The echoes of Enron in Greensill saga

In November last year, with funding from key financial backer Greensill looking shaky, Sanjeev Gupta seemed to do what many brazen business people do when the going gets tough: put on a front. He moved the headquarters of his sprawling GFG Alliance from a discreet Mayfair townhouse to a statement white-stone office block on Grosvenor Place. 

Lex Greensill, founder of the now insolvent supply chain finance company that bears the Greensill name, had done vast slugs of his business with Gupta: the majority of Greensill Bank’s exposure was to Gupta-related entities. The irony of the address — still widely known as Enron House after its former occupant — won’t be lost on him.

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

Enron operated in the previously staid world of energy intermediation, where companies made modest profits connecting producers with customers. Within just a few years, Enron’s cabal of smart, aggressive managers had transformed the company from a pipeline operator into an innovative tech-fuelled behemoth — and also a vast fraud.

At the heart of Enron were multiple layers of deception: the company overstated revenue by counting the value of a third-party trade as income; it adopted mark-to-market valuations that pegged assets to the cost of replacing them; and it raised an estimated $20bn of hidden off-balance-sheet “special purpose entity” debt.

Greensill looks amateurish in comparison but there are clear similarities. It took an unadventurous part of banking and sought to supercharge it. It is still unclear whether any fraud took place. But aggressive innovation certainly did.

Hundreds of big banks and specialist financiers operate in the area that Greensill broke into in 2011. The vast majority play a vital and uncontroversial role in sustaining global trade, and operating according to a centuries-old practice of prepaying supplier invoices for a small commission of, say, 1 per cent. After the global financial crisis, it was the kind of dull banking business that became fashionable.

Enter Lex Greensill. As a financier at Citigroup, and later Morgan Stanley, he made a name for himself by shaking up some of the fusty ways of invoice finance and introducing smart innovations. When he went solo, it appears innovation soon turned into obfuscation in at least three ways.

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

Second, Greensill devised a twist on the financing model to advance funds against predicted future invoices, often with no obvious predictive evidence: on the face of it this was unsecured lending dressed up as something far less risky, and without lender or borrower disclosures.

And obfuscation number three: the group’s image as a clever fintech was something of a conceit — the main technology Greensill relied on was a third-party platform.

Like Enron, Greensill also turned a relatively simple business into something far more complex, using derivatives as funding. Rather than backing each invoice finance arrangement with an issue of commercial paper, as traditional invoice financiers would, large chunks of Greensill’s operations were securitised via asset managers such as GAM and Credit Suisse. Conflicts of interest abounded: in Enron’s case, there were tensions between its own interests and those of the thousands of off-balance-sheet special purpose vehicles it created; Greensill, for its part, was shovelling money to companies backed by its own principal backer, SoftBank.

Another crucial parallel is the political favour that both companies curried — Enron with the Bush White House and in particular vice-president Dick Cheney; and Greensill with the UK government, illustrated by its hiring of former prime minister David Cameron as an adviser as well as its outsized role as a provider of government-backed Covid-period business loans.

The Enron scandal ended with 21 executives being convicted, with many of them sent to prison. Greensill will be hoping the parallels with the energy giant’s collapse stop well short of any such findings and outcomes. So far it is facing a lawsuit from a US client, a vague threat of litigation by Credit Suisse and a criminal investigation by German regulators. It does not augur well.

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