By Patricia Uhlig, Karen Lema and John O'Donnell
FRANKFURT/MANILA (Reuters) - Wirecard said on Monday that 1.9 billion euros ($2.1 billion) it had booked in its accounts likely never existed, a black hole that threatens to engulf the payments company and tarnish the reputation of Germany's financial watchdog.
The one-time investor darling is holding emergency talks with its banks, which are owed roughly 1.75 billion euros, to avert a looming cash crunch triggered by the missing money.
The episode marks a dramatic turn in the fortunes of a homegrown tech firm that attracted some of the world's biggest investors before a whistleblower alleged that it owed its success in part to a web of sham transactions.
Wirecard said last week that auditor EY had refused to sign off its 2019 accounts as it was unable to confirm the existence of 1.9 billion euros in cash balances in trust accounts, about a quarter of its balance sheet.
On Monday, the company was frank.
"The Management Board of Wirecard assesses ... that there is a prevailing likelihood that the bank trust account balances in the amount of 1.9 billion EUR do not exist," it said.
State prosecutors in Munich investigating the case are now considering issuing arrest warrants for its former CEO, Markus Braun, and Jan Marsalek, a board member fired on Monday, according to two people familiar with the matter.
Braun and Marsalek could not be immediately reached for comment, and their lawyers declined to comment.
The furore has also damaged Germany's image.
Felix Hufeld, head of Germany's financial watchdog Bafin, described the crisis, which has seen around 11 billion euros wiped off Wirecard's market value in recent days, as a "total disaster", conceding his agency and others had made mistakes.
"It is a scandal that something like this could happen," Hufeld said.
REGULATOR UNDER FIRE
Bafin's own record has come under fire as Wirecard's share price has imploded, hitting retail investors and some large money managers.
The regulator had focused on probing so-called short-sellers and journalists behind reports which questioned Wirecard's accounts, prompting criticism over its inaction against the company.
German lawmaker Fabio De Masi said that Bafin had failed in its duty over Wirecard, whose credit rating was ultimately withdrawn by agency Moody's.
Wirecard, which started out handling payments for adult entertainment and gambling websites and now processes payments for companies including Visa and Mastercard, has appointed investment bank Houlihan Lokey to help assess its options.