Last week, Bank of America Corp.’s head of U.S. equity and quantitative strategy, Savita Subramanian, said something very interesting about the S&P 500: “The S&P 500 has essentially turned int...
But I hold up my hand, I'm just trying make you understand, Lord, you know, everybody tells Lil' Junior "Somebody hoodooed the hoodoo man." – Junior Wells “The Hoodoo Man Blues”
The Hoodoo-Man comes from African-American blues folklore, a man or woman who could cast spells and hypnotize unfortunate victims to do bad things. Lex Greensill, the founder of Greensill Capital, would have been a great guy to write a Hoodoo-Man song about. The story is unfortunately a familiar one, take a mundane blocking and tackling business that has existed for decades -if not centuries- and add a little razzle-dazzle to it and turn it into something “new and exciting.” Somehow, the “new” model for an “old and boring” business excites fund gatherers like investment firms who make their money in the form of fees paid by investors to put them in the exciting new business. Eventually it all ends in tears for investors, as the reason a centuries-old business magically became a high-yielding asset class was a combination of fraud and greed. However, to make the eventual collapse and damage from these schemes spectacular you need an exceptional Hoodoo-Man like Lex Greensill.
Supply Chain Financing (SCF) may have been around during the time of Marco Polo, and definitely was around when Ebenezer Scrooge and Jacob Marley were running their financing business in mid-19th century London. Here is how it works,
A company delivers its product to a buyer and the buyer promises to pay in a few months’ time, creating an accounts receivable.
The company who has the accounts receivable sends it to the supply chain financer (Scrooge and Marley, or Lex Greensill)
The supply chain financer pays the company cash for the receivable minus a discount, which is another business practice called factoring, that has been around for centuries.
The buyer pays the financer the full amount of the receivable.
If that seems straightforward to you, that’s because it is! This is the life’s blood of how a modern (the standard for modern here is sometime shortly after The Dark Ages) economy functions. There are hundreds—if not thousands—of banks and financing firms who do this every day. Somehow, Lex Greensill’s version of this fundamental business enabled him to buy four private jets, become great pals with U.K. former Prime Minister David Cameron, and to be honored as a Commanding of the Order of the British Empire (CPE) by Prince Charles! The Financial Times article, “The Unravelling of Lex Greensill: A Mix of Bravado and Financial Alchemy” had a fantastic quote from another SCF player, who did not get to meet Prince Charles or buy four private jets.
How Greensill was able to afford such a luxury always baffled the company's rivals. As one supply-chain finance executive puts it: “This is a great industry, but I fly Ryanair.”
What Lex Greensill was able to accomplish, while gross, was also astonishing. As further reported in The Financial Times article,
The company had frequently portrayed itself as a saviour of small business, proclaiming that it was “making finance fairer” and “democratizing capital.”
Through fancy structuring (private jets, democratizing finance, and fancy structuring usually end up poorly for investors) Greensill created a byzantine circular loop where money flowed around the world, much of it to Greensill favorites like steel-maker Sanjeev Gupta and then back again, continuously funded by either GAM, Credit Suisse, SoftBank, or, wait for it…Greensill’s own federally-chartered German bank, Greensill Bank AG!
The bank came in handy when Greensill blew up in 2018 (the second time Lex blew up, the first being 2015) and sunk GAM’s $7.3 billion fund that invested heavily in Greensill deals. While the investigation into the bank is now ongoing by the German authorities, it appears that the bank funneled a significant amount of funds back to GAM in 2019. The bank is now insolvent.
Moving right along, the Greensill receivable structures insured by a number of insurers, the biggest being Japanese insurer Tokio Marine. At one point, the insurer had nearly $8 billion of exposure to Greensill deals. How insurers became comfortable with insuring receivables to a blizzard of shell companies that all seemed to point back to Gupta and Lex’s pockets is anyone’s guess, but the answer is usually greed and stupidity. Obviously, the insurance that Tokio Marine and others provided was a huge part of the “structure.” This had to be what the managers at GAM, Credit Suisse, and SoftBank told their bosses as they were investing billions. However, unless Greensill held members of the insurers families hostage, what exactly was going happen when somebody at the insurers actually looked under the hood of these deals, claimed fraud, and decided not to pay up and not insure anymore Greensill receivables?
Finally, it seems that no explosion of a “boring business” disrupter made sexy is complete without $100 billion fund SoftBank tossing a billion or more onto the deck of the sinking ship. In 2019, SoftBank invested $1.5 billion into Greensill. Lex Greensill promptly took $200 million of investment for himself. SoftBank has recently stated that they consider the $1.5 billion a total loss. This loss seems oddly familiar to SoftBank’s $18.5 billion investment to Adam Neuman’s WeWork. Similar to Greensill, WeWork somehow made subletting commercial office space sexy enough to be valued in 2020 at $47 billion. Now, its big investor Softbank says WeWork is worth $2.9 billion. Also similar to Greensill, Adam Neuman was able to take millions of SoftBank funds for himself while his company collapsed.
Greensill, after vaporizing billions of investor, insurer, and bank funds, has finally collapsed. Lex Greensill still has $200 million and his four private jets. How much do you want to bet he will be back again before we know it?
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