By suggesting that your girlfriend is the target market for hair dye.

That is unlikely to be true unless your girlfriend is 45+.

Genuinely you come across as pig ignorant.

FS: You must know there is a certain something I relish in a 40+ year old Italian woman. They are like nothing else, John 👌

May I ask, do you think L’Oréal is at fair value, under valued or (dare I say it) under valued?

JH: It is not cheap.

But 6x sales is the new normal

Nothing here is cheap.

L'Oreal is 6.8x revenue

Biggest competitor Estee Lauder is 7.4x revenues

Key suppliers

Givaudan - 6.7x revenue

Croda - 7.9x revenue

But telling us that these companies are pricey is not worthy of analysis.

Whatever, see if you can answer the big question - which is why hair dye  has  been problematic for 15 years?

It goes on. Dear graduate students - this is not how to apply for a job. But it is quite amusing...

JH

Grenke's audit statement

Grenke is a Geman listed (but global) equipment leasing company who has been subject to a short-seller research report (which Grenke supporters call an attack).

Grenke was late to publish an annual report, but they indicated to the market a date in May (today!) when the annual report would be published.

The question was whether - given the rather florid allegations - KPMG would be be prepared to sign the audit report (thus declaring the short-seller allegations false).

On 17 May the company put out a press release stating that they have received an unqualified audit report. The stock rose sharply. You can find an archived copy of the press release here.

The words of the release outlined what the key issue was - trust in a financial institution.

Here is a direct quote:

"We have delivered. With the unqualified audit opinion, we are regaining trust," says Antje Leminsky, Chair of the Board of Directors of GRENKE AG. "Investors, customers and employees can rely on GRENKE."

Below I publish an extract from KPMG's audit report.

I will leave it to you, dear readers, to decide whether Antje Leminsky has regained trust.

Or whether Antje Leminsky is a suitable person to be the CEO of a public company or a company with in excess of a billion Euro in deposit funding. Or whatever you want.

John

Extract

Following the allegations made public by Viceroy Research LLC, Wilmington, Delaware, USA, in the role of a short seller in September 2020, GRENKE AG’s financial reporting as at the immediately subsequent reporting date has a particularly indicative effect from the perspective of the capital market and other key stakeholders. GRENKE AG’s management is aware of this. In this situation it is particularly important that the judgements required for accounting and measurement purposes are not influenced by considerations that are not appropriate. Not least, there is also uncertainty due to the COVID-19 pandemic.

The key audit matters presented below contain manifestations of the risk of misstatements in the financial statements presented here in the introduction, which we address in greater detail in connection with the specific circumstances.

Existence of lease receivables and interest income from the leasing business

In respect of the accounting, recognition and measurement policies relevant to lease income, please refer to the disclosures in the notes to the consolidated financial statements in Section 3.3 ’Leases’, Section 3.16 ’Revenue from contracts with customers’, Section 4.1 ’Net interest income’ and Section 5.2 ’Lease receivables’.

The Financial Statement Risk

In financial year 2020, lease receivables from finance leases amounted to EUR 5,636.3 million and interest income from the leasing business to EUR 457.1 million. Requirements for the recognition of interest income from the leasing business in accordance with IFRS 16 include the transfer substantially of the risks and rewards from finance leases to the customer.

Leasing is the core business of the GRENKE Group; lease income and lease receivables therefore make up a significant share of the statement of financial position and income statement.

There is the risk that the recognised lease receivables do not exist and that the recognition of interest income from the leasing business is not consistent with actual performance and therefore is not presented correctly in the financial statements.

Our audit approach

Based on our risk assessment and evaluation of the risk of material misstatement in financial reporting due to misstatements and violations, we based our audit opinion on both control-based as well as largely on extensive substantive audit procedures. In determining the nature and scope of the required audit procedures and evidence, we also took into account our findings regarding the effectiveness of the overarching IT controls and the external allegations made by Viceroy Research LLC as indicators of an increased risk of material misstatement.

In respect of the existence of lease receivables and interest income, we conducted an assessment of the methods, procedures and control mechanisms used and first evaluated the design, setup and effectiveness of the internal controls for order acceptance, the transfer of the leased asset to customers, and invoicing as well as, in particular, controls concerning the definition and review of the correct or actual time of service performance or the transfer of risks and rewards. In addition, we evaluated to what extent controls implemented in respect of contract initiation and revenue recognition can be overridden by management. To this end, we also involved the auditors of the consolidated subsidiaries.

As part of the audit focus on risk assessment, we drew a sample from the population of all active leases and lease purchase agreements across the Group as at 31 August 2020 and obtained contract confirmations. In addition, we obtained further contract confirmations from the population of all leases and lease purchase agreements of the GRENKE Group as at 31 December 2020. We performed alternative audit procedures for contract confirmations for which we had obtained no answer. We reviewed the incoming payments to the bank accounts of the six most significant companies for all lease payments as at 1 July, 1 August and 1 October 2020. In this regard, the return debits were also reviewed on a sample basis. At the date of the risk assessment and in performing the substantive audit procedures as at the reporting date, we evaluated the existence of lease receivables using the contractual basis, which consists of leases, the accompanying customer handover certificates, external delivery records and/or dealer invoices as well as incoming payments to bank accounts. In addition, we analysed manual lease and lease purchase income entries during the financial year at the level of the Parent Company according to suitable criteria (e.g. users, dates of entry) as well as manual consolidation entries at group level to identify conspicuous entries.

Our observations

The procedure set up within the Group to ensure the existence of lease receivables and that interest income from leases is recognized consistently with the applicable accounting policies is appropriate.

Measurement of impairment losses on non-performing receivables from finance leases

In respect of the accounting and measurement policies applied for non-performing receivables from finance leases, please refer to the disclosures in the notes to the consolidated financial statements under Section 3.18.2 ’Determination of impairment for lease receivables’ and in Section 5.2 ’Lease receivables’.

The Financial Statement Risk

The consolidated financial statements of GRENKE AG recognise non-performing receivables from terminated finance leases of EUR 525.9 million after impairment losses on receivables of EUR 323.0 million. GRENKE AG applied the provisions set forth in IFRS 9 taking into consideration the lifetime expected credit losses to measure non-performing receivables.

Judgement must be exercised by management for the measurement of impairment losses on non-performing receivables from terminated finance leases. This includes selecting the model used for calculating the loss rates of the terminated receivables by determining recoverability rates (ratio of the total of discounted payments received to the entry balance in the respective processing class), the other estimation parameters used in the model and any adjustments to the model due to findings from model validations. These judgements are subject to uncertainty, which can be amplified by the effects of the COVID-19 pandemic.

In addition, calculating impairment loss allowances is highly complex and depends on a high degree of expertise and specialist knowledge from a limited number of employees and decision-makers.

There is the risk for the consolidated financial statements that the calculation of impairment loss allowances is not carried out in an appropriate manner or is based on inappropriate assumptions, an inappropriate database or inappropriate application of the valuation model and, as a result, the impairment loss is reported in an incorrect amount.

Our audit approach

As part of our risk assessment and evaluation of the risk of material misstatement in financial reporting due to misstatements and violations, we conducted a test of design and an evaluation of the methods, procedures and control mechanisms. By inspecting policies and work instructions, conducting interviews and reviewing the defined methods including their implementation, we gained a comprehensive understanding of the calculation of impairment losses on receivables from terminated lease contracts. In addition, we conducted a test of operating effectiveness at the level of the Parent Company. In response to the risk of material misstatement in financial reporting due to violations, we also reviewed the appropriateness of the debt collection process at the parent company level. Due to the ineffectiveness of controls, in particular general IT controls, identified in the course of the test of operating effectiveness, our opinion is based solely on extensive substantive audit procedures. In determining the nature and scope of the required audit procedures and evidence, we also took into account our findings regarding the effectiveness of the overarching IT controls and the external allegations made by Viceroy Research LLC as indicators of an increased risk of material misstatement.

With the involvement of our specialists, we performed the following audit procedures in particular.

We analysed the general suitability of the valuation model used by GRENKE AG to determine the recoverability rates and the suitability of the estimation parameters that are incorporated into the procedure.

In doing so, we investigated whether the key estimation parameters for calculating the recoverability rates have been calculated in a manner that is methodologically correct and mathematically accurate and have been correctly incorporated into the model to determine recoverability rates on non-performing receivables from leases and lease purchase agreements. In addition, we verified the annual validations of the recoverability rates.

We examined and reperformed the preparation of the recoverability rates at the individual transaction level on a sample basis to determine how these are derived for the calculation of the relevant data from the cash flows and balances recorded in the accounts. The recorded cash flows and variables were compared with the contractual basis. The determination of processing classes (payment status of the lease and lease purchase agreements) and the assignment of non-performing receivables to the processing classes was checked for accuracy on a sample basis.

Our observations

The valuation model for non-performing lease and lease purchase receivables is therefore appropriate and consistent with the applicable accounting policies under commercial law. The estimation parameters were appropriately derived. Not all of the key components of the internal control system are appropriate or effective.

Impairment testing of goodwill

In respect of the accounting and measurement policies applied, please refer to the disclosures in the notes to the consolidated financial statements under Section 3.8 ’Goodwill’; for the related disclosures on judgements exercised by management and on sources of estimation uncertainties please refer to the disclosures in Section 3.18 ’Use of assumptions and estimates’ and for disclosures on goodwill please refer to Section 5.7 ’Goodwill’.

The financial statement risk

As at 31 December 2020, goodwill amounted to EUR 43.6 million.

Goodwill is tested for impairment annually at the level of the cash-generating units. In the leasing segment this cash-generating unit generally refers to the business volume represented in the respective sales regions (countries), and usually corresponds to the legal entities.

Calculation of the fair value is complex and, as regards the assumptions made, is dependent largely on estimates and assessments of the Company. This applies particularly to the estimate of future business and earnings performance of the cash-generating units for the next five years and long-term growth rates as well as the determination of the discount rates. The COVID-19 pandemic has had a considerable influence on this year’s market conditions and has increased uncertainty regarding the measurement of goodwill.

There is the risk for the consolidated financial statements that, in this strained period both in economic terms as well as regarding the Company’s reputation, goodwill is reported in an incorrect amount.

Our audit approach

As part of our risk assessment and evaluation of the risk of material misstatement in financial reporting due to misstatements and violations, we conducted a test of design and an evaluation of the methods, procedures and control mechanisms. On the basis of the information obtained in our audit, we evaluated for which goodwill a need for impairment had already been identified and where indications of further impairment exist. Our opinion is based largely on extensive substantive audit procedures.

With the involvement of our valuation experts, we evaluated the appropriateness of significant assumptions and the valuation model of the Company. To this end, we discussed the expected cash flows and the assumed long-term growth rates with those responsible for planning. We reconciled the growth rates recorded in the respective valuation models for the planning years with the group planning adopted by management. We also evaluated the consistency of the assumptions using external market assessments as well as other external data sources.

Further, we confirmed the accuracy of the Company’s previous forecasts by comparing the budgets of previous financial years with actual results and by analysing deviations for deliberate sample of value drivers.

We compared the assumptions and parameters underlying the discount rate, in particular the risk-free rate, the market risk premium and the beta factor, with our own assumptions and publicly available data. To account for forecast uncertainty, particularly in light of COVID-19, we then examined reasonably possible changes in the discount rate, in the expected cash flows or in the long-term growth rate on goodwill (sensitivity analysis) by calculating alternative scenarios and comparing these with the Company’s valuation results. To ensure the mathematical accuracy of the valuation models utilised, we recalculated the Company’s calculations based on elements selected on the basis of risk.

Our observations

The process underlying impairment testing amounts of goodwill is therefore appropriate and consistent with the accounting policies.

The approach as well as the assumptions and parameters used by the Company are therefore appropriate. Not all of the key components of the internal control system are appropriate or effective.

Full identification of related parties and business relationships with related parties from the perspective of financial reporting

For the disclosures on related parties, please refer to the Section 9.5 ’Related party disclosures’ in the notes.

The Financial Statement Risk

In the case of related party transactions, there is a high risk with regard to recognising these transactions in full and determining the economic substance of the transactions and their terms and conditions. The design of the internal control system, including the financial reporting system, must therefore be adequate and effective also in respect of related party transactions. Accordingly, the corresponding requirement under Section 111a (2) sentence 2 of the AktG [Aktiengesetz: German Stock Corporation Act] in conjunction with IAS 24 applies to GRENKE AG with effect from 1 January 2020.

Related parties are relevant for the financial statement audit, as existing relationships or transactions with related parties can have a direct impact on financial reporting. In addition, transactions with related parties may be motivated by personal motives rather than the usual commercial considerations, which could have potential indirect consequences for financial reporting. Furthermore, audit evidence is assigned a higher degree of reliability if it has not been produced or prepared by related parties.

If there are indications of any circumstances that increase the risk of misstatements and violations in relation to related parties beyond the expected scope or that indicate that such misstatements and violations may have occurred, the auditor is required to expand the audit procedures beyond the customary scope or to perform additional or other audit procedures. We have classified the allegations of the lack of transparency expressed by Viceroy Research LLC with regard to links between related parties and GRENKE AG for business reasons, together with other findings from our audit procedures, as indication of increased audit risks.

Therefore, it was of particular relevance for our audit that the internal control system ensures that related parties and relevant business relationships between related parties and GRENKE AG are fully identified and that these parties and business relationship are named in full respectively become fully known based on audit evidence otherwise obtained.

Our audit approach

Based on our risk assessment and evaluation of the risk of material misstatement in financial reporting due to misstatements and violations, we based our audit opinion largely on extensive substantive audit procedures. In the course of the audit, we expanded the nature and scope of our audit procedures by deploying forensic specialists. Forensic aspects that required retracing included key issues that extended beyond the reporting year and the prior year.

Specifically, we performed the following audit procedures:

We conducted an assessment of the methods, procedures and control mechanisms and initially evaluated the design and setup of internal controls in respect of the identification of related parties, the identification and authorisation of related party transactions as well as the evaluation of the arm’s length conditions of these transactions. We interviewed the Board of Directors and Supervisory Board as well as other relevant senior executives within the Company on related parties and transactions conducted with such parties and evaluated committee minutes. We checked the completeness and accuracy of requests and responses sent by the Company to related parties in key management positions regarding disclosures on transactions and engagements. We also obtained confirmations from lawyers.

We received and reviewed a list of related parties prepared by the Company. Our audit resulted in findings that indicate other related parties that have not been identified respectively analysed by the internal control system. To counter the risk of incomplete information due to violations in the documents provided, we conducted forensic investigative procedures in the form of background research on key people and companies going beyond ordinary professional practice. We examined email correspondence and account movements in the accounts maintained by GRENKE BANK AG as well as other business connections of selected persons.

We also compared the analysis of business relationships with identified related parties of GRENKE BANK AG conducted by GRENKE BANK AG for GRENKE AG with the information provided in the queries and investigated deviations. Confirmations of transactions were obtained from selected – in particular newly identified – related parties. Similarly, we evaluated the state of knowledge and preliminary findings from other external audits that were accessible to us.

We examined the findings obtained in the course of the expanded audit overall in terms of their impact on GRENKE AG’s financial reporting and assessed their implementation.

Our observations

The internal control system for identifying related parties and business relationships with these parties was not effective in all key aspects. By means of the audit procedures conducted in response to the risks identified regarding complete identification of related parties and business relationships with these parties during the audit, we obtained audit evidence that is sufficient and appropriate to serve as a basis for our audit opinion. Based on the findings obtained in the audit, consequences for financial reporting were therefore appropriately derived and implemented.

Completeness of the consolidated group with regard to franchise companies

For the relevant disclosures on the consolidated group, please refer to Section 2.3 ’Adjustments in accordance with IAS 8’ and Section 10 ’Overview of the GRENKE consolidated group’s schedule of shareholdings pursuant to Section 313 (2) HGB’ in the notes to the consolidated financial statements.

The Financial Statement Risk

Due to a wide range of contractual relationships with franchise companies, the GRENKE Group has a complex group structure.

The assessment of whether there is a requirement to consolidate franchise companies pursuant to IFRS 10 requires significant judgement as many factors (potential voting rights, relevant activities, power, variable returns and the connection between power and variable returns) need to be assessed using in-depth analyses. This includes contractual rights, cash flows from contracts, contractual relationships with third parties and shareholders, the nature and scope of financing and guarantees granted and a comprehensive economic assessment. There is also the risk that not all information required for a proper overall assessment is retained and properly communicated and that, as a result, this information is not appropriately taken into account in the preparation of the financial statements and for the purposes of the audit.

There is the risk for the consolidated financial statements that, due to undisclosed relationships between the parties involved or incorrect use of judgement in assessing the factors to be taken into account according to IFRS 10, individual companies that require consolidation (in particular franchise companies) are not taken into account when determining the consolidated group and required disclosures in the notes are omitted. We have classified the allegations expressed by Viceroy Research LLC regarding the completeness of the consolidated group, together with findings from other audit procedures, as indication of increased audit risks.

Our audit approach

Based on our risk assessment and evaluation of the risk of material misstatement in financial reporting due to misstatements and violations, we based our audit opinion largely on extensive substantive audit procedures. In the course of the audit, we expanded the nature and scope of our audit procedures by deploying forensic specialists. Forensic aspects that required retracing included key issues that extended well beyond the reporting year and the prior year.

We largely performed the following audit procedures:

Based on the findings obtained in the past, we conducted an updated assessment of the consolidation requirement in accordance with IFRS 10. We evaluated the internal memoranda of  GRENKE AG on the analysis of consolidation in light of new findings and analysed the franchise, option, guarantee and credit agreements between the GRENKE Group and the franchise companies to determine whether they substantiate power, variable returns and whether the connection between these two attributes is relevant for consolidation. 

In addition, we assessed the external expert opinions and preliminary findings from other external audits regarding a potential consolidation requirement that were made available to us during the audit and discussed the assessments contained therein with the authors. Furthermore, we interviewed the Board of Directors and Supervisory Board of  GRENKE AG as well as other persons familiar with the franchise system. We analysed the cash flows between the franchise companies with their investees and  GRENKE AG. As new documents and findings obtained during the audit gave rise to significant doubt regarding information received at an earlier date, we analysed the email correspondence of selected individuals for indications of the exercise of factual power with the help of our forensic specialists and conducted background research.

To review the implementation of changes to the consolidated group in financial year 2020, we exclusively conducted substantive audit procedures.

Our observations

The internal control system for assessing a consolidation requirement for franchise companies was not effective in all key aspects. By means of audit procedures performed by us during the audit, we obtained audit evidence that was sufficient and appropriate to provide a basis for our audit opinions. Based on the findings obtained, consequences for financial reporting were appropriately derived and implemented by  GRENKE AG.

Other Information

Management respectively the Supervisory Board are responsible for the other information. The other information comprises the components of the combined management report specified in the appendix to the independent auditor’s report, whose content was not audited. 

The other information also comprises the other parts of the annual report. 

The other information does not include the consolidated financial statements, the combined management report information audited for content and our auditor’s report thereon. 

Our opinions on the consolidated financial statements and on the combined management report do not cover the other information, and consequently we do not express an opinion or any other form of assurance conclusion thereon. 

In connection with our audit, our responsibility is to read the aforementioned other information and, in so doing, to consider whether the other information

//  is materially inconsistent with the consolidated financial statements, with the combined management report information audited for content or our knowledge obtained in the audit, or 

// otherwise appears to be materially misstated. 

Responsibilities of Management and the  Supervisory Board for the Consolidated  Financial Statements and the Combined  Management Report

Management is responsible for the preparation of consolidated financial statements that comply, in all material respects, with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to Section 315e (1) HGB and that the consolidated financial statements, in compliance with these requirements, give a true and fair view of the assets, liabilities, financial position, and financial performance of the Group. In addition, management is responsible for such internal control as they have determined necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern. They also have the responsibility for disclosing, as applicable, matters related to going concern. In addition, they are responsible for financial reporting based on the going concern basis of accounting unless there is an intention to liquidate the Group or to cease operations, or there is no realistic alternative but to do so.

Furthermore, management is responsible for the preparation of the combined management report that, as a whole, provides an appropriate view of the Group’s position and is, in all material respects, consistent with the consolidated financial statements, complies with German legal requirements, and appropriately presents the opportunities and risks of future development. In addition, management is responsible for such arrangements and measures (systems) as they have considered necessary to enable the preparation of a combined management report that is in accordance with the applicable German legal requirements, and to be able to provide sufficient appropriate evidence for the assertions in the combined management report.

The Supervisory Board is responsible for overseeing the Group’s financial reporting process for the preparation of the consolidated financial statements and of the combined management report.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Combined Management Report

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatements, whether due to fraud or error, and whether the combined management report as a whole provides an appropriate view of the Group’s position and, in all material respects, is consistent with the consolidated financial statements and the knowledge obtained in the audit, complies with the German legal requirements and appropriately presents the opportunities and risks of future development, as well as to issue an auditor’s report that includes our opinions on the consolidated financial statements and on the combined management report.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Section 317 HGB and the EU Audit Regulation and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW) will always detect a material misstatement. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements and this combined management report.

We exercise professional judgement and maintain professional scepticism throughout the audit. We also:

//  Identify and assess the risks of material misstatement of the consolidated financial statements and of the combined management report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinions. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls.

//  Obtain an understanding of internal control relevant to the audit of the consolidated financial statements and of arrangements and measures (systems) relevant to the audit of the combined management report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of these systems.

//  Evaluate the appropriateness of accounting policies used by management and the reasonableness of estimates made by management and related disclosures.

//  Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in the auditor’s report to the related disclosures in the consolidated financial statements and in the combined management report or, if such disclosures are inadequate, to modify our respective opinions. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to be able to continue as a going concern.

//  Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements present the underlying transactions and events in a manner that the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and financial performance of the Group in compliance with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to Section 315e (1) HGB.

//  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express opinions on the consolidated financial statements and on the combined management report. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our opinions.

//  Evaluate the consistency of the combined management report with the consolidated financial statements, its conformity with law, and the view of the Group’s position it provides.

//  Perform audit procedures on the prospective information presented by management in the combined management report. On the basis of sufficient appropriate audit evidence we evaluate, in particular, the significant assumptions used by management as a basis for the prospective information, and evaluate the proper derivation of the prospective information from these assumptions. We do not express a separate opinion on the prospective information and on the assumptions used as a basis. There is a substantial unavoidable risk that future events will differ materially from the prospective information.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with the relevant independence requirements, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, the related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter.

Other Legal and Regulatory Requirements

Report on the Assurance in accordance with Section 317 (3b) HGB on the Electronic Reproduction of the Consolidated Financial Statements and the Combined Management Report Prepared for Publication Purposes

We have performed assurance work in accordance with Section 317 (3b) HGB to obtain reasonable assurance about whether the reproduction of the consolidated financial statements and the combined management report (hereinafter the “ESEF documents”) contained in the file that can be downloaded by the issuer from the electronic client portal with access protection, “16-05-2021-1236_xbrl_file.zip” (SHA256-Hashwert: d577ebf4cbcbacfa 0e8f547d80d80f4ba50fd9aa1f0ff2f2232e8144354793ad) und “JALA.xhtml” (SHA256-Hashwert: ae60422dc28df11cf97b491817b5b5051fd515478007ecc79816ba9de33fc535), and prepared for publication purposes complies in all material respects with the requirements of Section 328 (1) HGB for the electronic reporting format (“ESEF format”). In accordance with German legal requirements, this assurance only extends to the conversion of the information contained in the consolidated financial statements and the combined management report into the ESEF format and therefore relates neither to the information contained in this reproduction nor any other information contained in the above-mentioned electronic file.

In our opinion, the reproduction of the consolidated financial statements and the combined management report contained in the above-mentioned electronic file and prepared for publication purposes complies in all material respects with the requirements of Section 328 (1) HGB for the electronic reporting format. We do not express any opinion on the information contained in this reproduction nor on any other information contained in the above-mentioned file beyond this reasonable assurance opinion and our audit opinion on the accompanying consolidated financial statements and the accompanying combined management report for the financial year from January 1 to December 31, 2020, contained in the “Report on the Audit of the Consolidated Financial Statements and of the Combined Management Report” above.

We conducted our assurance work on the reproduction of the consolidated financial statements and the combined management report contained in the above-mentioned electronic file in accordance with Section 317 (3b) HGB and the Exposure Draft of the IDW Assurance Standard: Assurance in accordance with Section 317 (3b) HGB on the Electronic Reproduction of Financial Statements and Management Reports Prepared for Publication Purposes (ED IDW AsS 410) and the International Standard on Assurance Engagements 3000 (Revised). Accordingly, our responsibilities are further described below. Our audit firm has applied the IDW Standard on Quality Management 1: Requirements for Quality Management in Audit Firms (IDW QS 1).

The Company’s management is responsible for the preparation of the ESEF documents including the electronic reproduction of the consolidated financial statements and the combined management report in accordance with Section 328 (1) sentence 4 item 1 HGB and for the tagging of the consolidated financial statements in accordance with Section 328 (1) sentence 4 item 2 HGB.

In addition, the Company’s management is responsible for the internal controls they consider necessary to enable the preparation of ESEF documents that are free from material intentional or unintentional non-compliance with the requirements of Section 328 (1) HGB for the electronic reporting format.

The Company’s management is also responsible for the submission of the ESEF documents together with the auditor’s report and the attached audited consolidated financial statements and audited combined management report as well as other documents to be published to the operator of the German Federal Gazette [Bundesanzeiger].

The Supervisory Board is responsible for overseeing the preparation of the ESEF documents as part of the financial reporting process.

Our objective is to obtain reasonable assurance about whether the ESEF documents are free from material intentional or unintentional non-compliance with the requirements of Section 328 (1) HGB. We exercise professional judgement and maintain professional scepticism throughout the assurance work. We also:

//  Identify and assess the risks of material intentional or unintentional non-compliance with the requirements of Section 328 (1) HGB, design and perform assurance procedures responsive to those risks, and obtain assurance evidence that is sufficient and appropriate to provide a basis for our assurance opinion.

//  Obtain an understanding of internal control relevant to the assurance of the ESEF documents in order to design assurance procedures that are appropriate in the circumstances, but not for the purpose of expressing an assurance opinion on the effectiveness of these controls.

//  Evaluate the technical validity of the ESEF documents, 

i.e. whether the electronic file containing the ESEF documents meets the requirements of Commission Delegated Regulation (EU) 2019/815 on the technical specification for this electronic file.

//  Evaluate whether the ESEF documents enable an XHTML reproduction with content equivalent to the audited consolidated financial statements and the audited combined management report.

//  Evaluate whether the tagging of the ESEF documents with Inline XBRL technology (iXBRL) enables an appropriate and complete machine-readable XBRL copy of the XHTML reproduction.

Further Information pursuant to Article 10 of the EU Audit Regulation

We were elected as auditor at the Annual General Meeting on 6 August 2020. We were engaged by the Supervisory Board on 18 September 2020. We have been the auditor of  GRENKE AG since financial year 2018.

We declare that the opinions expressed in this auditor’s report are consistent with the additional report to the Audit Committee pursuant to Article 11 of the EU Audit Regulation (long-form audit report).

In addition to the financial statement audit, we have provided to the Company and its controlled entities, respectively, the following services that are not disclosed in the consolidated financial statements or in the combined management report:

//  Reasonable assurance pursuant to ISAE 3000 involving specific audit procedures on leases of  GRENKE AG in Q4 2019 and Q1 2020

//  Agreed-Upon Procedures Report pursuant to ISRS 4400 on agreed-upon procedures on leases of  GRENKE AG in Q2 and Q3 2020

//  Issue of comfort letter for the update of the EUR 5,000,000,000 debt issuance programme.

//  Issue of a comfort letter for the hybrid bond of EUR 75,000,000.

German Public Auditor Responsible for the Engagement

The German Public Auditor responsible for the engagement is Christian Bauer.

Frankfurt am Main, May 17, 2021

KPMG AG 

Wirtschaftsprüfungsgesellschaft [Orginal German version signe by:] gez. Bauer  Wirtschaftsprüfer gez. Göller  Wirtschaftsprüfer

Appendix to the Independent Auditor´s Report: unaudited components and cross-refences of the combined management report

We did not audit the following components of the combined management report:

//  the corporate governance statement contained in the combined management report in section 9 and

//  the non-financial statement contained in section 4 of the combined management report.

The following cross-references in the combined management report that are not required by law and the information to which the cross-references refer, have not been audited by us: 

//  In the introduction to the combined management  report: www.grenke.de/unternehmen/investor-relations/ berichte-und-praesentationen 

//  In section 2.7.5 “LIQUIDITY” of the combined management report https://www. grenke.de/unternehmen/ investor-relations/fremdkapital/emittierte-anleihen

//  In section 9.5 “SHARE TRANSACTION OF GOVERNING BODIES” of the combined management report: www. grenke.de/unternehmen/investor-relations/ corporategovernance/meldepflichtige-wertpapiere

//  In section 1.3 “MANAGEMENT SYSTEM” depicted key performance indicators.

How big is this crypto boom?

Google Trends doesn't predict stock market rallies, well somtimes it does. But more likely it is coincident with them, the suckers at the end of the boom being the biggest (yet) wave of retail buyers.

Here is a five year trend for the phrase "how to buy stocks" for the USA.

It has two peaks, one at the height of the first COVID lockdown, and a second and bigger peak at the height of the "meme-stock" rally in January.

The meme stocks haven't gone away, but most of them are well off their Mid February levels.

Still I can't resist the comparison. Here is "how to buy stocks" compared to "how to buy dogecoin" - again in the USA.

It is not even close.

This should give you some pause as to just how much money might pour into this rally.

I am old - even decrepit - and I do not understand. So I am going to leave it to someone else to explain to you. (And please appreciate the Matt Gaetz reference...)

John