Lex Greensill's Downfall Was a Predictable Story

With thousands of jobs at risk, billions of dollars of depositor savings on the line and large potential losses for fund investors, Greensill Capital’s implosion has the potential to inflict pain on many people. Though the firm’s demise probably doesn’t threaten the financial system, and some failures are inevitable, regulators have again come up short. The Greensill business model was questioned for years. This messy unravelling was avoidable.

It’s true that Greensill, founded by the charismatic farmer-turned-billionaire Lex Greensill, operated a supply-chain finance business that sat largely outside the direct oversight of financial regulators. Headquartered in Australia, Greensill Capital’s U.K. unit provided “invoice-based lending,” where it arranged for early payment of a client’s suppliers at a discount and received the full amount from the client later. It repackaged these obligations — effectively a form of short-term debt — in notes to sell to investors.

Because Greensill Capital loaned money to companies and not to individuals the business wasn’t overseen formally by British regulators. But supervisors in the U.K. and Germany were still aware of its activities that raised red flags, whether in its core invoice-financing business or its deposit-taking German bank. It’s troubling to think that regulatory siloes may have led to inaction.  

In particular, there were concerns that GFG Alliance, the metals empire built by Sanjeev Gupta, relied far too heavily on Greensill for its financing, including the cash it obtained from the finance firm’s commercial lender in Germany, Greensill Bank. That should have prompted more decisive action. Now that Greensill has filed for administration and stopped funding Gupta the latter has defaulted on monies it owes its former partner.

This shouldn’t have been a surprise. The German Banking Association, which runs the country’s deposit-insurance program, had alerted its national regulator BaFin to the risks at Greensill Bank more than a year ago. BaFin may have been preoccupied with a bigger disaster at the time, the implosion of Wirecard AG, and only opened a probe into Greensill Bank in the summer.

It wasn’t until a credit insurer withdrew its cover on Greensill’s invoice-backed loans that the music stopped. Credit Suisse Group AG had to shutter funds worth about $10 billion, which were backed by the Greensill assets (many of them tied to Gupta). Separately, BaFin has shut Greensill Bank and asked law enforcement officials to investigate accounting irregularities involving Gupta assets.

The Greensill Bank failure could be particularly painful for German taxpayers. Municipalities and individual savers, desperate for some returns in a low interest-rate environment, piled into its deposit accounts, which offered the highest rates in the country. That should have been another warning signal for regulators: Wirecard also raced to raise funds from depositors before it blew up.

Most of the 3 billion euros ($3.6 billion) of savings parked at Greensill Bank should be protected by insurance, but some local governments could suffer because 500 million euros of their savings remain exposed. More than a decade after German municipalities took a hit on toxic mortgages and derivatives, it’s hard not to side with the mayor of Giessen in feeling abandoned by the regulator.

In Britain, too, concerns had been raised about Gupta’s borrowings and his reliance on another bank — this time a lender controlled by his own group. A 2019 Financial Times report disclosed the ties between Gupta’s business empire and Wyelands Bank, a trade-finance specialist that funneled deposits to related parties of Gupta. A review by the U.K.’s Prudential Regulatory Authority that year found the bank may have breached rules.

But Wyelands operated largely unfettered and it was only last week after Greensill imploded that the Bank of England ordered Gupta to inject 75 million pounds ($105 million) into Wyelands Bank and return all retail deposits.

Although regulators can’t be blamed for paying more attention to systemically important firms, the complexities surrounding the accounting of supply-chain finance and Greensill’s exponential growth were alarming and well explored by journalists. Greensill’s shadow bank left deep trails in the regulators’ path. With the knowledge available, regulators can hardly blame the powers they didn’t have.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

©2021 Bloomberg L.P.

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