In September 2014, Alex Friedman replaced David Solo as CEO at Global Asset Management (GAM). Like Solo, Friedman was cerebral, and rather quiet for a CEO. But in other ways, the two were very different. Solo’s early career had been in trading derivatives at Chicago’s O’Connor & Associates. Friedman had been an elite mountaineer and climber, sponsored by major outdoor clothing brands, who only stopped after a couple of close calls on the mountains. He’d also been a White House Fellow in the Clinton administration and an assistant to the US Secretary of Defense. In business, he’d worked as a mergers and acquisitions banker, he’d been the CFO of the Bill & Melinda Gates Foundation and, since 2010, the global chief investment officer at UBS, overseeing more than $2 trillion in clients’ money. Solo was a trader, fixated on clever ways to make more money. Friedman was methodical, more process-driven, a strategizer.
Though he and Solo had spent a lot of time discussing the business before it was handed over, Friedman was still surprised by what he found once he got inside. GAM was disjointed and dysfunctional. It operated like a bunch of fiefdoms. There was one head office in London – on King Street in St James’s, where Friedman spent most of his time – and another in Zurich. Teams in both locations were suspicious of one another and often sought to undermine their Swiss or UK cousins. Each of these locations ran separate, duplicate IT systems and human resources functions. It was like two totally different companies.
The structure was knottier still. There were offices in fifteen countries. Many of the staff in far-flung locations had been with GAM for decades and hadn’t met with their senior managers in either Zurich or London. Across the company, managers were running more than 170 different investment strategies, often branded in completely different ways. Many of them were underperforming and going nowhere. There was no central department managing risk either, which meant that no one had a great handle on what risks the company was taking as a whole.
GAM had about 1,500 staff – three times as many as comparable businesses. Many tasks were still done manually, and antiquated IT systems often ran databases from the 1990s, written in code by staff who had long since left the company. In contrast to the hard-charging culture in much of the City, most staff rarely worked long hours. Few of them owned shares in the company and didn’t appear to care that the stock price had been going nowhere for years. The frontline investment staff were more addicted to their bonuses, which were tied to the performance of their investments and the amount of assets they managed.
All of this had led to a situation where the investment teams often viewed themselves as independent units, operating loosely under the GAM umbrella. The way GAM was set up, individual portfolio managers ran their own strategies without reference to the CEO, who was not allowed to interfere or question their investment decisions.
GAM had also fallen foul of its main UK regulator, the Financial Conduct Authority. The FCA had expressed concern about documentation and practices on the equity trading side at GAM. The regulator had indicated they thought GAM was not cooperating with their inquiries about these problems. After Solo left, the FCA ordered a so-called Section 166 or Skilled Persons Review – a kind of special, independent audit that aims to root out inappropriate behaviour. It’s a blemish on a company’s record and puts the executives on notice that the regulator has its eye on them.
GAM’s cost base was bloated and performance was not as good as in the past. But there were broader, external forces hurting GAM too. The whole industry was under pressure to reduce costs and justify their fees. The global investing environment was relatively benign, with low interest rates and weak economic growth everywhere. That made it harder for investment managers to truly stand out. Active managers like GAM – which charge higher fees because they aim to actively outdo benchmark indexes – were losing out to passive managers that just copy the market and charge clients less.
When Friedman reported his first set of annual results in early 2015, profits had fallen by about 16 per cent from the previous year. Just months into his tenure, the company appeared to be in trouble. He unveiled a plan to cut costs and simplify the organization. He’d also bring on board new people and some new investment strategies. Within eighteen months, there was a whole new management team, and hundreds of jobs had been cut to save money.
The changes were very disruptive. Assets continued to decline as the company shifted strategies. A couple of new businesses that Friedman had acquired were taking too long to integrate and dragged on the company’s earnings. The staffing cuts damaged staff morale, especially in Switzerland. A hostile activist investor had bought a bunch of GAM shares and started jostling for Friedman to go. The share price, which had initially risen in Friedman’s first six months, was soon down by about 50 per cent from its peak.
None of that, though, would prove nearly as significant as the affair the company was about to run into.
Months after leaving GAM, Solo had taken a stake in Greensill. And soon after that, he began pushing for GAM and Greensill to work together.
Solo had a close and long-standing connection to one of the key investment managers at GAM, a portfolio manager named Tim Haywood. He was one of the highest-profile investors in the City, whip-smart, convivial, well known to finance journalists and well liked by colleagues. Haywood ran GAM’s biggest fund, the Absolute Return Bond Fund (ARBF), which courted investors from around the world, including the likes of the Chicago Police Pension Fund and the team that invested savings on behalf of all the municipal workers in Berlin. The fund’s rules allowed Haywood to invest their money in a broad range of assets, including government, corporate and emerging market bonds, as well as pretty much anything else he liked the look of. He could also use complex derivatives to hedge the fund’s performance or to juice its returns. As a senior, experienced manager with tenure at GAM, his informal role stretched well beyond managing his own fund. He had, for instance, designed some of the processes for managing risk at GAM – the checks and balances meant to prevent major missteps or stop individual portfolio managers getting out of line.
Haywood had a degree in chemical engineering from Edinburgh University and an MBA from Cranfield School of Management, one of the UK’s top business schools. His father had been a farmer and Haywood owns a country estate in Rutland, in the east of England, known as Gunthorpe Hall. The property includes a large manor house and several holiday rental properties. He told acquaintances that when he wasn’t working in the City, he loved to be on the farm.
After college, Haywood had spent more than two decades in the investment management industry, in Hong Kong and in London. He had a reputation for swinging for the fences as an investor. Colleagues sometimes referred to Haywood as Paul Tibbets – after the pilot of the infamous Enola Gay Superfortress bomber that dropped the atomic bomb on Hiroshima in 1945 – because of his tendency to drop big investing bombs.
Haywood also became something close to a City celebrity and liked to mingle with the rich and powerful. He planned to run for the largely honorary position of Lord Mayor of London. He sat on the board of St Paul’s Girls’ School, an elite private school in West London.
Solo and Haywood’s connection ran deep. They had spent years bailing each other out.
In 2007, Haywood led a team of managers that established a hedge fund firm called Augustus Asset Managers, which they spun out of Swiss bank Julius Baer. The firm, named after the Roman emperor who succeeded Julius Caesar, started out well enough, and had accumulated $14 billion of client funds within a few months of launching. In the run-up to the global financial crisis, he made an early bet against US subprime mortgages, and made bumper returns. He told colleagues he was genuinely unhappy that the author Michael Lewis had not included him in his blockbuster book The Big Short. But performance stuttered thereafter, and investors pulled their money out as the crisis raged on. By 2009, Augustus was bleeding assets and its flagship fund was more or less closed down. Solo, then CEO of GAM, came to the rescue. GAM was itself owned by Julius Baer at that point (it was spun out later, enriching Solo and some other senior managers), and Solo agreed to buy Augustus back for a nominal sum.
A little later, Haywood returned the favour. Pre-financial crisis, Solo had taken a big investment in a US mortgage company called Carrington. The bet had soured fast when the mortgage market tanked. Haywood had helped Solo out by putting the Carrington investment into one of his better performing funds, where the losses on the mortgage company could be hidden from investor scrutiny.
Though Haywood’s funds were focused on bonds, his heart always appeared to be in equities. It was hard to make a blockbuster investment in bonds, whereas a good equity trade could deliver the fabled ‘ten bagger’ – an investment that returned ten times what you paid for it. Between 2006 and 2011, Haywood entered a series of private equity-style investments that had been structured as debt securities. These deals, structured to comply with the bond fund Haywood managed, amounted to almost $200 million and involved investments in a series of seven or eight African businesses, including manufacturers of car parts, helicopters and electric meters. In the end, all the investments were a bust, though investors wouldn’t have known it. GAM’s other portfolio managers were having a stellar year, so Haywood’s failed private equity investments were effectively hidden by the bigger picture.
Haywood eventually caught the bond bug, finding ways to make investing in bonds more exhilarating. In 2014, he told an interviewer that innovations like being able to buy credit protection or options on currencies meant ‘the way you can express yourself in [bond trading] has become really quite manifold and that’s exciting.’
After that big sub-prime trade, Haywood had struggled for a repeat win. The fund lost the confidence of many investors, with assets dropping from about $18 billion in 2013 to under $13 billion by the end of 2015. That decline was not just embarrassing: it had a direct impact on Haywood and his colleagues. The size of the bonus pool that many staff counted on for their big annual payout was tied to the amount of assets under management at the firm. The shrinking of Haywood’s giant fund meant that the bonus pool for GAM’s staff also took a big hit.
Some big investments he made with his own money didn’t turn out well either. In 2015, he bought shares in a wood-chip fuel business for about £1 million and loaned the business about £1 million too, according to filings at Companies House. Within a couple of years, the company was in administration and Haywood lost everything, the filings show.
Solo knew Haywood wasn’t afraid to place a big bet on assets that others thought were too illiquid or too risky to take on. He also knew Haywood had an appetite for innovative – riskier – trades. And by this time, he knew that Greensill needed to find a more stable, more flexible source of funding.
WITHIN A FEW months of Solo’s departure from GAM, he’d introduced his old firm to Greensill. He messaged Friedman telling him he should meet with Lex, that he was impressive, well connected and had an interesting and potentially lucrative business model. They could be great partners, Solo thought. He told Friedman that he wouldn’t be disappointed.
The new GAM chief invited Lex to his relaxed office in St James’s. As always, Lex was formally dressed, in a tie and dark suit. He handed Friedman his UK government business card and introduced himself as working with Prime Minister Cameron’s office and the US administration of Barack Obama.
Friedman was taken aback. It’s highly unusual for a foreign, private sector business person to be an adviser to the US government, he said. Friedman had worked in US administration himself and had never seen an arrangement like that.
Yes, said Lex bluntly, it is highly unusual.
The inference was clear. Lex was staring Friedman down and claiming that he was indeed exceptional.
The meeting was tense. Lex appeared unhappy whenever he was really challenged. If he was questioned, he tended to push back hard, as if trying to prove he knew more about the subject at hand than Friedman. Friedman was not convinced that this was a person GAM should work with. He was particularly unsure about the role of Greensill Bank, wondering what its purpose was. He told Lex politely that he was declining to invest in Greensill.
But if he thought that would be the end of it, he would have been wrong. Within days, Friedman took an angry call from Solo. The former CEO called Friedman, screaming and swearing down the line. You’re missing out on a huge opportunity, Solo told him. You don’t understand what Lex is building. If you don’t work with him, he’ll take the opportunity elsewhere and everyone will know you turned it down.
Friedman knew Solo was an investor in Greensill and had a vested interest in the success of Lex’s business – that was a warning sign that he should factor into Solo’s ‘advice’ on the subject. Still, maybe he had a point, he conceded. Maybe he should give Lex another chance. Friedman second-guessed his previous decision. He set up another meeting with Lex, this time with the whole of GAM’s senior management team, including legal counsel, the CFO and other top executives. If everyone else was on board, then Friedman would reverse his earlier call and allow the firm to work with Greensill.
Lex came back to GAM’s office a few days later. He ran through his pitch again. Some of Friedman’s colleagues asked about Greensill Bank. Why didn’t it take deposits? How did it fit into the Greensill structure? Why was it needed? Lex pushed back. They were looking at its role in Greensill all wrong. The bank really wasn’t a concern. Lex refocused the group on his supply chain finance business. It was a winning strategy. That business was safe, steady, reliable. The GAM management team was broadly behind it. Friedman decided that if his legal counsel could take a deeper look into Greensill Capital and find nothing untoward, then maybe Solo was right after all.
Meanwhile, Solo himself had been lobbying for Lex. He had introduced Lex to Tim Haywood, and Haywood fell for him. Hard. They were similar in many ways. They came from farming stock. They enjoyed proximity to power and politics. And they had an unwavering belief in their own abilities. Greensill’s esoteric investments also seemed perfectly designed to appeal to Haywood’s sense that he was smarter than the average City money manager.
With Friedman essentially out of the way, Haywood began working with Lex. He dined with Greensill’s board and executive committee at the historic, swanky – and somewhat stuffy – Royal Automobile Club on Pall Mall in London. He took flights on Greensill’s private aircraft to Sardinia on vacation. He was a guest at a Greensill-sponsored performance of the Monteverdi Choir at Buckingham Palace. He took tickets from Greensill to Glyndebourne, the famed opera house set in the Sussex countryside south of London.
The result of their close relationship was that GAM’s investment into Greensill’s assets began flowing freely. Haywood’s ARBF fund made its first investment in supply chain finance assets sourced by Greensill in October 2015. The deals started small. Initially they were simple SCF investments. But they grew, and changed, and morphed and became more complex, riskier and loaded with potential conflicts.
There was a series of investments tied to something called Laufer Ltd, a company incorporated in October 2016 whose sole shareholder was Lex Greensill. In all, over the next couple of years, Haywood invested more than $500 million in Laufer. This investment had allowed Lex to pay off loans to Greensill’s wealthy backers. He had told Haywood that the giant private equity firm Blackstone wanted to work with Greensill if he agreed to drop other funding partners. Greensill was paying 10 per cent to 12 per cent on a bunch of loans to some of his shareholders – friends and family like Solo, Gorman and so on. If GAM refinanced those loans, at a cheaper rate, Lex would turn Blackstone down and stick with Haywood’s firm.
Lex and Haywood also began working ever more closely with Sanjeev Gupta, a British-Indian industrialist. Gupta said he was aiming to build a global metals empire out of unloved businesses around the world. Haywood and Lex were keen to finance it. Haywood had invested in assets tied to Gupta starting in 2015. Over the next couple of years, he invested hundreds of millions of dollars more in Gupta’s deals, all brokered by Greensill. Haywood bought securities tied to the purchase of an aluminium smelter and a power plant in Scotland. He invested in portable power units, known as Little Red Boxes (LRBs), that ran on biofuels, and which were supposed to take advantage of government subsidies. To long-time colleagues and investors in the ARBF fund, Haywood appeared to be besotted and beguiled by Gupta and Greensill. He flew around with them, visiting potential acquisitions and investments and shaking hands with top politicians.
During this period, Haywood also bought complex Greensill securities backed by aircraft leasing payments and by a loan to an offshore company that tied back to Andy Ruhan, the former owner of Greensill Bank. The loan, which Ruhan discussed with Haywood in GAM’s office, was supposed to be backed by a stake in a New York skyscraper development.
Haywood and Lex had also launched a separate GAM Greensill supply chain finance fund (GGSCF), which exclusively bought securities backed by SCF loans made by Greensill. Initially, most of the loans went to Vodafone. Lex had worked with the telecoms company years earlier when they’d been a client of Citigroup.
The fund was filled with invoices from Vodafone’s suppliers. Greensill paid these invoices early and at a discount and then reclaimed more from Vodafone later. A convoluted set-up saw Vodafone also become an investor in the fund. To the non-accountant it’s hard to figure out the point of it. But there were significant benefits to Vodafone. The arrangement meant Vodafone was essentially profiting from having its suppliers choose between being paid a discount or being paid late. It also helped improve the look of Vodafone’s balance sheet. (Normally, when a company pays its suppliers’ invoices, it reduces its payables and cash balances by the same amount. Processing invoices through the fund results in a lower payables balance but cash just shifts into ‘short-term investments’.)
Although nominally open to other borrowers and investors, Vodafone dominated the fund. The telecoms company was so important that executives at Greensill and GAM began referring to the fund in conversation and in emails as the ‘Vodafund’.
Haywood also struck an unusual side arrangement with Lex that said if total assets in the Vodafund fell below $1 billion at the end of March 2017, Greensill would pay a fee of $1.25 million to GAM for each of the next four years. The arrangement, known as a fee ramp agreement, didn’t provide any benefit to investors in any of GAM’s funds. Instead, it was effectively a $5 million pledge to GAM itself.
By early 2017, the Vodafund had not grown as anticipated. Vodafone’s auditors were uneasy with the accounting benefit the company got from its dual role as investor and client, which restricted how big the fund could grow without the involvement of other partners. Haywood and Lex amended the fee ramp agreement so that the trigger date for payments to GAM was shifted to the end of September 2017. In the summer, Greensill also struck a complex deal with the Swiss branch of US agribusiness Bunge. The deal essentially saw GAM provide hundreds of millions of dollars in financing to Bunge, which it reinvested in the SCF fund. The transaction doubled the size of the Vodafund and dealt with the problem with Vodafone’s auditors. (I came across the Bunge deal later, in part because of a strange reference to the $1.2 billion in Greensill’s own accounts, which made it look as though Greensill itself had a huge stake in the GGSCF. When I asked Greensill about it, one senior executive who was rolled out to explain it to me initially tried to suggest it had something to do with insurance before simply acknowledging he didn’t understand what had happened.)
As Haywood’s involvement with Greensill deepened, it also started to raise eyebrows at GAM. The was some pushback from Haywood’s colleagues, some of whom were reticent about putting more money into investments sourced from Greensill. When there was resistance, Solo, who still held some influence at GAM, came to the rescue. In a December 2016 email to a senior GAM investment manager, Solo made it clear that he had supported GAM’s involvement with Greensill, and he touted his knowledge of trade and receivables financing. Greensill was selling practically risk-free investments, he wrote. He also pointed out that he was both an investor in Greensill and an investor in the GAM funds. It read like a brazen attempt to exert his influence, and an admission of his potential conflicted interest.
Still, within a couple of years, the GAM connection had transformed Greensill’s business. Haywood had invested about $4 billion in Greensill’s assets. It had allowed Greensill to largely pay off his wealthy backers. It had delivered crucial cash flow. It had established the idea of a dedicated SCF. And it meant Greensill was attracting interest from even larger pools of money.
Eventually assets from Greensill of all shapes and sizes came to dominate Haywood’s ARBF fund. These investments were out of sight of the senior management team. But they were the cause of deep concern for one of Haywood’s oldest colleagues.