Credit Suisse, Greensill & financial innovation gone wrong

Yesterday was a bad day for Thomas Gottstein, CEO of Credit Suisse. Having taken the job last year and promised to move the bank to a “growth phase” in 2021, he’s now faced with a mini-financial crisis in the form of $10bn of funds linked to Greensill Capital, which the bank yesterday suspended redemptions on.

As is often the case, Gottstein’s difficulties are born of financial innovation gone awry. In this case, the innovation was around the commonplace practice of ‘invoice discounting’, under which lenders provide funding to companies to pay invoices early and at a slight discount. The company later pays the bank for the full invoice, and the lender pockets the difference.  

This is the fundamental activity of Greensill Capital, a provider of ‘supply chain finance’ which sounds like it should be an ESG fund, but isn’t. Greensill’s problem is that up to two thirds of its loan book (based on a report from Scope ratings in 2019) is based on invoice discounting loans made to British steel magnate Sanjeev Gupta, whose opaque business empire is subject to increasing regulatory scrutiny.

Credit Suisse comes into the picture because Greensill hasn’t been keeping its invoice loan book on its own balance sheet. – It’s spent the past few years packaging up its loans into bonds and selling them to vehicles like Credit Suisse Asset Management’s Supply Chain funds. Credit Suisse manages four such funds, and they rely almost entirely on the ‘debtlike securities created by Greensill’ according to the WSJ. 

The current crisis surrounding these funds has come to a head following what Credit Suisse yesterday described as “considerable uncertainties with respect to their accurate valuation,” which itself seems to be the result of expiring insurance policies that previously covered Greensill for defaults on its assets. Now that Credit Suisse has suspended redemptions in the funds and won’t be buying any more Greensill bonds, Greensill may reportedly file for insolvency within days and founder Lex Greensill, who previously worked for Citi and Morgan Stanley and who has an MBA and something called ‘Most Excellent Order of the British Empire’ awarded to him by the Queen for ‘services to the economy,’ won’t look so shiny after all. 

Also less shiny will be Gottstein’s Credit Suisse, left holding $10bn of Greensill-linked bonds of highly indeterminate value. SoftBank is reportedly thinking of writing down its investment in Greensill to nothing at all. Colin Fan, the former head of trading at Deutsche Bank who joined SoftBank’s Vision Fund in 2017 was reportedly behind the investments in Greensill, which might explain why Fan left SoftBank in January. There should surely be some exits from Credit Suisse too.

Sarah Butcher –


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