Echoes of Enron in the Greensill saga

In November of last year, when funding from major funder Greensill looked shaky, Sanjeev Gupta appeared to be doing what many cheeky businessmen do when the going gets tough: pushing forward. He moved the headquarters of his vast GFG alliance from a low-key Mayfair townhouse to a white stone office building on Grosvenor Place.

Lex Greensill, founder of the now insolvent supply chain finance firm that goes by Greensill’s name, had done large amounts of his business with Gupta: The majority of Greensill Bank’s exposure was to entities related to Gupta . The irony of the address – still widely known as Enron House after its former occupant – will not escape him.

It’s been 20 years since Enron collapsed. Yet the nature of the energy giant’s boom and bust has striking echoes in the rise and fall of Lex Greensill.

Enron operated in the previously frozen world of energy intermediation, where companies made modest profits by connecting producers with customers. In just a few short years, Enron’s cabal of smart, aggressive managers had transformed the business from a pipeline operator into an innovative monster fueled by technology – and also vast fraud.

At the heart of Enron were several levels of deception: the company overestimated income by counting the value of a business with a third party as income; it adopted mark-to-market valuations that indexed assets to the cost of their replacement; and it has raised about $ 20 billion in hidden off-balance sheet “special purpose entity” debt.

Greensill looks amateurish in comparison, but there are some obvious similarities. It took a no-adventures part of the bank and sought to supercharge it. It is still not known if a fraud took place. But aggressive innovation certainly did.

Hundreds of major banks and specialist financiers operate in the area Greensill broke into in 2011. The vast majority play a vital and compelling role in sustaining global commerce and operate under an age-old practice of prepayment of supplier invoices for a small commission of, say, 1 percent. After the global financial crisis, this is the kind of boring banking business that has become all the rage.

Enter Lex Greensill. As a financier at Citigroup, and later Morgan Stanley, he made a name for himself by shaking up some of the difficult methods of financing invoices and introducing smart innovations. When he went solo, it looks like the innovation quickly turned into obscurity in at least three ways.

First, as it has recently become clear, the group has operated with an insane degree of undisclosed focus on risky businesses, exemplified by exposure to Gupta, while simultaneously touting its (small-scale) contracts with big brands such than AstraZeneca and Airbus.

Second, Greensill devised a twist of the funding model to advance funds against expected future bills, often without obvious predictive evidence: at first glance, these were unsecured loans disguised as something much less risky, and without any obvious predictive evidence. lender or borrower disclosure.

And obfuscation number three: The group’s image as a smart fintech was sort of vanity – the main tech that Greensill relied on was a third-party platform.

Like Enron, Greensill also turned a relatively simple business into something much more complex, using derivatives as funding. Rather than backing every bill financing deal with a commercial paper issue, as traditional financiers would, large parts of Greensill’s operations have been securitized through asset managers such as GAM and Credit Suisse. Conflicts of interest abounded: in Enron’s case, there was tension between its own interests and those of the thousands of special off-balance sheet vehicles it created; Greensill, for his part, was shoveling money at companies backed by his own major funder, SoftBank.

Another crucial parallel is the political favor the two companies have sought – Enron with the Bush White House and in particular Vice President Dick Cheney; and Greensill with the UK government, exemplified by the hiring of former Prime Minister David Cameron as an adviser as well as his outsized role as a provider of government guaranteed business loans during the Covid era.

The Enron scandal ended with the conviction of 21 executives, many of whom were sent to prison. Greensill hopes the parallels to the energy giant’s collapse end long before such discoveries and results. So far, it faces a lawsuit from an American client, a vague threat of litigation by Credit Suisse and a criminal investigation by German regulators. This does not bode well.

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