Review: Lex Greensill epitomised post-2008 finance

The logo of Greensill Bank is pictured in downtown Bremen, Germany, March 10, 2021. REUTERS/Fabian Bimmer

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LONDON, July 22 (Reuters Breakingviews) – About a decade ago Daniel Tarullo gave a speech warning of the dangers posed by shadow banking. The law professor and Federal Reserve governor contrasted the extensive efforts to reform big banks, many of which had almost collapsed in the crisis of 2008, with the limited supervision of asset managers, brokers, and other intermediaries in financial markets. “As the oversight of regulated institutions is strengthened,” he noted, “opportunities for arbitrage in the shadow banking system may increase.”

Tarullo had probably never heard of Lex Greensill when he drafted his speech. Yet the previous year, on the other side of the Atlantic, the ambitious Australian had founded a company to take advantage of the imbalances Tarullo warned about. Over the next decade Greensill’s eponymous firm surfed the waves of cheap capital sloshing around the world, duping big banks, high-profile investors, and former politicians, until it finally collapsed. In the process it became a parable of the excesses of global finance after the crisis.

Duncan Mavin’s “The Pyramid of Lies: Lex Greensill and the Billion-Dollar Scandal” leaves readers with little doubt about the culpability of its central villain. Mavin, a financial journalist who spent years digging up the squalid truth behind Greensill’s fanciful claims, combines clear explanations of intricate financial structures with a keen eye for the colourful and at times absurd human drama.

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Greensill is all the more extraordinary because it operated in a supposedly humdrum corner of finance known as supply chain lending. For centuries, small companies have raised money by selling unpaid invoices to lenders at a discount to the amount they are owed. More recently, banks and others inverted the process by offering credit to big companies, and then paying their small suppliers’ bills earlier than before, in return for a fee.

This system rests on an accounting sleight of hand that allows companies to report supply chain loans as working capital, thereby lowering their reported debt. It was a factor in corporate collapses such as the British outsourcing firm Carillion, which went into liquidation in 2018. Nevertheless, it’s a relatively low-margin business that is only profitable for lenders which can do it on a large scale.

Greensill did not have the balance sheet or blue-chip clients to compete with big banks. Instead of using deposits for funding, it packaged up loans and sold them to asset managers. And though it bought a small German lender, Greensill’s parent company was not regulated like a regular bank. What it lacked in size it made up in bravado, including fanciful claims that it was a disruptive technology company.

From the beginning, the firm appears to have lacked basic controls. It labelled long-term loans as supply chain financing; it rolled over some credits as they came due – a process known as “evergreening”; and moved loans between different entities. Best of all, it offered some clients credit secured against contracts they had not yet won – a category it labelled “future receivables”.

Finance has always attracted rule-breaking rascals. What’s remarkable about Greensill is how far he got. The support of big institutions elevated him from the more mundane ranks of financial scammers.

Greensill secured equity injections from General Atlantic, the investment firm, and SoftBank Group (9984.T), the giant tech investor run by Masayoshi Son. Asset managers GAM (GAMH.S) and Credit Suisse (CSGN.S) repackaged its loans and distributed them to yield-hungry clients. Large insurance companies provided protection against default. Meanwhile, politicians like former British Prime Minister David Cameron helped Greensill open doors, and pleaded for help from governments and central banks when the Covid-19 pandemic hastened the firm’s demise.

Another striking fact is that in the 10 years during which Greensill zipped around the world on his private jet, he had almost no interaction with the traditional custodians of finance. The financial regulators who were enforcing stringent new banking rules are almost entirely absent from Mavin’s book, with the notable exception of BaFin, the hapless German watchdog which was supposed to supervise Greensill’s banking subsidiary in the country. Obscure firms in London and Sydney audited the company’s accounts. Credit ratings agencies barely featured.

Some policymakers might argue that this is an endorsement of the post-crisis financial architecture. Greensill’s collapse did not drag down large Western economies, as banks had threatened to do 13 years earlier. Its primary victims were institutions like Credit Suisse, which paid a hefty price for not doing their homework. Multiple investigations in several countries will establish whether Greensill and his cohorts broke the law.

Yet this interpretation is too complacent. For one, Greensill and his largest client, the steel tycoon Sanjeev Gupta, benefited from government guarantees during the pandemic. More broadly, when the Federal Reserve and other central banks intervened to prevent financial markets from seizing up in March 2020, they acknowledged the global economy’s dependence on shadow finance.

Finally, it’s far too early to tot up the bill from a decade of financial excess. Now that interest rates are rising around the world, the tide of cheap capital that buoyed shadow banks is receding. Lex Greensill was one of the first to sink. He’s unlikely to be the last.

Follow @peter_tl on Twitter

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)


“The Pyramid of Lies: Lex Greensill and the Billion-Dollar Scandal”, by Duncan Mavin, was published by Macmillan on July 21.

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Editing by Liam Proud and Oliver Taslic

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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