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The fool’s gold of Greensill

Friday 16 April 2021

The supply chain financing offered by Lex Greensill seemed like a useful tool. But its shiny appeal was deceptive – and the fallout has potentially serious implications for politics, government and fintech. To help you through the thickets, here’s a step-by-step guide.


Why did Cabinet Secretary Jeremy Heywood bring Lex Greensill to work in Downing Street in 2011?

Credit was in short supply in the wake of the financial crisis of 2008-09, and, among other things, this meant some companies were being slow to pay their bills. If the economy was to expand, businesses needed to be confident that money would flow smoothly through the system in order to finance their growth.

Jeremy Heywood, who died in 2018, liked to confront problems and sort them out. He had spent time out of government working at Morgan Stanley, where he had met a bright young Australian called Lex Greensill who had an idea that seemed interesting. 

Supply chain finance was not a particularly novel proposition – financiers in London had been undertaking this kind of business in one form or another for at least five hundred years. But if it could be used to create a mechanism for paying suppliers of goods and services more quickly, then it might just be a way to ease the credit shortage that was holding back UK commerce in general. And that was where Greensill came in.

The idea wasn’t all that relevant to the Government itself, which can always pay its bills as quickly as it likes. But maybe – Heywood thought – it could be a way of speeding up the flow of finance to small and medium-sized enterprises working to supply big businesses.

So – contrary to much that has been written – there was at least a plausible prima facie reason for inviting Greensill to share his ideas with the government. But what’s extraordinary in this case is that he was allowed to hand out business cards, giving a personal email address in Number 10 and describing himself as “Senior Adviser, Prime Minister’s Office”. More than that, he was – to judge by the tone of leaked emails – in a position to boss officials around.

How was that permitted? He was not an official, a special adviser, nor a consultant under contract. David Cameron says he only met Greensill on a couple of occasions during his time as prime minister. Yet that kind of calling card must have been invaluable for someone who was planning to set up a financing business that would be looking for both corporate and public sector clients.

In any event, his efforts produced results. In October 2012, a press release from the prime minister’s office announced that a group of very large companies would be “actively evaluating the implementation of, or continuing to offer, Supply Chain Finance”. 

The initiative was welcomed by the CBI, the Federation of Small Businesses and the British Bankers’ Association, and Cameron himself enthused that this “can be a win-win, with large companies and small suppliers both benefiting from this innovative scheme”. He added that the Government would explore ways – “where it can” – of offering this product to its own suppliers.

What exactly was the business of Greensill Capital?

The model adopted by Greensill and others worked roughly like this. Imagine a big company, Megacorp, that has invoices from hundreds of small suppliers of goods and services. It turns to Greensill, which pays off the suppliers straight away, keeping a small amount back for itself as its payment. That means Megacorp is effectively borrowing money from Greensill until it is ready to pay off the full amount of the invoices which Greensill has already settled.

Megacorp’s credit rating is likely to be better than that of its small business suppliers. Since its risk is lower than theirs, Greensill can lend it money at a lower rate than it would be able to offer the suppliers. So the financing costs should be cheaper than otherwise would be the case.

Greensill itself funds much of this activity by assigning the promises from Megacorp and other clients to what’s called a special purpose vehicle – which asset managers like Credit Suisse sell to their investor clients. And in what turned out to be a key part of the transaction, Greensill arranges insurance against the risk of non-payment on the money that it is owed by Megacorp in return for paying off the invoices.

So this was a complex piece of machinery that appeared to work well – until, one day, it didn’t. And, as we shall see, once one cog in the machine came loose, the whole thing blew up.

Why would a creditworthy company like Megacorp do business with Greensill?

After all, if it can borrow directly from the bank, the financing cost should be rather lower than if Greensill is inserted into the chain to take its turn.

One answer is that the big company gets to conserve cash, while its suppliers, which may often be cash-constrained, are paid earlier. The transaction reduces the complexity of its invoice arrangements, and might help it to manage its cash flow.

And there are other possible ways of using supply chain finance. In a press release last year, Greensill explained that its technologies would allow it to forecast the value of prescriptions to be filled by a pharmacy, enabling payment a month in advance of the medicines actually being dispensed. Another example: in his apologia this week, David Cameron cited what he called an “exciting and innovative product with the real potential to help employees with their finances, not least being able to get paid at the end of their shift, rather than at the end of the month”.

Never troubled by false modesty, the company proclaimed: “Reformers at heart, Greensill challenges the status quo by working to make global finance fairer, and levelling the playing field for all businesses and people alike. The company unlocks capital so the world can put it to work.”

But there are darker sides to the story. For several years, credit rating agencies Fitch and Moody’s have warned that this kind of financing arrangement has the potential to muddy the water for the financial markets, since, under the present accounting rules, companies like Megacorp don’t have to classify this form of financing as debt. 

This means they can give a false picture of their ability to generate cash – and of their balance sheet strength. Excessive use of such financing tools is said to have contributed to the high profile defaults of (among others) Abengoa, the big Spanish energy business, and of Carillion in the UK.

In other words, supply chain finance can be used by troubled companies to disguise their mounting borrowings.

How risky was Greensill’s business?

In a word, very. Extremely rapid growth by a company in the financial sector always sends off flashing red lights. Greensill Capital (UK) is a main component of the group: by 2017, its revenues had climbed from zero to $116m in five years. By 2019, the last published report, the figure had jumped to $420m.

The financial report is opaque, with some odd features. For example, a footnote explains: “There were no employees during the year apart from the directors, who were remunerated by another group company.” The auditors are Saffery Champness LLP, not a name you might expect to see on a company of this size.

One hint of trouble to come is the admission that the company’s rapid growth in the previous two years had led to “concentration on certain customers, key employees and suppliers”. What that turned out to mean was the business had become heavily exposed to troubled enterprises like Sanjeev Gupta’s GFG Alliance, a metal industry conglomerate spread around the world with large steel and aluminium interests in the UK, where it has 5,000 employees. Greensill’s exposure to this business has been put at $5bn.

By going to places where other financiers might be unwilling to tread, Greensill had expanded its business at an extraordinary pace. But there was to be a heavy price.

What were Credit Suisse – and others – thinking of?

In a paper for the Institute of Government, Giles Wilkes explains that “underneath any financial idea lie the same basic questions – how are funds raised, how are they invested, how are the risks managed. A failure in one, two or all of these is what lies beneath every collapse.”

Greensill fuelled its explosive growth at least in part by investing in what were effectively short-term loans to risky enterprises. What made this possible was the fact that those loans were in turn refinanced by financial institutions like Credit Suisse and GAM, another Swiss-based asset firm, which were willing to set up funds to sell to their clients in order to cover these obligations.

Why would they do that? One answer is that at a time of very low interest rates, investors are willing to take on higher risks to secure decent returns.  Another is that this business must have generated attractive fees. And the third is that the financial risks were limited by credit insurance placed by Greensill’s insurance broker, Marsh McLennan.

The website Behind the Balance Sheet examined the summary sheet for one of the Credit Suisse funds, which was valued at $6.8bn this January. Looking at the top ten positions on the list, the writer only recognised four of the company names involved. It was concluded that “many advisers and private investors would look at that top ten list of credits and would rule this uninvestible – 10 minutes work”.

That’s why Greensill’s insurance arrangements were so vital. They had allowed investors to treat the credits as almost risk free and, in the words of the company’s lawyers, had enabled it “to access sources and levels of funding which it would not otherwise be able to access and which are critical sources of financing for its business”.

But this is where the fire started. The Bond & Credit Co., an Australian underwriting firm, warned last summer that it was reducing the authority of the executive responsible for writing Greensill’s main policies: he had apparently exceeded his underwriting authority and was dismissed shortly afterwards. Later that year, it became clear that the underwriter would not be renewing the major contracts that were due to expire in March. When no other insurers could be found to take on the risk, it was game over for Greensill.

There’s another big puzzle in this financial story. Back in 2019, SoftBank of Japan injected $1.5bn into the company, valuing it at $3.5bn and giving a great boost to its credibility. How could this price possibly have been justified? It wouldn’t be SoftBank’s first howler – its investment in WeWork had cost billions – but it was still a remarkable figure.

Maybe there was more to it than meets the eye. The Financial Times has pointed out that some of SoftBank’s other portfolio companies had used Greensill to pay their suppliers, and had itself put more than $500m into the Credit Suisse funds.

Was Greensill’s failure a big surprise?

Maybe not, at least to anyone who had been looking closely for the previous couple of years. Paul Myners, with decades of experience in the financial services business, started asking awkward questions in the House of Lords in the summer of 2019. Behind the Balance Sheet published a post last July with the racy headline: ‘Greensill, SoftBank & Cooking the Books’.

And the sheer pace of the company’s growth should have been enough by itself to raise warning signs.

What about David Cameron?

Cameron left Downing Street in 2016 and signed up for Greensill in 2018. So he broke none of the rules that apply to former ministers, which only last for two years after leaving office. And the rules governing lobbying only apply to professionals doing the work for hire rather than to company employees – which is what Cameron had become. Moreover all his increasingly frenetic lobbying of the Treasury and Number 10 came to nothing. So why all the fuss?

The answer, of course, is that his shameless attempts to exploit his former colleagues through texts, phone calls and face-to-face meetings can only do damage to public trust in politics. In the words of the Conservative MP Sir Bernard Jenkin this week, detached observers are left to wonder how much of this kind of thing is going on undetected: “This is catastrophic for public confidence in our system of government.”

Cameron held share options in Greensill and so had a direct financial interest in his efforts to persuade the Government to change the rules of its emergency loan scheme in order to benefit his company. Thanks to the strength of his contacts book, he was able to secure access at the highest levels of Whitehall in a way that would not have been possible for ordinary citizens. And he didn’t take no for an answer.

According to leaked emails, Cameron tried from early April to late June last year to persuade his contacts in Whitehall and Westminster to redesign a scheme that was intended to give big blue chip companies in Britain access to government loans in order that it could accommodate the very different purposes of a complex financial firm with interests spread around the world.

In his statement this week, Cameron said “there are important lessons to be learnt” from what happened. And that’s certainly true.

How does the Treasury come out of all of this?

On the evidence available at least so far, the answer is “not bad”. It has released details of the two texts that Rishi Sunak, the Chancellor, sent to Cameron in response to what has been described as multiple messages. One, on 3 April , said he’d been too busy to respond but would call back. The other, on 23 April, said he couldn’t make any promises but had pushed officials to see whether a way could be found to admit Greensill to the loan facility.

Did he mean he was going to twist their arms? Or was it simply a way of kicking an embarrassing request from his former boss into the long grass? In the event, although talks with the company dragged on for a couple more months, officials stood firm. Greensill later secured access to taxpayer-backed funds made available under a different loan scheme, but this was not agreed or arranged by the Treasury.

So what are the important lessons to be learnt?

So far, all the attention here has been focused on how to make former prime ministers behave themselves. There are actually bigger questions at stake, but let’s start with Mr Cameron.

In his statement, he accepted that, as a former prime minister, he ought to undertake “communications with government… through only the most formal of channels, so there can be no room for misinterpretation”. That’s obviously true, and should be easy enough to implement.

But should someone in his position be doing any kind of lobbying at all for commercial gain? That’s the argument for extending the rules banning lobbying from two years to perhaps ten, and for requiring former prime ministers to register their interests in public. There is also plenty of room for discussion about whether the independent Advisory Committee on Business Appointments, which is supposed to monitor moves out Westminster and Whitehall, needs sharper teeth. This week’s news that senior government officials have been moonlighting in the private sector – including for Greensill – underlines the shortcomings of the present system

The more serious questions are these. What are the accounting standards authorities in the UK and the US going to do about the use of supply chain finance to mask a troubled company’s true debt position? A way must be found to incorporate such liabilities into the balance sheet in a transparent fashion.

And when are the banking regulators in both countries and beyond going to get to grips with businesses like Greensill, which are effectively shadow banks of a scale and a size to pose real economic risks?

Final question: what does all this mean for fintech businesses in the UK?

David Cameron made great play of Greensill’s position as one of the fastest growing UK fintech businesses – that was one reason he argued for taxpayer support. And it’s certainly government policy for the UK to become a global centre for this industry, both for its growth potential and to offset the losses the City is facing as a result of Brexit.

But in what sense was Greensill actually such a business? It was certainly involved in the “fin” bit – it is said to have issued over $140bn in finance in 2020. But the “tech” part is another story. The company appears to have relied on third parties for its IT platforms, and it’s not clear that it developed any important technology tools of its own.

No doubt the administrator will find out in time whether there are such valuable technology assets ready to be salvaged from the wreckage of the business. But for the moment, there is at least a suspicion that what we are seeing in parts of the fintech phenomenon may be a bit like the internet bubble of twenty years ago, when adding dotcom to the name of a mundane business significantly boosted its market value – if only for a moment.

Photograph by Ian Tuttle/Shutterstock