Here are a few phrases you may have seen hit the headlines over the last week: ‘Greensill, text messages, David Cameron, Cronyism’. Another equally exciting phrase you may have seen in the same headlines is ‘Supply chain financing’.
Okay, okay, maybe everyone wasn’t as excited as me when they saw the term ‘supply chain financing’ appear in the headlines.
Since I started working in investment I have become embarrassingly excited when something related to my job (either investment-related or pensions-related) hits the mainstream headlines – it feels like I may be getting closer to my friends and family finally understanding what my job is (amma, appa, if you are reading this – no, I am not an investment banker).
The last time this happened was actually fairly recently with GameStop and the reddit forum Wallstreet bets hitting the headlines (#Stonks).
But this story is full of masala for everyone – it has all the spices to make a good headline – cronyism, corruption and a bit of straight up stupidity on behalf of a former prime minister.
During the pandemic I’ve been using my time really productively – I’ve been binge watching lots of trashy movies on Netflix - so I thought I’d put my new found movie knowledge to some use and present this story in the form of a movie (hit me up Hollywood for the rights!).
Let’s start by introducing the key cast to the story:
The cast
1. Lex Greensill
The titular character of the movie: Lex Greensill starts his life in Australia, as the son of parents who owned a sugarcane and melon farm. There’s an important bit of backstory where his parents struggled financially when they were not paid in time for the goods they had produced on their farm. This melon detour may seem irrelevant, but it becomes extremely important when we meet the next main character of the story: ‘Supply Chain financing’.
Greensill later becomes a banker, working in the UK offices of various banks including Morgan Stanley, Citigroup and JP Morgan. At this point, he lives a lifestyle very different to that on the melon farm, owning multiple private jets and living lavishly.
In 2011, he founds his own firm, Greensill capital – remember that name as it will play an important part to the rest of the story.
2. Supply chain financing
Supply chain financing is introduced as the central character in the story – but over time her role becomes corrupted and she morphs into something different.
But lets talk about what she’s meant to be.
The idea of supply chain financing is based around a small company that produces goods or services for a larger company getting paid on time.
For example, the small company could be a family-owned melon farm (I told you that bit was going to be an important!) and the large company could be the supermarket that they supply their melons to.
Without supply chain financing, the melon farm is reliant on the large supermarket for paying them on time – and if the large supermarket doesn’t pay them on time, perhaps because it needs to wait to receive cash from another source in order to pay its melon supplier, then the melon farmers are in a bit of a sticky situation.
Enter supply chain financing – in this process we introduce a middle man to the relationship between the melon farm and the large supermarket. This middle man is usually a bank. The large supermarket effectively takes a short-term loan with the bank so that it can pay the melon farm immediately, using the money from that loan. The large supermarket then pays back the bank when it has the cashflow to do so. The supermarket will pay a small fee to the bank in order to do this – usually around the region of 0.05% of the value of the loan.
The melon-farmers don’t have to go hungry because they get their money in time, the middle man bank gets a little bit of cash in the form of the fee for providing a loan that is deemed to be very low risk, and the supermarket is able to maintain a positive relationship with its melon supplier.
All in all it sounds like a win-win-win situation – and supply chain financing in her pure form is not the villain of this story. The villain is what the other characters morph this process into (cue dramatic music DUN DUN DUNNNNNN).
3. David Cameron
Former prime minister of the UK, you may remember David Cameron from some of his cameos in other movies such as ‘Brexit: a tale of referendums and resignations’, ‘Tory origins: The Bullingdon Club’ and the more controversial ‘PigGate’.
Cameron’s role in this saga begins as the prime minister of the UK. His role evolves over the course of the movie – from Greensill lobbyist, to Texty McTextman to his current role – the headlining disgrace.
4. Jeremy Heywood
Jeremy Heywood was a civil servant who worked as the cabinet secretary to David Cameron. He was considered to play an integral role in running the country during his life, and has been nominated with a number of different honours. He passed away in 2018 and so was not able to comment on the headlines that we have been seeing this week.
Between 2003 and 2007, Heywood worked for Morgan Stanley where Greensill was also working at the time.
Heywood’s role in this story is important, because he is the person who Greensill approaches with the idea of supply chain finance lending, which Heywood wholly endorses (obviously not knowing what it will morph into …. DUN DUN DUNNNNN). He plays a key role in lobbying the government to engage with this in the first place.
5. Sanjeev Gupta
Sanjeev Gupta only enters the story in Act 2 – but he plays an important role.
He is the CEO and chairman of GFG Alliance, an international conglomerate that mainly operates in the steel and mining industries.
We will see GFG and Greensill get into some dodgy dealings as the story progresses.
6. Crow Neeism (Say it out loud)
Ms Crow Neeism seems to be a ubiquitous feature in parliamentary cinema this year. Her roles have mainly been within the pandemic genre - Keir Starmer, leader of the Labour party summarised her performances with the following tweet:
‘In the last year, £2bn of taxpayers’ money has been spent on products and services provided by firms with a financial or personal connection to the Conservatives.’
We saw Ms Crow Neeism raise her insidious head as part of the contracts for PPE (which were predominantly awarded to people with connections to those in parliament without any sufficient competition or tender process), as well as defective Covid-19 testing arrangements and the infamous free school meal contract.
She lurks in the background for most of this story.
Act 1 – the setup
Scene 1 – How Greensill grasps the government
After getting to know each other during their respective times working at Morgan Stanley, Heywood and Greensill both take different career paths.
Heywood goes back to government, and continues to pay a key role there.
Greensill works for Citibank for a brief period, and then starts his own firm: Greensill capital.
Greensill is passionate about the idea of supply chain lending and wants to use his firm to do this. He pitches the idea to Heywood, who sees it as a ‘win-win’ situation and strongly encourages the government to get on board with the idea.
At this point, the government does do some due diligence and research into the idea of it and establishes that it is a good idea, in line with their general values around supporting small- to medium-sized businesses.
However, now Ms Crow Neeism sneaks onto the stage (okay we are mixing metaphors, it’s a theatre now). Rather than undergoing a tendering process, or working with a number of different banks to set up these supply chain finance systems, the government seems to be predominantly working with Citibank and Greensill itself.
Another red flag appears – Cameron and Greensill seem a bit closer than they should be. Greensill now has an office and business card with the 10 Downing Street label (remember business cards – those things we used to exchange with a germ-transmitting handshake in pre-pandemic days…I almost feel nostalgic for them).
But the red flags are small and Greensill is not getting paid in his capacity at 10 Downing Street – it is not clear at this point where his income is coming from but at least it’s not being funded by taxpayers’ monies.
Scene 2 – Cameron resigns.
Cast your mind back to what feels like a century ago: 2016. In more innocent, germ-ridden times a historic event takes place in the UK: The EU referendum. Cameron campaigns to remain, but loses when the results of the referendum come out as being 52% leave.
For some reason that is either about his own intergrity or about not wanting to clear up the mess and division he caused by introducing this referendum, Cameron resigns as prime minister.
And guess what he does next?!
His next role is as a lobbyist for Greensill capital. He is on Greensill’s payroll, and owns Greensill stock options worth tens of millions of pounds.
So things are starting to feel a little bit dodgy and we can definitely see Ms Crow Neeism dancing around in the background (yeah this is a musical now).
But the real dodgy dealings take place in Act 2.
Act 2
Scene 1 – Greedy Gupta, Greedy Greensill
So the intermission has taken place, and we now are introduced to a new character – Sanjeev Gupta aka the mining mogul – remember him from the intro bit?
He’s the CEO of international conglomerate GFG Alliance which mainly functions in the mining and steel industries (hence my catchy ‘mining mogul’ nickname…).
Greensill starts providing financing via its supply chain financing structure to GFG Alliance. There are two dodgy things it does here.
1. Overlending - Greensill is meant to have a rule where it will not lend more than £50m to any one company, in order to reduce the concentration of risk within its portfolios. But because the mining mogul’s company is a conglomerate, it is considered to be a collection of different companies – so Greensill actually uses this as a loophole to provide GFG with over £250m of financing funding.
2. Recognising fake services – the idea of supply chain financing is making loans to companies to pay them for a service they have already provided to another company. Given that they have already provided this service, this is considered to a be a really low-risk, secure investment – akin to government bonds. But Greensill starts doing something a bit dodgy with GFG. It starts providing financing for services that have not yet been provided – for services that are not expected to be provided for another few years. This is not in line with the guidelines of what supply chain financing is supposed to do.
And this is affecting multiple parties – including institutional investors. Greensill starts collecting pools of these supply chain finance loans together and selling them as assets to institutional investors – a process known as securitisation. Now there is nothing wrong with the idea of securitisation, and there are a lot of great providers of securitised credit and loans that do deliver consistently high risk-adjusted returns.
But something we have learned from the sub-prime mortgage crisis of 2007-2008, which involved securitising pools of dodgy mortgages, is that it is really important that due diligence is done on the underlying loans to ensure there isn’t too much risk being taken – and this is definitely something that Greensill missed out. Because the technical term for the loans underlying the securitised assets that Greensill was providing to investors is: MEGA DODGY.
If only Greensill had done what I do every time I get bored trying to revise for my CFA exam: sat down and watched ‘The Big Short’ (I like to pretend it counts as studying) – he may have realised that his firm was replicating mistakes that we saw made not that long ago.
Scene 2 – the collapse
Spoiler alert, but surprise surprise, these dodgy dealings end in a similar way to the plot of the Big Short – with utter collapse.
Greensill ends up having to file for bankruptcy.
Auditors start going through the finances of Sanjeev Gupta’s company, GFG Alliance. They find that GFG has been falsely characterising future payments – the same future payments that Greensill has then been providing supply chain financing for. In fact, there are companies listed on GFG’s balance sheet that report never having done business with GFG at all: mega dodgy stuff – and who said audit was boring!
GFG’s UK wing has not yet filed for insolvency, but it looks like it most likely will.
When it does, this is likely to cost an estimated 55,000 jobs – the jobs of ordinary people who pay their taxes, don’t have crony connections in government and probably haven’t even heard of supply chain financing.
Scene 3 – Cameron’s return
Now during the whole of scenes 1 and 2, Cameron has been lurking in the background acting as a lobbyist for Greensill – a role that is currently considered completely legitimate in the course of our democracy but something that may start receiving more scrutiny in the future.
As I mentioned earlier, Cameron has some major dollar in stock options with Greensill, so he does not want Greensill to lose all his value.
So this is when Cameron takes on the role of Texty McTextman.
Now personally, I use messenger to send memes to my friends, receive extremely random videos from my parents and get my sister to send me reels and reels of photos of my family dog, Mulu.
Cameron on the other hand uses his messenger for different purposes – he uses it to get in touch with his old pal Rishi Sunak, chancellor of the Exchequer, and various other Treasury members, to see what they can do to help Greensill.
He wants Rishi and his pals to give Greensill access to some of the Covid financing schemes that have ben set up to protect businesses whose cashflows have been impacted by the effect of the pandemic.
The idea of these schemes is to provide these businesses with short-term loans so that they can continue functioning while they recover from the pandemic.
These schemes are not meant to be used to protect companies who have gone bankrupt due to their own dodgy dealings – dodgy dealings which are causing the value of Cameron’s own stock options to plummet.
Now of course, these texts have now been leaked, and the whole story is getting a lot of scrutiny.
And this kind of brings us up to where we are in the movie so far – act 3 will only be written once we see what the next steps will be.
Will there be a big inquiry into cronyism and informal arrangements within our government?
Are there certain regulatory bodies who should be accountable for ensuring these kind of things don’t happen?
What is the impact of this crisis going to be for institutional investors, for those who had exposure to Greensill in their portfolios, possible unknowingly?
Will this crisis affect sentiment around securitisation again, like we saw following the 2008 Global financial crisis? (the one in The Big Short)
What will the impact on the wider economy be, on society, on politics?
There are a lot of important questions that I don’t have the answers to yet – perhaps these will follow in the sequel to this movie – after all, if there’s one thing we all learned from Shrek 2, it’s that the sequel can be even better than the original.