The collapse of the Aussie-led group has reignited bad memories of the financial crisis

 

The collapse of the Aussie-led group has reignited bad memories of the financial crisis

“It’s been a week to forget for financial innovation,” Observers have been shaken by the rapid collapse of Greensill – a so-called supply chain finance company, founded by Lex Greensill, the colourful “son of an Australian watermelon farmer”. “The plot so far has more twists than an M. Night Shyamalan movie.” It became plain that Greensill was in deep trouble when Credit Suisse suspended $10bn of funds linked to its assets. Soon after, the German regulator, BaFin, took control of the company’s German bank, and within days the UK arm had filed for insolvency protection. Greensill’s lawyers warned an Australian court that, if the business unspooled, 50,000 jobs globally were at risk. Industrial Britain faced particular “mayhem”, thanks to Greensill’s role as the main lender to GFG Alliance – the sprawling empire run by steel magnate Sanjeev Gupta, whose Liberty Steel group owns 12 steel plants in the UK. Some 5,000 jobs are still at risk.

The implosion is “causing ripples through finance, industry and government”, and not just because the former PM David Cameron was employed as an adviser. The company’s “spread-out structure” and risky business model should have been early red flags – it “inhabited the strange world of shadow banking”. The company’s supply-chain credit model is an update on traditional bank “factoring”, or the financing of invoices. But Greensill took it to new levels. Founded by Lex Greensill in 2011, it rolled up these supplier credits into the sort of “structured insured securities” that were “part of the poison at the core of the 2007-9 financial crisis”. Worse, by 2019, the firm was reliant for 90% of its revenues on just five clients. Yet in spite of these “fragile foundations”, Lex Greensill managed to establish “a foothold” in Downing Street via his connections with the late former head of the civil service, Jeremy Heywood.

Untangling Greensill’s murky arrangements will take some time given its complicated crossover of interests, One of the firm’s big financial backers – the Japanese tech incubator SoftBank – was also a major customer. Greensill “bore many of the classic signs of a financial accident waiting to happen”, Revolutions in finance have a nasty way of ending badly. Fortunately for the world’s regulators, its plight “appears to pose no systemic threat”. Yet Greensill’s rapid passage “from hubris to nemesis” raises disquieting questions. “The capacity of shadow banking to spring more dangerous systemic shocks shouldn’t be underestimated.”

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