Credit Suisse, a leading global financial services provider, has been at the center of a major scandal involving its relationship with Greensill Capital, a UK-based financial firm specializing in supply chain finance. This article examines what supply chain finance is, how Credit Suisse got involved with Greensill Capital, what went wrong, and the repercussions for Credit Suisse.
Understanding Supply Chain Finance
Supply chain finance is a form of short-term lending that enables companies to extend payment terms to their suppliers while providing the suppliers with earlier access to cash. The goal is to improve the cash flow and working capital of both parties, while reducing the risk of default or late payment.
Greensill Capital was a major player in this market, providing over $140 billion of financing to more than 10 million customers and suppliers in 175 countries. It was founded in 2011 by Lex Greensill, a former Citigroup and Morgan Stanley banker who received a CBE from former UK Prime Minister David Cameron for his contributions to the economy.
Credit Suisse’s Relationship with Greensill Capital
Credit Suisse had a close business relationship with Greensill Capital since 2017, when it launched four funds that invested in loans originated by Greensill. These funds were marketed as low-risk alternatives to money market funds, offering higher returns and daily liquidity. They attracted billions of dollars from institutional and retail investors globally, including pension funds, charities, corporations, and high-net-worth individuals.
Credit Suisse also provided other services to Greensill Capital, such as arranging credit lines, issuing bonds, and facilitating mergers and acquisitions. In return, Credit Suisse earned fees and commissions from Greensill Capital for its intermediary role.
What Went Wrong with Greensill Capital?
The trouble began when some of the insurers that guaranteed the repayment of Greensill’s loans decided not to renew their contracts in early 2021. This meant that Greensill lost its main source of protection against defaults or late payments by its borrowers. Without insurance coverage, Greensill could not sell its loans to Credit Suisse’s funds or other investors.
One of the reasons why the insurers pulled out was their concern over Greensill’s exposure to GFG Alliance, a conglomerate owned by British-Indian tycoon Sanjeev Gupta. GFG Alliance owns several steel plants and other businesses worldwide that heavily rely on Greensill’s financing. According to some reports, GFG Alliance accounted for up to $5 billion of Greensill’s loan portfolio.
Additionally, the insurers questioned the quality and validity of some of Greensill’s loans, particularly those based on future receivables or invoices that had not yet been issued or verified. These loans were allegedly used by some borrowers to inflate their revenues or obtain more financing than they needed.
As a result of losing its insurance coverage, Greensill faced a liquidity crisis and filed for insolvency protection in March 2021. This triggered a domino effect on Credit Suisse‘s funds that invested in Greensill’s loans. The bank had to freeze redemptions from these funds as it tried to recover money from Greensill’s borrowers or sell off its assets at discounted prices.
The Repercussions for Credit Suisse
The collapse of Greensill Capital has had a significant impact on Credit Suisse in several areas:
Financial
The bank has reported losses totaling $5.5 billion related to its exposure to Archegos Capital Management, another troubled client that defaulted on margin calls in March 2021. The bank has also set aside $2 billion for potential litigation costs and regulatory fines stemming from its involvement with Greensill. To bolster its capital base, the bank has raised $2 billion from investors through issuing new shares, cut its dividend by two-thirds, proceedings against Credit Suisse, and the bank’s CEO Thomas Gottstein and other senior executives have faced calls to resign.
- Legal: Credit Suisse was also facing several lawsuits from investors who lost money in the funds that invested in Greensill’s loans. These investors accuse the bank of misrepresenting the risks and liquidity of the funds, and of failing to conduct adequate due diligence on Greensill and its borrowers. The bank has already settled one lawsuit for $140 million, but more legal challenges are expected.
- Operational: The scandal has also forced Credit Suisse to review and overhaul its risk management, compliance, and governance processes. The bank has already announced several measures to strengthen its controls and oversight, including the creation of a new risk committee, the appointment of a new head of compliance, and the separation of its asset management and investment banking businesses.
Conclusion
The Credit Suisse-Greensill Capital debacle has highlighted the risks and challenges of supply chain finance and the need for better regulation and transparency in this market. It has also exposed the weaknesses and failures of Credit Suisse’s risk management and governance systems, and the consequences of putting short-term profits and fees above long-term reputation and stability. The fallout from this scandal is likely to continue for months or even years, as the bank tried to restore its credibility and trust among its stakeholders. As of March 2023, we know that the bank has been sold to UBS.
If you liked this post and want to chit chat with me, book me.
Keywords: Credit Suisse, Greensill Capital, scandal, supply chain finance, risk management, regulation, transparency, governance, litigation, reputation