Greensill is a multibillion dollar corporate calamity

Greensill Bank in Germany (Image: EPA / Focke Strangmann)

Well, it got out of hand quickly. Three weeks ago, Lex Greensill was destined to become one of Australia’s richest people, the Queensland farmer who created a financial powerhouse worth $ 6 billion. Now it’s gone.

It’s been a while since we’ve seen a real business collapse. But with Greensill Capital late fall into insolvency yesterday we finally got one.

Not all business collapses are created equal. Some characters, like high-flying Alan Bond or Christopher Skase, become intergenerational greed memes. Others, like the late David Coe of Allco or Mark Sowerby of Blue Sky, are able to escape with a high degree of anonymity and millions of dollars in profits invested in homes and cars safe in the dark. name of their spouse.

It took the business media about a week to realize that UK-based Greensill was no longer a shocking Bundaberg boy – instead, he is the author of a multibillion-dollar calamity. dollars. The true magnitude of this calamity will not be realized for months, if not years. Some have speculated that this could have a serious impact on the IAG insurance goliath as well.

Lex was the founder of Greensill, his eponymous factoring house that has managed to bluff pretty much everyone that this is some sort of nimble fintech company. Originally working for banks like Morgan Stanley and Citigroup, Lex started his own supply chain finance business in 2011. This was of course not a new business model. Lex did the same in the big banks himself, and people had been selling debt for centuries.

The model works like this: let’s say you were a development company that a large company owed a few million dollars to, say Telstra or CIMIC. Instead of getting paid by Telstra in 60 or 90 days (their common terms for small suppliers), a factoring company like Greensill would pay you, say, 95% of what was owed, and sue Telstra for the full amount. .

The concept is intended to be win-win, the customer is paid quickly and the large customer can continue to extend onerous terms to his small suppliers. Lex has managed to coat his factoring business with his Bundaberg shtick and goofy smile, but it’s not as sunny as it first appears.

Factoring is a useful tool for harassing small suppliers: it allows large companies to impose long payment terms on suppliers and charge the cost to the supplier. It is also a convenient way for indebted companies to hide the extent of their borrowing. British construction company Carillon collapsed in 2018 while reporting net debt of £ 219million, while having additional factoring of £ 400-500million that was not properly disclosed.

As the world discovered this week, Greensill was not a tech-driven financial innovator, but essentially a terribly managed bank. Over 80% of Greensill’s exhibits were in as few as five companies – the largest being owned by Indo-Anglo steel baron Sanjeev Gupta. Greensill also lost millions in loans to failed retailers BrightHouse and Shop Direct.

The predominant genius behind Greensill’s business was that he was successful (until last week) in convincing insurers and investors to take the risk of his silly lending practices.

Greensill would consolidate its debt (which is an “asset”) and sell it to funds managed by Credit Suisse.

If this sounds familiar to you, you’re right – this was pretty much the exact pattern that led to the global financial crisis, where mortgage lenders essentially packaged high-risk home loans and sold them as backed securities. to mortgage claims.

To make the investment more palatable to yield-hungry investors, Greensill would ask insurers like IAG and Tokio Marine to cover some initial portfolio losses. What rocked Greensill’s eventual collapse was that insurers finally grabbed the horrid loan portfolio that Greensill was managing and disengaging. This meant that Credit Suisse and GAM would not be able to sell the funds and that Greensill would quickly implode under the weight of its terrible loan portfolio.

The collapse of Greensill will not only impact IAG, but also SoftBank’s Vision Fund, one of its main investors. The fund is the toy of billionaire Masayoshi Son. He injected $ 1.5 billion into Greensill (now down to zero), which joins other investments like WeWork and a dog walking company.

But even without looking at Greensill’s bloody loan book, the sirens should have sounded that the finance firm, itself less than a decade old, had a fleet of four private jets, including a Gulfstream G650 from $ 50 million.

Greensill had not one but two politicians to advise him. There was Julie Bishop (whose brief reign as shadow treasurer ended after losing the trust of her colleagues) and David Cameron (the Brexit Prime Minister). So Greensill joined such luminaries as Theranos, MFS and ABC Learning Centers as businesses overseen by former politicians.

Greensill’s analysis will soon turn from how the calamity happened (answer: greed and foolishness) and towards an analysis of the victims of the collapse.

Questions will also be asked about how much Lex Greensill and his brother Peter (both still members of the AFR Rich List) managed to siphon off before the inevitable implosion. Lex is believed to own over $ 150 million in assets.

Once again, this shows that there is money in being a bad businessman.

Adam Schwab is the author of the bestseller Pigs in the Trough: Lessons from Australia’s Decade of Corporate Greed, an analysis of the Australian calamities of the global financial crisis. He is director of Private Media, which publishes Crykey and SmartCompany.

This article was first published by Crykey.

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