By early 2020, Lex was living large. The company had four private jets. Lex, his brother Peter, and several other top executives had squirrelled hundreds of millions of dollars out of the company. He had remodelled his Cheshire home and acquired the Queensland beachfront property.
The business was hiring at a clip. Managers were faced with few restrictions or processes to go through. The company’s workforce already numbered a few hundred and was headed towards a thousand employees. Lex signed a lease on an enormous new office in the northwest of England, near his home.
The roster of big businesses and individuals who’d staked their reputations on Greensill was large and growing.
But there were some serious fault lines – and they were starting to widen.
Outwardly, the biggest problems appeared to be a wave of ugly defaults at Greensill’s clients, several of them financed through the Credit Suisse funds. Some of these were long-troubled businesses that finally ran aground. Brighthouse, a UK-based rent-to-own retail business, was a longstanding Greensill client. The Credit Suisse funds had loaned it tens of millions of dollars over several years. Its fortunes had been declining since 2017 after it was accused of charging excessive interest rates, leaving some of its relatively poor customers owing huge debts. The UK’s Financial Conduct Authority (FCA) had slapped Brighthouse with a £15 million fine, from which it had struggled to recover. By late 2019, Brighthouse was barely surviving and it went into administration early in the new year.
Other businesses that Greensill had loaned money to were mired in fraud allegations.
Agritrade was a Singapore-based commodities trading company that Greensill financed out of the Credit Suisse funds. In early 2020, Agritrade ran into financial difficulties. A group of European banks that were owed money by the firm – ING, Natixis and Commerzbank – filed court documents accusing its management of a ‘massive, premeditated and systematic’ fraud. The allegations included that Agritrade had used forged documents to finance the same trades several times over – like getting several mortgages on your house at once. When the firm filed for insolvency, it owed Greensill about $30 million.
Gulf Petrochem, known as GP Global, was another troubled commodities trader, this time based in Dubai. Greensill had loaned GP Global more than $30 million from the Credit Suisse funds. But the company was caught up in a protracted restructuring through much of 2020, while its management, customers and legal advisers fought a very public battle over allegations that some of its senior executives were engaged in widespread fraud, including using fake documents and financing the same transactions more than once.
Greensill was also party to the high-profile default of NMC Health, a Dubai-based healthcare chain and distribution business whose shares are listed in London. In late 2019, NMC was in the crosshairs of Muddy Waters, a US-based investment firm run by an investor named Carson Block, which publishes investigative research on public companies. Block was infamous in investing circles after unearthing a series of frauds at Chinese companies. Typically, his research notes seek to reveal some big accounting fraud and are often characterized by flowery language. Muddy Waters profits from making investments that increase in value when his research goes public and shares in the target company sink.
Regarding NMC, Muddy Waters’ allegations included that the company overpaid for investments, overstated cash balances, and reported profit margins that were too good to be true. Block’s report also singled out NMC’s use of reverse factoring, which, he said, made it hard to tell how much debt the company had taken out. It mentioned the Credit Suisse funds specifically and noted that NMC had been less than forthcoming about the nature of these loan facilities.
Block also told a colleague of mine at Dow Jones US-based investor magazine Barron’s that, ‘Accounting standards don’t really address reverse factoring . . . There’s not necessarily a standardized way to report. That’s the whole point of financial engineering, to take something that’s not flattering and to hide it.’
Greensill had loaned NMC $137 million from the Credit Suisse funds.
NMC was eventually placed into administration and revealed that debts of $2.7 billion had not previously been reported. (There was another oddity about NMC. Companies linked to its founder, Indian businessman B.R. Shetty, were audited by a tiny London accountancy firm called King & King. The same tiny firm, whose main office was based in a trading estate on the outskirts of London, also audited several companies owned by Sanjeev Gupta.)
Between these borrowers, the Credit Suisse supply chain finance funds had loaned well in excess of $250 million. When the Greensill board asked about them, Lex seemed open and direct. They weren’t life-threatening. They were too small for that, and several were covered by trade credit insurance.
But the defaulting loans seemed like a series of toppling dominoes. Each one that fell was a blow to Greensill’s reputation and its relationship with insurance providers and potential funders. After the GAM scandal, Greensill could hardly afford to be linked to another. And while the insurance cover provided a safety net, claiming on it didn’t come without a cost. For starters, Greensill usually had to take a ‘first loss’ – like a deductible on your car insurance. That was painful enough, eating directly into Greensill’s profits. And with each claim, the premiums that insurers would charge Greensill were likely to rise too, cutting into the already fine margins of Greensill’s core business.
Inside Greensill, there were other concerns about several of the companies Greensill had loaned money to. Staff in risk management were worried that invoices from some of these companies all seemed to be very similar. You could see that they all followed the same template. It was troubling. It suggested that maybe the invoices that backed the loans weren’t real.
There were also questions about the amount of exposure that the company was building up to Sanjeev Gupta. But when staff raised their concerns about any of these issues, there appeared to be little appetite for further investigation. At times, the credit risk team would joke that there was no point in their existence at all – if Lex wanted a loan to go through, then it would go through.
One of the loudest dissenting voices was that of Brett Downes, a dour Australian veteran risk manager who had joined Greensill in 2015. He had previously built out Citi’s commodity trade finance business, a type of financing similar to supply chain finance but for traders of raw materials. Downes had been hired by Lex to be the chief risk officer (CRO), and had been given the task of building up a proper risk function, capable of weighing up the various loans Greensill had extended to its clients and assessing what could go wrong. In practice, he frequently clashed with Lex and was frequently overruled by Lex too.
For months, Downes had highlighted the Gupta Family Group (GFG) issue at management group and board meetings, presenting the problem in stark detail. GFG was dominating the assets placed at Greensill Bank – Gupta’s companies accounted for 80 per cent or more of the bank’s assets – and made up more than half the assets in at least one of the Credit Suisse funds. Not only that but 40 per cent or more of the GFG loans in total were backed by ‘Future Receivables’. This referred to one of the most controversial aspects of Greensill’s business, and Downes was highlighting it for everyone to see. Typically, supply chain finance programmes involve extending loans backed by actual transactions – actual amounts owed by one company for goods received from another. Lex and Sanjeev had entered new territory altogether. In order to extend even more financing to Gupta, they’d come up with a new category of loans – they would extend financing based on transactions that might happen at some time in the future. The guesswork to come up with these numbers might have made some sense if it had been based on a detailed analysis of past purchase orders, inventory levels, demand and market prices. None of that was involved. Instead, the future receivables balances were calculated by little more than plucking a number out of thin air.
Downes’s team highlighted several other worries heading into 2020. Greensill was moving too far, too fast. Too many functions were still manual. The company was moving into risky new geographies and its systems were not ready to deal with the consequences. Half of Greensill’s staff had been with the firm only a few months. Key processes were still not up to the level you would expect in a big company, including for data protection, whistle-blowing, and for policies to deal with financial crime, anti-bribery and corruption.
Downes’s team also pointed out problems with key partners. A single insurer, The Bond and Credit Company (TBCC), provided $6.8 billion of cover and needed monitoring. Suddenly, there were lots of loans to other SoftBank Vision Fund companies, many of them start-up companies whose creditworthiness was questionable.
The risk reports also focused on sanctions and anti-money-laundering (known as AML) questions. The complexity and volume of cases were growing rapidly. The team noted that Huawei, the Chinese telecoms business that Greensill worked with through Deal Partners, was under expanded US government sanctions. The reports made specific mention of GFG companies, noting that there were several Gupta-company transactions where one of the parties involved had filed ‘Iran Notices’ with US regulators – a type of required disclosure indicating that you have done business with the sanctioned country. There was no indication of any wrongdoing, but these were serious issues, and the worry was that Greensill’s risk function was struggling to keep up.
The reports show that there was never a shortage of disclosure at Greensill. The board and senior management were furnished with plenty of warnings about the risks the company was facing, whether related to insurance or GFG or bad loans or poor processes. From time to time, someone at a senior level would ask about these issues in a high-level meeting. Lex would always have an answer. The issue – TBCC, GFG, AML – was under control. But the impression from reading these reports was of a business too reliant on a single client, GFG, and too dependent on a single insurer, TBCC. The impression was of a business growing too fast and rapidly running out of control.
Downes was becoming increasingly agitated. As Greensill expanded, the risk of a major issue was rising sharply. Downes appeared to be especially stressed out about GFG. Greensill was lending about $7 billion to Gupta’s companies. And much of that was backed by future receivables. A lot of it was in the bank, but some of it was stuffed into the Credit Suisse funds, often packaged up in the so-called multi-obligor programmes named after streets and districts in Lex’s hometown.
By early 2020, some of Gupta’s businesses weren’t even paying the interest or fees they owed on Greensill debts. Instead, Greensill just kept adding the outstanding amounts to the total owed by GFG, while booking the revenues as though nothing was wrong. Senior Greensill staff sometimes asked Lex about the rising risk of concentrating too much of the business with Gupta. Lex would calmly say that he expected to outgrow GFG. If Greensill became ten times the size it was currently, and GFG stayed the same, then the problem would be ten times smaller.
Lex’s relationship with Downes was increasingly fraught, and the strain was starting to tell on the CRO. Lex and Downes were regularly going toe-to-toe. It sometimes seemed to others as though the two would come to blows.
Downes’s behaviour on calls became erratic. He frequently yelled at junior staff and colleagues. In early 2020, Downes and Lex had another stand-up row. Lex told him he could either walk out, with his shares, or face legal action. In May 2020, the board asked Downes to take some leave. Effectively, they fired him but kept him on payroll indefinitely. At Greensill, he was replaced by his understudy, who had arrived at the firm only a few months earlier. The move did little to ease tension among staff. If an experienced hand like Downes could be sidelined, how could a relatively new joiner – with far less experience – stand up to Lex? What would happen to the overhaul of the entire risk function that Downes had been working on? Who was left who could apply the brakes to Greensill’s reckless acceleration? There were no good answers.
Lex had never showed the risk team much respect. They were like a necessary evil, tolerated but not really listened to. The situation certainly didn’t improve after Downes’s departure. One Sunday, some members of the team called a meeting to discuss a loan that Lex was planning on pushing through. Greensill grumpily joined the call. Before anyone else could speak, Lex set the tone, telling them: staff are welcome to hold a call like this, but I’m the CEO and it will be my decision. Talk for as long as you want, but the decision’s already been made. We’re going to do this deal.
IN MARCH 2020, the global financial markets were swooning over the possibility that the pandemic would stifle the world’s economy and trade. Investors pulled money out of all sorts of funds, including the Credit Suisse–Greensill funds. Billions of dollars left the funds in just a few days. It threatened disaster for Greensill. When investors demand their money back, fund managers are forced to liquidate assets to make the payments. If investors pulled too much money out of the Greensill funds, then eventually the fund managers would find there were not enough good assets left to liquidate quickly. Many of the loans couldn’t be repaid in short order, in ninety or 180 days. Some of them likely would not be repaid in a year, or at all. If the market chaos continued and investors kept demanding their money back, Greensill – and Credit Suisse – would not be able to liquidate enough assets to pay them all back.
Lex increasingly turned to an inner circle, a kind of Star Chamber of favoured Greensill executives, including his chief legal counsel Jonathan Lane, chief operating officer Chris Bates, and vice president Sean Hanafin. It was a dysfunctional group. They were loyal to Lex but had varied knowledge of the business as a whole. Hanafin had only joined recently. The others had been there from the start. As the world moved to remote working, information – which had always been concentrated in and around Lex – dried up almost completely. For the most part, internal communication was reduced to weekly Zoom meetings. Lex would usually show up late, give a rosy view of the business, and end the meeting.
Even as the problems mounted, Lex was presenting a very optimistic picture of the future to senior management and investors alike. He projected revenue doubling every year for years ahead, and the potential for a lucrative initial public offering of the company’s shares seemed just around the corner.
In reality, the business was souring fast. What Lex later described as ‘a perfect storm’ was already brewing.