Greensill’s ghost will haunt the financial world

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Masayoshi Son, chief executive officer of SoftBank Group Corp., and Axel Lehmann, chairman of Credit Suisse AG, no doubt wish their respective firms had never met disgraced financier Lex Greensill.

But hopefully they – and the financial industry at large – can learn from the scandal that followed.

Greensill’s charm, confidence and reputed ability to turn the solid supply chain finance business into a booming moneymaker made both Softbank and Credit Suisse see dollar signs, as did Duncan Mavin’s new book (1) on the saga – “The Pyramid of the lies”—revealed.

For Son, whose vision fund recently caused SoftBank to suffer a record loss, acquiring a stake in Greensill should be a fintech home run. Here was a company that claimed to be mixing old finances with new data tricks, growing at breakneck speed and with apparently enough cash to support dreams like investing in a new $34 billion Borneo city.

For Credit Suisse, desperate to move away from financial trading and towards recurring income from high net worth individuals, investing client money in Greensill fortunes was a way to join an influential network of billionaires and earn big returns at a low interest rate. rate world.

Unfortunately Greensill Capital was built like a house of cards and collapsed when Covid-19 hit. Investors and insurers were deterred by revelations of reckless lending and shady conflicts of interest. Money ran out, Son’s prized “fintech” unicorn soon became worthless, and wealthy Credit Suisse clients lost billions.

There will no doubt be more revelations as Credit Suisse prepares a legal claim against SoftBank in hopes of recovering up to $3 billion — one of several lawsuits that will take years to resolve. SoftBank has called “desperate” claims that it diverted funds owed to the bank’s customers.

Yet Mavin’s book makes it clear that the cast of characters drawn into Greensill’s orbit have serious work to do to minimize the risk of a similar explosion one day. Many backers seemed overly eager to buy what the selfish, larger-than-life financier was selling, and they didn’t always do their homework. The book delights in exposing Greensill’s ridiculous airs, including an oversized business card straight out of American Psycho.

“I think there are a lot of other greensills waiting to be passed and far too few people willing to do the right thing,” says Mavin.

Contagious hype is a recurring theme throughout the saga. Greensill rose at a time when retired bankers were joining startups instead of playing golf, and low interest rates were pushing investment firms into riskier waters. The marketing miracle of the “fintech” label distracted many eyes from the fact that high growth and high returns in the financial sector are rarely accompanied by high risks. With valuations falling across the fintech space, it’s not just SoftBank that needs a reminder.

The hype also meant that traditional financial firms that bought into Greensill ignored internal red flags, often because of his shrewd approach and connections. This led to an internal crisis at asset manager GAM over its increasing exposure to Greensill. The Credit Suisse supply chain fund, meanwhile, arguably outsourced too much decision-making to Greensill and at one point didn’t even apply its own rules to the fund when it came to credit insurance — a key part of Greensill’s demise.

Regulators need to show they can keep tabs on markets that appear safe and sound as they may hide significant risks. Supply chain finance is a business as old as banking, but it has been exploited by super-fast-growing companies that took advantage of opacity and favorable accounting rules. In the end, Greensill not only helped suppliers get paid early by using invoices as collateral, but was also able to fund themselves on theoretical future deals.

Hopefully, new US accounting standards starting next year that will require more transparency in supply chain finance will instill more confidence in the industry.

And with governments playing a bigger role in the economy since the pandemic – even in traditionally laissez-faire Britain – politicians and their lobbying activities need to be kept at a higher level. Had David Cameron succeeded in his intensive efforts to secure government support for Greensill – which Mavin humorously describes as the former Prime Minister’s attempt to prove his own worth to Lex – British taxpayers might have been worse off.

Years of legal battles lie ahead for those involved in the Greensill scandal. But with bankers, techies, and those who regulate them hitting the beach this summer, this could be the time to refresh how this pyramid of lies was constructed. It might be built again one day.

More from other authors at Bloomberg Opinion:

• The Doctor Won’t See You Now: Britain’s Cost of Survival Crisis: Therese Raphael

• Facebook does something right for a change: Parmy Olson

• Britain’s summer of unhappiness is a tale of bad planning: Martin Ivens

(1) Mavin was a 2016 writer for Bloomberg Opinion.

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. He was previously a reporter for Reuters and Forbes.

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