Here's Who Made A Real Killing On Wirecard (Hint: Not The Stock Shorts)

With Wirecard emerging as one of the biggest corporate frauds of the post-crisis era (at least until the emperor of a certain other company is finally exposed as naked and stoned), one which has terminally crushed the reputation of Germany's regulator Bafin - which instead of exposing the biggest German fraud ever was targeting short sellers and journalists and banning shorting - it has been quite a payday for the shorts such as Armin S, and numerous others who patiently waited until the hammer dropped.

Indeed, with the stock plunging more than 80% since news of the missing billions broke, the result has been a $2.2 billion payday for shorts.

Yet while the shorts most certainly deserve to be congratulated for their patience, the victory did not come without pain, and in addition to being targeted by a hostile regulator, the stock recently surged more than 60% since the March lows, likely forcing many bears to cover their positions at sizable losses.

So who is the biggest winner here?

Well it is the shorts, but not in the stock - which as a reminder can only generate profits that are capped at 100% assuming the stock plummets to zero - but in the bonds, in the form of long CDS position, where the upside was virtually unlimited.

As the chart below shows, Wirecard's 5Y CDS has blown out from a spread of just over 500bps (or 18 points up) two weeks ago to 8600bps, or roughly 73 points upfront, a gain.

This means that the biggest winners in this case were the CDS longs (i.e., bond shorts), whose only limitation was the initially available capital (the theta, or coupon, is tiny by comparison).

Which begs the question: are we about to witness the second coming of CDS, whose very use by its reflexive definition, forces markets to reasses the fair value of credits... and will the ECB (or Fed) be forced to go company by company and bail them out by purchasing their bonds out of bankruptcy? We will find out soon.

Meanwhile, for those who have yet to catch up on the Wirecard saga, here is a good recap courtesy of Donut Shorts: