Even before the arrangement with GAM and Tim Haywood had begun blowing up, Lex had already started working on an alternative source of other people’s money, and it would dwarf what he got from GAM.
David Solo, the robotic banking guru and Greensill shareholder, had connections running through the core of the Swiss banking world. He introduced Lex to top executives at Credit Suisse, one of the biggest banks on the planet.
Lex rolled out his sales pitch. Supply chain finance was not only a ‘fairer’ type of banking, it was also safe. The loans were short term, liquid, diversified. They were backed by millions of invoices, flying between thousands of companies, many of them giant, global businesses.
For added safety, the funds could be wrapped in trade credit insurance. It would cost a bit. But even if borrowers defaulted, the investors would still get paid. It was almost too good to be true.
Lex’s timing was on the money. In the years after the financial crisis, the biggest banks in the world were undergoing a major strategic upheaval. New regulations had made some old business lines obsolete, inefficient or unprofitable. Uneven rules around the world also tipped the balance so that US investment banks were winning out against banks in Europe, even on their own patch. Ultra-low interest rates set by central banks – a blunt instrument meant to boost economic activity – also tilted business lines in or out of favour, as did emerging technologies. The shifting global balance of economic power, from West to East, played a role too.
Most of the pre-crisis finance giants were going through some kind of overhaul. Credit Suisse was no different. In March 2015, the bank hired the charismatic French-Ivorian executive Tidjane Thiam as its CEO. Thiam was deeply intellectual and a former minister in the government of the Ivory Coast. He was an ultra-bright star of the finance world, with a Bill Clintonesque ability to engage audiences large and small.
Thiam had risen through the ranks at UK insurance giants Aviva and Prudential, which made him a slightly odd choice for CEO of a Swiss bank. He was an outsider, and he came armed with an outsider’s perspective on the bank’s predicament. He was also frequently blunt and direct.
One of his first aims at Credit Suisse was to rid the bank of a deserved reputation for sleepwalking from one scandal to another under his predecessors. The bank had paid huge fines for missteps, including helping some rich US clients evade taxes and for mis-selling mortgage securities.
‘It’s as though you guys have been shitting everywhere,’ he told some senior managers shortly after taking over. He extended the metaphor. ‘I’m going to clean up all that mess. I’m going to put in new toilets – the best, modern Japanese-style toilets with flashing lights and music. And then your job is to make sure people stop defecating on the floor and start using the toilets.’
His plan was to have a small number of key executives running major business lines, directly accountable to the CEO. It was a highly personalized structure, with Thiam at the summit. Over the next few years, the CEO himself was up way past midnight every evening, poring over daily profit and loss accounts sent from New York. The system was meant to ensure information flowed right to the top, that Thiam would have oversight of everything. But in some cases, it had the opposite effect, with staff fearful of sending problems up the chain. There was a perception that anything unusual, or in which the rewards came with a significant amount of risk, would be stamped on by Thiam. One particularly fraught relationship was with Iqbal Khan, Credit Suisse’s wealth management chief. Khan and Thiam clashed frequently, with Thiam trying to curb the wealth management unit’s appetite for selling riskier, but potentially higher-yielding, investments to its clients.
Thiam had pledged to shift the focus at Credit Suisse from investment banking to wealth management. But he wanted it to be safe, steady, not taking unnecessary risks. He would tip the balance of the bank’s revenue away from dealmaking and one-off transactions towards long-term, repeatable fees. He also encouraged his bankers to target hungry young entrepreneurs, who could amass their own fortunes. The right entrepreneurs were little gold mines, just waiting to be tapped. These people could become a huge source of fees – for private bankers, the smooth-talking schmoozers who act as personal financial planners to the bank’s ultra-wealthy clients; and for the investment bankers, who made money from helping to arrange loans and equity investments that new businesses need to keep growing.
Lex Greensill, with his burgeoning finance business, was right in the Credit Suisse sweet spot. Here was an ambitious entrepreneur with a track record of attracting waves of cash. He would be a lucrative personal client; Credit Suisse assigned Shane Galligan, their top private banker in Australia, to look after him. Lex was also building a major business that needed all the usual corporate finance services the bank could provide, such as loans and cash management. Finally, Greensill Capital was growing fast, which meant it was raising money, either privately, or potentially through a big initial public offering (IPO). There were huge advisory fees to be made in meeting Lex’s debt and equity fundraising plans. In short, Greensill equalled fees galore for everyone.
There were other factors at play. For one, Galligan, the private banker who personally worked with most of Australia’s billionaires, also counted Sanjeev Gupta as a client. The bank had provided Gupta with a mortgage on his A$35 million Sydney mansion. Lex also had on his side a deep inside connection at Credit Suisse. David Solo, the American banker who had been one of Greensill’s earliest backers, had become the chairman of Systematic Investment Management AG, a quantitative investment business that was funded by Credit Suisse and which counted on its board Michel Degen, the head of Credit Suisse asset management for Switzerland, Europe, the Middle East and Africa. Solo’s link to Degen proved critical in getting Credit Suisse’s backing for Greensill. (Systematic Investment Management, known as SIMAG, was supposed to conjure up investment ideas that could survive any market crisis, using physics, complex self-organizing systems, and behavioural science. Instead, it struggled to cope with the turmoil of the global pandemic. In October 2020, Solo left the business and Credit Suisse folded it into another fund.)
There were Greensill sceptics at Credit Suisse, for sure. Bankers who worked with insurance companies who had dealt with Lex had heard of his reputation for pushing the boundaries and for lending to borrowers who defaulted all too often. They knew about what had happened at Tower Trade and Dragon and elsewhere. Others with connections at GAM had heard some of the inside stories about what happened with Haywood and his Greensill investments. Some bankers on the trade finance desk were also well aware of Lex’s growing reputation for writing deals that seemed to hide the true nature of the dangers involved or accepting levels of risk that were not compatible with a highly regulated financial institution. Some of them spoke up. But Greensill – Lex and the business – were too good a fit for the new direction at Credit Suisse. None of the concerns carried enough weight to block the Greensill pitch.
The Swiss bank started with a single Greensill fund in 2017. In a glossy magazine the bank published that year and distributed to its high-net-worth clients, Credit Suisse executives gushed over the promise of supply chain finance. The article, headed ‘Good Mood Included’, emphasized that these were safe, reliable investments with a broad benefit to investors and corporate clients alike.
SCF funds were ‘short-term, low-risk investments that feature attractive returns’, according to Luc Mathys, the head of fixed income in Europe, Middle East and Africa. Lukas Haas, the portfolio manager of the funds, said they ‘have a term structure similar to low-risk money market instruments.’ Eric Varvel, the bank’s global head of asset management, wrote about how SCF could help clients of the bank ‘gain an edge through this innovative concept’, while investors could ‘invest their funds on a short-term basis, similar to the money market, and achieve attractive returns.’
The glowing endorsements from some of the most senior bankers didn’t end there.
A full-page chart explained ‘How Buyers, Suppliers and Investors Benefit’. The benefits apparently included reduced risk of bankruptcy, greater transparency, more liquidity. None of them really turned out to be true. At least not in the case of the Greensill funds.
The article included an example to illustrate how the funds worked.
Imagine a supplier delivers goods valued at $10 million, and sends an invoice to the buyer demanding payment in three months. The buyer approves the invoice to Greensill and provides a promise to pay the $10 million in three months. The supplier then sells the debt it is owed – the trade receivable – to Greensill for $9.9 million, which is paid immediately. Greensill transfers the trade receivable to an SPV that creates and issues a note, which is bought by the SCF fund. Insurance covers the risk of a default. And after ninety days, the buyer pays the agreed $10 million into the SPV. When the note is due, the SPV pays out to the fund. Bingo.
The magazine even included a full-page photo of Lex, grinning like Time magazine’s person of the year, in a dark blue suit, crisp white shirt and perfectly knotted crystal-blue tie. His bio included the MBA, the law qualification, his stints at Morgan Stanley and Citi and in the UK government. It also said: ‘He advised both Downing Street and the White House on the launch of their own supply chain finance initiatives.’
Lex talked gushingly of democratizing finance, of having small businesses close to his heart, though he also said that clients were typically large multinational companies. The returns on offer are ‘hugely attractive’, he said, as are ‘the short duration and insurance cover of the underlying notes.’
The article said that Greensill Capital had started out with ‘a seasoned team of specialists’ and had grown to more than 160 staff in London, New York, Chicago, Frankfurt, Sydney and Mexico City. They had loaned more than $25 billion to companies in more than forty countries. What it didn’t say was that Greensill Capital at that point had racked up accumulated losses of more than $100 million.
With the full support of the Swiss bank, interest in the funds swelled. The bank, with Greensill, launched another, and another, and eventually a fourth fund. By the end of 2019, there was about $10 billion of client money in Credit Suisse’s SCF funds, which all invested exclusively in assets sourced by Greensill. The bank was making tens of millions of dollars in fees, and the claims that Mathys, Haas, Varvel and Lex himself made in the glossy magazine were echoed in marketing materials distributed to potential clients too.
Credit Suisse fact sheets scored the funds as a 1 or 2 on a scale of 1 to 7, where 1 is the safest. The fact sheets said that investors could withdraw their money weekly or monthly, depending on the fund, with just a few days’ notice. The larger funds that mostly stuck to investment-grade borrowers – big, safe companies that were very unlikely to default – offered a meagre return of 0.8 per cent to 1.5 per cent more than the benchmark short-term interest rates, while a so-called ‘high income’ fund that worked with riskier borrowers offered returns of 3.5 per cent above the benchmark.
More marketing materials that Credit Suisse bankers shared with potential investors said the funds had ‘multiple layers of protection’, with the investments secured by claims against the borrower and in some cases guaranteed by a broad group of insurance companies.
A promotional document said that ‘all the supply chain programs [sic] undergo a rigorous onboarding process including legal and risk checks’, and that the investments ‘have to meet predetermined criteria concerning e.g., credit risk . . . otherwise the trades are rejected by the portfolio manager.’
There were risks – the funds ‘may at certain times have a relatively high exposure to a small number of obligors’ and ‘there is no guarantee that either the obligor or the associated insurance contract pays in full and on time.’
But several pages of charts with dotted lines and arrows flying back and forth tying SPVs to underlying obligations indicated to any reader that Credit Suisse and Greensill were smart. Greensill, the document points out, was backed by giant, global investors. Investors could get their money back with just a few days’ notice. What could possibly go wrong?
IN INTERVIEW AFTER interview, Credit Suisse executives were always clear that the funds were only ever sold to qualified investors – conjuring up the image of sophisticated pension funds or sovereign wealth funds with armies of accountants and experts managing money on behalf of an entire company or country. Or super-wealthy individuals who can afford to hire the best advisers, and who ought to know what they’re getting into. Some of the investors in the Credit Suisse funds even took a long hard look at Greensill itself, spending months combing over its accounts and business practices before committing to the funds. So sympathy was likely to be in short supply for this group of clients. If the funds they invested in got into trouble, well, they would only have themselves to blame.
But the reality was different. Many of the investors in the funds were not sophisticated and didn’t have the resources to carry out their own detailed due diligence. Few of them could possibly have understood the risks inherent in the insurance arrangements of the funds or the true nature of some of the underlying borrowers.
Some pension funds, especially smaller ones, are staffed by accountants who don’t have specialist expertise in complex financial instruments. They rely on outside advisers – including their bankers – to help them wade through a confusing landscape of legal and financial chicanery. Greensill’s web of SPVs and insurance contracts was nothing if not complex. Several big pension funds and institutional investors refused to put money into Greensill investment on those grounds alone – reams and reams of complex legal documentation just to make a few basis points more than you’d get from keeping your money in cash? It just wasn’t worth the hassle, or the risk that there was something hidden deep in the legalese jargon.
The bank’s individual private clients are heavily reliant on the advice they get from their expert banker to make those sorts of decisions. These people are not always financially sophisticated, even if they’ve personally made a lot of money. Some of these investors may be entrepreneurs who have run complex businesses. But there are plenty of others who have inherited their money or earned it in a world far from finance.
While some of the investors were certainly big institutions, most investors on average had a stake closer to just a few million dollars. These are still large sums to ordinary people. But an investor with a few million dollars could be a small-time entrepreneur, or might have inherited a windfall, or they could have sold a property in London or Paris and need somewhere safe to park the funds for a few weeks. It is unlikely people like this would have their own team of super-charged financial experts poring over every detail of Greensill, the underlying obligors, or the minutiae of the relevant trade credit insurance documents. They relied on their private banker for that.
Many of these people are looking for somewhere to preserve their savings and come to a bank like Credit Suisse precisely because they are seeking good advice. Often, they have been introduced by a friend or business associate to a private banker over dinner at a nice restaurant. Sometimes, they’re invited to the banker’s home. The banker talks about the Swiss bank’s funds and asks questions about the prospective client’s investing ‘style’.
The Middle East became a key market for selling the Greensill funds. Credit Suisse has an extensive network of private bankers in the region. Some of those clients were persuaded to take out loans to generate bigger returns for their stake in the funds. Sometimes they were told to borrow as much as 60 per cent more than they had invested in cash. Wealthy clients of the bank can borrow money at a low interest rate and invest it into a fund that pays a slightly higher rate. That way they’re effectively getting paid for nothing, though if the investments go bad, they’re on the hook for their own investment plus the total of the loan. It’s a way to juice the potential reward, though at some considerable risk.
There were, the bank told clients, three layers of protection. First, the investments were backed by actual receivables payments, meaning that there was something tangible to hang the loans on. Second, there was due diligence on the obligors, to ensure they were sound businesses able to pay back the money they received. And third, there was trade credit insurance that would pay out in the event of a default. What’s more, all these loans were very short term, another sign that they were relatively safe compared to other investments.
With such a safe investment, a client could be persuaded to put all their cash and similar investments into the funds.
But clients who read through the marketing materials could miss the role of Greensill, might fail to grasp that Greensill was the policyholder on the crucial trade credit insurance, and not understand that Credit Suisse was doing very little due diligence of its own on the loans it was making, or on the businesses of the underlying obligors.
Investors could hardly have known that Credit Suisse had delegated practically all the decisions related to the funds to Greensill. They couldn’t know that Greensill was taking their money and making long-term loans to speculative businesses. There was little to indicate that most of the trade credit insurance – billed as a crucial protection for investors – was sourced from a single, small Australian insurance provider courted by Lex himself.
From the investors’ perspective, they put their money into Credit Suisse funds. In reality, they’d invested in Greensill funds that hid behind a credible Swiss veneer.
For a while, the funds performed as advertised. Until it all went wrong.