The Financial Sector Will Be Haunted by Greensill's Ghost
German city of Bremen, March 23: On March 23, 2021, in Bremen, Germany, stands the office building housing the former Greensill Bank's headquarters. Supply chain financing specialist Greensill Capital, the parent firm of Greensill Bank, filed for bankruptcy protection earlier this month. Since as regional collectives in Germany were placing cash in Greensill Bank without being informed the BaFin, national Germany finance authority, was looking into irregularities at the bank, Greensill's collapse has rekindled calls for revisions to the country's financial regulation. David Cameron, a former British prime minister, is also under fire for his lobbying efforts for Greensill Capital.
Masayoshi Son, the CEO of SoftBank Group Corp., and Axel Lehmann, the chairman of Credit Suisse AG, probably wish they had never met convicted banker Lex Greensill.
But maybe they can learn from the crisis that followed, as well as the financial sector as a whole.
According to Duncan Mavin's new book(1) about affair, "The Pyramid of Lies," Greensill's charisma, self-assurance, and alleged ability to convert the stodgy industry of supply-chain financing into a burgeoning source of money also had Softbank & Credit Suisse anticipating dollar signs.
Purchasing a share in Greensill was intended to be Son's big break in the fintech world, since his Vision Fund just caused SoftBank to post a record loss. Here was a company that advertised its ability to combine traditional banking with cutting-edge data techniques. It was expanding quickly and appeared to have enough of capital to support fantasies like investing in a brand-new metropolis in Borneo valued at $34 billion.
Investments in Greensill assets were a method that Credit Suisse, that was eager to transition out of financial trading either towards recurring business from high-net-worth people, to become a part of a powerful billionaire network and generate significant profits in a low-interest rate environment.
Greensill Capital, sadly, was constructed like such a house of card that fell when Covid-19 struck. Investors and insurers fled as it was revealed that there had been irresponsible lending and dubious conflicts of interest. Son's prized "fintech" unicorn quickly lost all of its value when the funds run out, and Credit Suisse's rich clients was billions in debt.
As Credit Suisse launches a court lawsuit on SoftBank with in hopes of recovering more than $billion dollars — one among multiple legal fights that may take years to complete — there will undoubtedly be more discoveries. Claims that SoftBank stole money owing to the bank's customers have been referred to as "desperate" by SoftBank.
However, Mavin's book makes it abundantly evident that cast of individuals drawn into Greensill's circle have important job to perform in order to reduce the likelihood of a such blow-up occurring again someday. Many backers didn't always do their research and were overly ready to purchase what the egotistical, larger-than-life banker was peddling. The novel enjoys exposing Greensill's absurdities, such as an outsized business card that might have come right over of American Psycho.
According to Mavin, there are a lot of other Greensills just waiting to take place and far too few individuals who are prepared to act morally.
The narrative frequently returns to the idea of contagious hype. Greensill was founded at a time when investment firms were being forced into riskier waters by low interest rates and when retiring bankers were join startups rather than playing golf. Many people were blinded by the marketing fairy dust of the "fintech" name to the fact that great growth and high profits in finance rarely occur without considerable risk. Not just SoftBank needs a lesson when values in the fintech sector decline.
The hoopla also caused conventional financial institutions who supported Greensill to disregard internal warning signs. This typically happened because of his persuasive pitch and connections. That's what sparked a problem among wealth manager GAM over growing Greensill exposure. A significant factor in Greensill's demise was Credit Suisse's supply chain fund, which potentially delegated too many decisions to Greensill and at one point failed to enforce its own restrictions just on fund when that came to credit insurance.
Regulators will need to demonstrate their ability to monitor markets that seem trustworthy and safe since they can be concealing serious hazards. Supply-chain finance is an industry that has existed for as long as banking, but super-rapidly expanding businesses have taken use of it by taking full advantage on opacity and advantageous accounting laws. By the time it was all said and done, Greensill was receiving funding based on hypothetical future business, not just helping vendors get paid in advance by utilizing invoices as security.
Hopefully, the sector will gain more trust as a result of new US accounting requirements that will take effect the next year and necessitate more openness in supply-chain finance.
Governments and their lobbying operations must be held to a higher bar since governments have been more involved in industry since the epidemic, even in the historically free-market UK. The British public may have been worse off if David Cameron had been successful in his tireless attempts to get government backing for Greensill, which Mavin hilariously depicts as an effort by the ex-prime minister to establish his personal value to Lex.
Those implicated in the Greensill scam still face years of legal fighting. But now would be a good moment to review how this pyramid of falsehoods was constructed as bankers, techies, and the people who regulate them head to the beach this summer. It could one day be reconstructed.
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