Billions at stake and no one knows who takes the hit: when is Greensill a systemic risk?

There are echoes of 2008 in the Greensill Capital collapse. Since the global crisis, most financial company failures have been localised implosions. Wirecard, Woodford and their ilk have all caused pain and losses but nothing systemic.

This time might be different. And if it isn’t, regulators should consider themselves lucky. SoftBank-backed Greensill lent billions of dollars to companies that included the highly indebted metals conglomerate GFG Alliance. 

Greensill itself was funded by its own German-based bank and via Zurich-based Credit Suisse Asset Management. But its main operations were in London. And they had very little supervision. German regulators last week seized control of the bank and filed a criminal complaint alleging balance sheet manipulation. Swiss and Australian officials are asking questions of Credit Suisse.Meanwhile, in the UK, the heart of Greensill’s operations, where it has been celebrated as a leading “fintech” and counted former prime minister David Cameron as an adviser, there is little sign of regulatory action. Citing the need for confidentiality, the government has refused for almost two years to answer questions about Greensill posed by former City minister Lord Myners.

The main entity, Greensill Capital UK, was registered with the Financial Conduct Authority only for anti-money laundering purposes. Supervision of a separate entity that arranged deals with clients such as GFG Alliance was subcontracted to a third-party firm Mirabella.

This is a dubious set-up for keeping watch on a company of Greensill’s size — it arranged about $50bn of financing last year alone. However, even if the FCA were more involved, there would not be much to police under current rules. Commercial lending, as one regulatory lawyer puts it, is a “big boy market — never really seen as needing regulatory approval”. Since market participants are not retail investors or small businesses but large institutions and wealthy individuals, mainly based outside the UK, they are considered too sophisticated to need much protection. The problem is that also describes the participants when AIG got into trouble after its lightly regulated London-based unit wrote insurance on risky mortgage bonds. The damage was enough to trigger a $180bn US government bailout. What matters is the systemic risk. This is partly fuelled by uncertainty and there is plenty of that in the case of Greensill. No one knows the precise amount of bad loans involved: Credit Suisse is budgeting for at least $1bn to $2bn; insurance policies covered at least $4.6bn; in July last year insurer Tokio Marine said an underwriter had breached exposure limits by writing coverage for more than $7bn. And no one is sure who will bear the losses. GFG has already defaulted on loans to Greensill. Some of those loans exist within Credit Suisse funds. Those funds have insurance written by the likes of Insurance Australia Group and Tokio Marine. IAG says it has no “net insurance exposure” to Greensill because of “extensive reinsurance” and “agreements with Tokio Marine for it to hold any remaining exposure”. Tokio Marine, in turn, says it also has reinsurance, it may turn to litigation and, anyway, the insurance may not have been valid in the first place. This looming fight between loan originators, securitisers, funds, banks, insurers and investors looks very like the fallout from the 2008 crisis. The lawsuits that followed took up to a decade to resolve and cost tens of billions of dollars. For now, there is little general market turmoil, though shares in IAG did fall 10 per cent on Tuesday in response to warnings from hedge fund manager John Hempton about its possible exposure. But it could still get messier. And even in a best case, where large institutions such as SoftBank, Credit Suisse and Tokio Marine chew through the losses without indigestion, there are still big questions. What if Greensill were 10 times bigger — would anyone have supervised it then? Where is our radar for systemic risk? Thirteen years on from the financial crisis, there are still gaping holes.

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