Greensill failed not because of risky business model: founder

London

GREENSILL Capital collapsed because it lost insurance coverage for the loans it offered - not because of its risky business model, Lex Greensill insisted in testimony on Tuesday, breaking his silence more than two months after his company abruptly filed for bankruptcy.

Also on Tuesday, Britain's top financial regulator said it was formally investigating his firm.

"The ultimate failure of Greensill was for one reason, but as ever there are always associated reasons," Mr Greensill told British lawmakers in a parliamentary hearing. The "withdrawal of insurance capacity" was why the company failed, he added.

As Mr Greensill was speaking, much of Westminster was parsing through another of the day's revelations: messages from David Cameron, the former prime minister, as he lobbied the highest officials in British government last year on behalf of the finance firm. The easy banter between Mr Cameron and government ministers, in messages turned over by Mr Cameron in response to queries from lawmakers, has raised questions about the access given Mr Greensill's firm as it tried to take part in pandemic lending programmes.

The rapid downfall of Greensill Capital caused SoftBank and Credit Suisse to lose billions, endangered thousands of jobs and prompted a series of inquiries and investigations in Britain, where the company has its headquarters.

And the effects have rippled across the world to Australia, where the company began, and to the United States where the governor of West Virginia has sued the company over a loan his coal-mining business received. By the time Greensill Capital filed for bankruptcy, it had more than 1,000 employees and offices in 16 countries.

Mr Greensill told the lawmakers, members of the Treasury Select Committee, that he regretted that his company's business was so heavily concentrated on one customer, which he declined to name. That company is widely understood to be GFG Alliance, a collection of private companies linked to Sanjeev Gupta, a steel and metals magnate in Britain. GFG employs more than 35,000 around the world and has been hunting for new financing after Greensill Capital's bankruptcy.

Late last year, Greensill Capital, which lent money to large companies and advanced payments to suppliers, was seeking a valuation of US$7 billion and planning to go public. Just a few months later the company swiftly fell apart in the face of investigations into its business by German regulators and one of its key insurers' refusing to extend policies backing US$4.6 billion in loans.

Mr Greensill told lawmakers on Tuesday that he had been "absolutely" confident his company's insurance was going to be renewed. He said the company had been working "day and night" to restore the coverage after learning in September that it would not be extended beyond March.

He said he first became concerned about his company's financial health in December, when a German regulatory agency said a bank that Greensill Capital had acquired needed to reduce its exposure to one customer.

The request "was going to be impossible for us to comply with," Mr Greensill said.

Greensill Capital's business model has raised concerns and even accusations of fraud. Its main offering was supply chain finance, in which a middleman advances payments to suppliers and then the money is repaid by the buyer.

It's a long-established kind of financing, usually provided by banks, but Greensill added a twist. It packaged the invoices and other receivables by the suppliers into assets that were then sold to investors through funds. The company also provided financing to companies based on "future receivables", which were based on transactions that hadn't yet happened.

In Tuesday's hearing, held virtually, Mr Greensill strongly defended the business model.

"Every asset we ever sold was correctly described," he said, adding that all investors would have had complete information about what they were buying.

But he made a small admission to failures he had made. He told lawmakers that one of his company's innovations was taking information directly from company accounts to make fast lending decisions. This "absolutely is the future but the way that I did it definitely had flaws", he said without specifying what they were.

In March, as the insurance coverage came to an end, Credit Suisse shut down US$10 billion worth of supply chain finance funds it sold that were put together by Greensill. The Swiss bank has returned just under half the amount to investors but is still exposed to billions of dollars in potential losses.

"I bear complete responsibility for the collapse of Greensill Capital," Mr Greensill said, adding that he was "desperately saddened" that more than 1,000 of his employees had lost their jobs. But he added: "It's deeply regrettable we were let down by our leading insurer, whose actions assured Greensill's collapse."

The Financial Conduct Authority, Britain's chief financial regulator, said in a letter to the committee that it was "formally investigating" Greensill Capital because some of the allegations about its failure are "potentially criminal in nature". The authority is also working with regulators in Germany, Australia and Switzerland, Nikhil Rathi, the regulator's chief executive, wrote.

Greensill Capital's supply chain finance business wasn't regulated in Britain but the Financial Conduct Authority did have supervision of the company to ensure it complied with anti-money-laundering rules. NYTIMES