Relief from residual worries is the most likely reaction of central bankers and financial regulators to the sudden release of Greensill Capital, a large shadow bank.
The position of this global player in supply chain finance does not appear to be a systemic risk or a need for central bank assistance. But its rapid shift from rubble to nemesis raises vague questions about the evolution of the global financial system and the ability of regulatory authorities to keep up.
Many of Greensill’s classic signs of a financial crash were waiting to happen, starting with flame founding entrepreneur Lex Greensill. The company’s website is trumpeting its path “from humble beginnings to revolutionary thinking”, explaining that it has seen the devastating impact that inefficient financial supply chains can have on a business. grew up on his parents’ sugar and melon farm in Australia.
Revolutions in finance have a bad way of ending badly, especially when they happen at a fast pace. Greensill Capital went from nothing in 2011, when Lex Greensill left a position at a major bank, making global supply chain financing at Morgan Stanley and Citibank, to go it alone.
By 2019 this upstart non-bank says it had extended $ 143bn of funding to 10m-plus customers and suppliers in 175 countries. The man who established him established powerful links in government and hired David Cameron, the former Prime Minister of the UK, as an adviser.
In banking that rate of expansion tends to indicate excessive risk taking and a poor quality loan book. And of course the Australian parent felt a sense of balance. In 2016 and 2017, his responsibilities exceeded his assets, according to a report by rating agency Scope. But Lex Greensill sparked a surprise coup by forcing General Atlantic’s first private equity group to invest $ 250m of new capital, followed by SoftBank Vision Fund of Japanese entrepreneur Masayoshi Son for $ 1.5bn spend more.
It is therefore not surprising that the last accounts filed by the British subsidiary at the end-2019 showed a truly resolving balance sheet with fat capital issues of $ 155m supporting total assets of $ 682m. However, in supply chain financing the face of the balance outweighs much about the nature of the risks that run them.
Supply chain financing is just an interesting modern name for the age-to-factor use, where suppliers sell at a discount to their customers ’debt to a financier who collect the total amount in time. Lex Greensill ‘s revolutionary innovation was the realization that these debts could be packed into investment funds – just as the big investment banks turned subprime mortgages into securities before the 2008 financial crisis.
The investors, who were primarily clients of Credit Suisse Asset Management and a GAM fund manager, urged Greensill to take out credit insurance to pay off the debts. But – unlike the subprime mortgage lenders – Greensill kept a skin in the game as it was exposed to initial losses under an uninsured portion of the fund.
This insurance was an important protection for investors, especially since the package was very close. The rating group Scope estimated in 2019, for example, that two-thirds of German subsidiary loans came from a single group of private affiliates. These were certainly part of the metals of Sanjeev Gupta’s empire. And such dense information was one of several concerns of German watchdog BaFin, which this month ordered the closure of German activity for business.
The major risk was that Greensill’s balance sheet could not reflect the fact that insurers had ceased to provide coverage. That is exactly what happened. Greensill Capital’s chief insurer, Tokio Marine, has pulled a line and Greensill’s legal suit in Australia for forcing a resumption of coverage has failed.
Both Credit Suisse and GAM have decided to freeze their funds.
This has reflected a loss in Greensill’s business model that is just as devastating, for example, as Northern Rock or GE Capital’s over-reliance on a financial crisis over short-term wholesale financing while financing ill-fated funds. legal in the long run. Without insurance, there may be a low-risk loan package
replaced is a high-risk package with too much weight put down by everyone
the dangers of the worst decay in living memory – clearly a
non-starter for investors.
A distinctive feature of this saw is that Greensill Capital, as the default payment agency Wirecard, owned a regulated German bank while large parts of its operations were outside the regulation of mainstream banking. The ability of shadow banking to attract more risky systemic movements should not be underestimated.