the big short deja vu

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Many of you will have seen the movie, The Big Short, and undoubtedly watched aghast as the once-feted  ‘masters of the universe’ contrived increasingly complex, fraudulent ‘swap’ products of toxic debt which ultimately caused the financial crash of 2007/8 and almost led to the demise of our whole worldwide financial framework. Sadly, this was a work of fact not fiction and even though none of the well-dressed, beautifully-coiffured investment banking charlatans were held accountable, we can at least relax in the knowledge that it couldn’t happen again. Could it?

Well, perhaps not yet on a global scale but the rapid collapse of the Aussie-led Greensill Capital has resurrected the bad memories and troubled times of the recent past. In fact, the demise of Greensill, a so-called ‘supply chain financing’ company, founded by Lex Greensill, the colourful flamboyant son of a watermelon farmer, has both the twists and turns and all the hallmarks of the movie, and more.

If you already know what ‘supply chain financing’ is then you’re a better man than I, but as soon as ‘factoring’ was mentioned I got it. Back in the day, we occasionally used factoring as a means of ensuring a certain level of liquidity within the business and were able to offset some financial exposure. In short, factoring refers to a process whereby an outstanding unpaid invoice is sold to another company for a substantially reduced amount, and, provided the ‘selling’ businesses can cope with the lower margin and the ‘buying’ business can cope with the cash-flow delay and potential shortfall (as there will undoubtedly be some bad debt) then all will be good. But Greensill took it to a whole new level.

Greensill rolled-up all these supplier credits and unpaid invoices into exactly the same type of insured security that was the poison at the corrupt heart of the earlier financial catastrophe. And worse, by last year the firm was reliant upon a mere five clients for over 90% of its revenues. Not good. This risky business model and shady world of shadow banking should have been red-flagged before upwards of 65,000 jobs worldwide were placed at risk. It became clear that serious-trouble was brewing when Credit Suisse suspended $10bn of funds, before the German regulator took control of the company’s bank, forcing a filing for insolvency protection.

Anyone watching the news this week will know that Sanjeev Gupta’s Liberty Speciality Steels, previously hailed as the saviour of Sheffield’s steel industry, is one of the unfortunate five and had its production halted when Credit Suisse choose to no longer loan any money, and allowed the indemnity insurance on potential defaulters to lapse. In a feat of financial alchemy, the Japanese behemoth, Softbank, is both Greensill’s major financial backer, and major customer. The implosion will cause far-reaching ripples and not just because No 10 has become inveigled via seemingly dubious and sour-smelling relationships with both Davey-Boy Cameron and the late former head of the civil service, Jeremy Heywood. Supposed revolutions in banking and finance have a nasty way of ending badly and precious little ever seems to be learned. 

Ironically, Michael Lewis, author of The Big Short, was a recent guest on Desert Island Discs and he remains adamant that another financial crash, the likes of which we have never seen, remains just around the corner. I believe it a brave or foolish man to bet against him.