Lex had built a business that avoided the toughest regulators. Greensill’s parent company was registered in Australia, but mostly operated elsewhere. The Australian securities authorities left it alone. His auditor in Australia was a tiny firm called Nexia Sydney that had only a few million dollars in revenue.
Greensill’s operations were run out of the UK, where the company was registered with the Financial Conduct Authority through a so-called registration agent – a kind of outsourcing shell that offers a light registration, typically for very small hedge funds and individuals who don’t want to go through the costly and time-consuming red tape of a full registration. His UK auditor, Saffery Champness, was relatively small too, lacking the scale to typically work on a multinational client running billions of dollars of transactions.
The funds Lex operated with Credit Suisse were registered in Liechtenstein and Luxembourg, where the regulators didn’t have oversight across the whole Greensill business. Swiss regulators kept an eye on GAM and Credit Suisse, but they weren’t keeping tabs on Greensill.
The European regulator with a reputation for being among the most toothless, however, was in Germany. BaFin, Germany’s banking regulator, was heavily criticized for its role in the downfall of Wirecard, the credit card payments company that, like Greensill, had once been backed by SoftBank. Journalists at the Financial Times had spent years writing critical stories about Wirecard, only to face a concerted effort by the company, German authorities and large swathes of the German establishment to undermine their work.
In 2019, I found out that Greensill had taken a huge new round of funding – from the SoftBank Vision Fund – and parked it in the bank. The press release announcing the funding round had talked about using the money to ‘accelerate new technology’ and expand into emerging markets. In fact, the money was mostly sent straight to the bank. ‘I can’t hide from the fact that’s what I have done,’ Lex told me. He said that putting the money there was more efficient than trying to build the business in China or India, and that it could provide a buffer for a potential economic downturn. ‘My board and I are pretty bearish about the economy going forward,’ he told me. Having a bank ‘with oodles of cash’ was a hedge against the uncertainty ahead.
In that interview, there was also a stunning admission, one that revealed the true purpose of Greensill Bank. It was, Lex told me, ‘as much as anything a warehouse that provides us with the ability to manage the liquidity requirements of our business.’
In other words, Greensill Bank would buy the loans Lex was selling even when no one else would take them off his hands.
Greensill Bank, which was regulated by BaFin, grew rapidly after Lex bought it. He had used a good chunk of the SoftBank money to build its balance sheet, and then attracted more money from ordinary Germans, as well as German town councils. The bank pulled in huge amounts of deposits by offering interest rates that were better than you could get elsewhere. Then Lex used the bank to buy loans that couldn’t be squeezed into the Credit Suisse funds, especially loans to Sanjeev Gupta’s business.
The challenges arising from this period of supercharged growth were everywhere. A report on the bank by credit rating agency Scope in August 2019 said that ‘the ambitious growth strategy requires the group to invest heavily in staff, systems and processes.’
The bank was heavily reliant on other people’s technology. It depended on platforms such as Taulia’s and others to originate, structure and service loans. Because it did not have a big network of branches, it had to rely on external platforms and brokers to attract deposits. Its assets were narrowly focused too. Scope reported that in August 2019, two-thirds of the loans it had made were to parties connected, one way or another, to Sanjeev Gupta. There were mitigating factors that reduced the risk of too much concentration. Almost all the loan book was covered by insurance. And the Gupta Family Group-related business was mostly receivables financing, meaning the money was owed to the bank by a diverse range of businesses. Still, the transactions that were financed by the bank were all related to GFG, meaning that Greensill Bank was little more than a funding source for GFG’s operations.
The injection of capital from SoftBank money had certainly seen Greensill Bank grow at a rapid clip. Its loan book was just about €200 million in 2016, but it had grown to about €2.8 billion by the end of 2019, according to research from Scope Ratings.
BaFin’s leadership was suspicious about Greensill Bank. Having been caught out on Wirecard, they would hardly want to be in the same position again. They were particularly concerned about the exposure the bank had to Gupta’s companies.
The German regulator initially started to make inquiries about Greensill as early as the start of 2019. At first, these were fairly benign questions about Greensill’s ownership structure or the insurance coverage that Greensill had in place to protect bank depositors. Greensill was able to deter further probing by providing a self-certification that the insurance policies were adequate.
BaFin’s inquiries ramped up a few months later. In January 2020, BaFin contacted the Financial Conduct Authority in the UK. The German regulator was keen to know what to make of what had happened at GAM in relation to Greensill. Shortly afterwards, the German regulator received the first in a series of whistle-blower tips, alleging there was a fraud at Greensill Bank.
The allegations from an anonymous whistle-blower were serious. Someone inside the bank claimed to have knowledge of wrongdoing connected to loans the bank was making to its biggest – by some way– client, Sanjeev Gupta. The allegations included the suggestion that some of the loans were not backed by real invoices, as was supposed to be the case. In fact, they were backed either by fake invoices or by nothing at all. All of that would mean Greensill Bank’s balance sheet was far weaker than it looked. Depositors’ money was being handed out to a single, rather tenuous, steel and metals business in the form of effectively unsecured loans. It would put at serious risk money deposited at the bank by ordinary German citizens and municipal governments too.
Over the next few months, BaFin received several more tips from the whistle-blower. Some of these focused on Greensill Bank and the loans to Gupta. They pointed to more fake invoices and more unsecured loans. Other whistle-blower tips came in, making allegations focused more broadly on the financial health of the bank’s 100 per cent owner, Greensill Capital.
By March, the regulator was considering asking Greensill to bulk up the amount of capital held at the bank, to further safeguard against the risk of a major blow-up. BaFin’s supervisors had also told Lex Greensill and the bank’s senior managers that they had to reduce the amount of exposure the bank had to Gupta.
Through May, June and July, the regulator had monthly calls with Greensill’s board and management to get an update on efforts to reduce the GFG loans. The regulator also sent a series of letters to the management of Greensill Bank. BaFin repeatedly complained that some of the bank’s senior executives were not properly qualified. They warned of a series of governance violations. And they started demanding more and more information from Greensill Bank.
WITHIN GREENSILL, THE problem with the bank’s exposure to GFG had been on the agenda for at least a year. It was in the reports that Downes’s team submitted to management meetings, which had noted that most of the loans the bank made were to GFG, and that many of those were backed by so-called future receivables.
By the time BaFin was asking for regular updates and launching its task force, though, Downes had been put on leave. The subject still came up at management meetings. Some of it had leaked into the media – reporters from Bloomberg had first published a story about BaFin looking at Greensill Bank in the summer. When I and other journalists asked Lex about these leaked reports of an investigation, he would get tense. Either Lex or Doran would then insist that there was no special investigation, that the German regulator’s questions were just part of its regular oversight of all the banks it supervised. This was patently false.
At that point, management meetings were still on Zoom. Whenever one of Greensill’s managers asked about the German investigation, Lex would repeat the same mantra: ‘We’re all set with BaFin.’
Except that they were not. His risk management team – inexperienced, with their leader Downes gone – was left to pick up the pieces. While Lex would insist all was fine, the team would discover the reality on their own calls with BaFin. The regulator wanted more information, more action. They wanted the GFG loans to go away.
While Lex remained outwardly calm and in control, the BaFin probe was potentially life-threatening for Greensill. The Germans wanted him to reduce the proportion of assets tied to Gupta from about 90 per cent of the assets in the bank to around 30 per cent.
Lex had other sources of financing. Greensill sometimes placed supply chain finance programmes or other assets directly with a handful of big banks, including Lloyds of the UK, Mizuho and Sumitomo of Japan, and BBVA of Spain. These banks would buy billions of dollars of assets between them. But they were only interested in the best, blue-chip stuff. They wouldn’t take Gupta debt.
His other pool of available cash was the Credit Suisse funds. He could hardly hide the Gupta loans there. For starters, the Credit Suisse funds were already stuffed with vast amounts of lending to Gupta companies. The ongoing investigation into those funds – provoked by the piling up of loans to Vision Fund companies – meant it was definitely off-limits for more controversial assets. Lex couldn’t place more GFG debts there without attracting further unwanted attention to the funds.
In June and July 2020, Lex told Neil Garrod, the CFO, and Wasif Raza, Greensill’s head of distribution, to investigate alternative sources of funding. The two put together a report that went to the board and senior management. In theory, the report was supposed to be looking at ways to expand the available funding to cover the expected growth in Greensill’s business. In reality, it was a scattergun review of the possible escape hatches that could deliver Lex from another looming crisis.
The Greensill team figured they had a little under $25 billion in available funding. This included all the Credit Suisse funds, all their banking relationships, the rump of the GAM Greensill Supply Chain Finance fund (GGSCF), which had somehow survived the Haywood debacle, and Greensill Bank. But $23.5 billion of that funding capacity was already invested in assets. There was very little spare capacity, and not enough funding even to hit Greensill’s revenue target for the year. To meet that goal, they’d need to find about $6 billion in funding from somewhere, according to Garrod and Raza’s calculations.
There were several short-term options under consideration. These included a new securitization programme with Mizuho and Lloyds, and a new facility potentially provided by a combination of Morgan Stanley, Barclays and BNP Paribas that would finance cash advances through a government Covid-19 loan scheme. They also hoped to boost Greensill Capital’s own balance sheet by $500 million by issuing bonds in the company. It wasn’t clear whether any of these could really be delivered or whether they were just pipe dreams.
A longer-term plan seemed even more ambitious. By the end of 2023, Garrod and Raza’s report said, Greensill aimed to have access to $91 billion in funding. Some of this, they said, would come from Credit Suisse. They projected the bank’s Greensill funds would grow to more than $15 billion, partly because Credit Suisse was planning to market the funds in the US. They planned for Greensill Bank to provide $7 billion in loans. There’d be more funding from bank partners too. Where would the rest come from? Even if the existing sources of funding grew at the aggressive rates that the Greensill team projected, they’d still need to find about $45 billion in new funding sources to hit their targets.
They came up with another ambitious list. They wanted to build $9 billion worth of new funds, like the Credit Suisse funds, and identified giant asset manager BlackRock and Spanish bank Santander as the likely partners. They planned to develop more investment-grade rated securities, by putting insurance wrappers around the underlying loans to non-investment-grade companies. They also planned to convince the rating agencies to attribute ‘shadow investment-grade ratings’ to assets that weren’t investment grade and didn’t have an insurance wrapper either – Raza and Garrod acknowledged this would be a challenge, but told Lex that ‘the prize is sufficiently large that this is a route we must pursue.’
The biggest source of funding – the big prize – was to tap the US capital markets. Though Greensill loaned money to plenty of US clients, it had not been successful trying to tap US investors. US regulations stated that they would have to retain at least 5 per cent of the credit risk of any assets they securitized. Greensill didn’t have the balance sheet to do that. Garrod and Raza’s report said that the firm could not afford to ignore the US for much longer if it wanted to hit its growth targets.
They also proposed buying several commercial banks – a move that would bring ‘unfettered access to central bank balance sheets, which has proved so illusive [sic].’ At least in this case, Garrod and Raza acknowledged that it could take years to pull it off.
Given everything Greensill was facing at that time – the BaFin investigations, the investigation at Credit Suisse, the governance issues on top of growing pains – it was an astonishingly optimistic plan. Some of the board and senior management thought it was delusional. These weren’t plausible ideas to address Greensill’s many problems. Raza and Garrod were just delivering what Lex wanted to hear, regardless of the blunt reality. Greensill had become like a cult, where no one wanted to upset the leader.
At the same meeting in which Raza and Garrod mooted their ideas, another report was presented, looking into short-term funding mismatches. Greensill had what it considered ‘committed facilities’ of $3.3 billion to seventeen clients. These were longer-term lending commitments that the firm was legally obliged to fulfil. The average remaining length of the loan commitments was twenty-one months, though some were considered ‘evergreen’ – essentially loans that never matured. The report, from a member of Garrod’s team, said that Greensill had ‘reasonably permanent’ funding sources of $7.7 billion – theoretically plenty to cover its commitments. But there was a potential pitfall: some of the ‘reasonably permanent’ funding could not be deployed quickly enough to cover ‘the more uncustomary credits that are commensurate with the majority of the Committed Facilities’. This tangle of jargon meant that the long-term commitments were largely loans to the likes of Bluestone, GFG, the SoftBank Vision Fund companies and other potentially problematic Greensill clients. Some of these long-term loans were hard to fund out of the longer-term funds Greensill could access. There was no real solution to this problem, other than crossing your fingers and hoping the mismatch never came to fruition.
Meanwhile, BaFin’s focus on Greensill Bank was not wavering. Far from it.
In July 2020, BaFin put together a special task force that would be entirely focused on getting to the bottom of the issues at Greensill Bank. In August, the regulator sent a list of detailed questions to Lex. They wanted to know more about the business model, about the ownership structure, and the loans he made. That month, BaFin also reported to Germany’s Ministry of Finance on its ongoing investigation into Greensill and GFG.
In September, BaFin sent more questions, and hired the accountants KPMG to start a forensic audit, looking at Gupta loans and pretty much everything else.
While Lex continued to downplay the regulator’s questions, it was clear that they weren’t going to go away. The only solution would be to reduce the amount of exposure Greensill Bank had to GFG. Even that might not be enough.
On 15 December 2020, Lex, along with the management and directors of Greensill bank, were summoned to a video conference with BaFin’s representatives. The regulator asked yet more questions – about the business model, about the loans to GFG, about the measures it had demanded in terms of restricting further loans to Gupta.
When the first draft of KPMG’s special audit report landed at the regulator a few days before Christmas, it was damning. The auditors had found plenty of reasons to be concerned, uncovering evidence of what they considered ‘serious violations by the management’ of the bank. These included the way the bank was accounting for some of the Gupta-related loans, and how the loans themselves worked in practice. They were supposed to be backed by real transactions, but in fact they were supported by guesstimates of future deals.
These were serious issues. Alone, it could have been enough to kill off Greensill. But there were other terminal problems too.