Greensill Capital folds up - another CDO financial disaster in the making?

[onetrack]

Jerry - What's your take on this collapse of Greensill Capital - the supply chain financier? Seems like their banking supporters are saying their "receivables" are just rubbish? 

Is this going to be a repeat of the CDO disaster that caused so much damage in financial circles, and major losses, worldwide?  I'm asking, because you seem to be right into the bigger end of town, in the finance world.

 

IIRC, the CDO's were just uncollectable debts from dubious borrowers, bundled up as a "quality" product and onsold to other financial institutions.

Is Greensill just part of a larger problem, with a lot of businesses in many areas facing serious liquidity problems, and the likelihood of liquidation and nil return to creditors?

I'm talking airlines, tourism, and many other businesses severely impacted by the COVID-19 virus and major travel and transport difficulties.

 

It also seems the golden-haired boy of the British steel industry is also deep in the manure and maybe not as successful as he has been made out to be?

When I see people such as former high-profile politicians becomeing spruikers for businesses and their CEO's, I get a feeling that those businesses and their operators are on a par with Honest Johns Used Cars.

 

https://www.theguardian.com/business/2021/mar/03/greensill-crisis-spreads-as-bank-of-england-and-german-regulator-take-action

 

https://www.theguardian.com/business/2021/mar/03/greensill-crisis-leaves-bank-founder-facing-sudden-fall-earth

[old man emu]

Seems it could be a bit shaky for the likes of After-Pay and its ilk. 

 

There's a lot to be said for a cash economy.

[spacesailor]

I like that CASH economy.

Haven't got it, Don't buy it.

Houses excepted. It's a Mortgage. against your home, keep up those payments, and send the kids to bed without their Dinner.

IT was normal in the War years.

Could be the Downfall of the " weight-loss" industry.

spacesdailor

[Jerry_Atrick]

To be honest, I haven't been following Greens(p)ill's story, but I did have a look at it... And to make clear, I am not a banker - I work in projects (chnage, solutions, etc).. Also, I haven't been involved in whiolesale finance for about 10 years and asset back securities for about 5 years.. although I do miss wholesale finance and have applied for a role in Melbourne (we'll see how that goes).

I took a quick look at what had happened by looking at their web site and searching the news (I am sure the links were paid for by the search engine ;-))

 

First, their business model. They are an originator and syndicator of debt. This is exactly the same business model as Aussie Home Loans (I think that's what they have been called) who have been operating successfully for years and pioneered lower cost home loans. To summarise, borrower gets money from institution. The institution uses its balance sheet to lend the money (this can be from cash reserves or funding from the short term money makets). It packages a set of loans with similar credit characteristics into a pool and sells them to the special purpose vehicle (SPV), which is a company usuisally incorporated specifically to receive that pool of loans. The SPV issues bonds of different seniority secured by the pool and sells them to investors. The credit risk (and any other risk, such as FX risk) is transferred from the lender to investors. The lower the level of seniority of the bond, the more itnerest the investor gets.

 

A bond, like a share, is a financial security. Which basically means it is more or less a standard form of financial instrument that can be traded in secondary markets (the ASX is a secondary market for shares, options and warrants - and I think bonds, too). Bonds issued in the above manner are called asset backed securities (ABS), as they are backed by the assets (loans) in the pool. It is important to note, by backed, when mean both collateralised (i.e. in the case of default, we can access these assets) and leveraged (i.e. the repayments are funded solely by the cash flows of the assets and there is no recourse to other sources for payment).

 

To take Aussie Home Loans as an example, they will pool a set of home mortgages and sell them to a SPV (which they probably have created - but operates at arms lenght). The SPV will create a RMBS (Residential Backed Mortgage Security), which is a type of ABS by creating different tranches of bonds against the pool (each tranche represents a different seniorority) and syndicate them to the wholesale markets, where investors will buy them. Aussie Home Loans will collect payments from the borrowers onm a monthly basis, take some out for the cost of managing the loans (they still hold the relationship to the borrower) and pay the SPV the rest. The SPV will take a small chunk from that (or, inthe case of a mismatch in the receipt v. payment cycles, use that time to earn interest on money they hold) and pay the bond holders theproceeds of the lending. This is an oversimplification, but you get the idea.

 

I am a big fan of responsible and prudential ABS because it does the following:

• Frees up the lender's balance sheet so they can lend more money which is instrumental the economy (although credit bust cycles do happen).
• Allows investors to get exposure to creduit risk at their selected level of risk. You can get access to sub-prime, but at the senior tranches of the bonds, you have a much lower risk than the bonds of lower security. (note, I use this as an example intentionally)
• Opens up compeition in the credit markets.. Before companies like Aussie, which made borrowing money cheaper for home buyers, the competition was the big 4 banks, and I would not be surprised with that few players or well establsihed institutions with the collective market share they had, that a cartel was operating for some time.

Of course, there are downsides, linked mainly to when the use of ABS is not responsible or prudent. Markerting loans to subprime customers is one such area... Also, ABS is viewed as credit enhancing; the problem is that when you start being less responsible, you have to find "innovative" ways to enhance the credit.. The borth of the CDO (as a type of ABS) was one such beast - where basically, the bonds issued by the CDO were collateralised as part of a CDO, as an example. This was known as CDO squared and had obvious issues, known as correlation risk (where the quality of, say collateral, is correlated to the quality of what it is collateralising). This is when things started going very wrong.

 

To Greensill.. They originated a specific type of supply chain financing often termed as reverse invoice or reverse factoring financing. This is a simple model, which is normally used by SME companies rather than larger compaines to help manage cash flow. Basically, the supplier sells something to a buyer on credit terms; say 90 days. In order to get their hands on most of the cash sooner, they basically use the invoice as collaterial to borrow money from the bank (or credit institution) , with the promise to use the proceeds of invoice to pay the debt. Actually, this is invoice (or factoring) financing. Reverse factoring is where the bank or credit institution are paid directly by the supplier.

 

This is a specialised form of financing and the bank that I worked for in wholesale finance had a specialist unit to deal with invoice/factoring finance. So, I have no idea of the legal form reverse factoring takes. For example, is it still a loan with the supplier, or does the bank buy the invoice from the supplier at a discounted rate (e.g. 85% of value) and hold the legal relationship with the seller now? It is important.. in terms of who the defaulter is.. is it the the supplier or the institution?

 

This type of financing is designed for small and medium businesses so that they can manage their cash flows.. It is an expensive form of financing because it is risky.. You have to risk assess the supplier and the buyer... Therefore, it is usually reserved for financing larger purchases by the buyer and the buyer is usually required to be a bigger company (or government agency, etc). It is not designed to finance small accounts receviables.

 

The advantage of using reverse factoring finance (where the supplier pays the bank direct) is that the bank (or credit company) is paid direct by the buyer and reduces the risk that the SME supplier and the cash paid by the buyer just goes into insolvency proceedings. For this to work legally, the buyer has to be the debtor to the bank.. so the bank buys the invoice (but may require the supplier be a guarantor to the buyer). The problem with this model is that the buyer knows the supplier is financing their invoice/s and ddemands longer time to pay - say 180 days.. They know the supplier is getting their money sooner. Of course, it costs the supplier more to finance longer terms. If a supplier is struggling a bit, the best way to hide longer term debt is to shift it to trade payables (current liabilities) rather than debt on the balance sheet. This is an old trick that established players know about, but an aggressive player in the market seeking to get traction may well overlook this trick to get a better assesment of the supplier to make it look more attractive to lend against and package into a pool and sell off to investors.

 

Back to Greensill.. They are not offering anything new.. They are being aggressive. The first thing that worries me is the their home page is that they are: "Visionary, Bold, Disruptive". Their not visionary in a new or changed product offering. As for bold - well, a global head of credit risk said to me that they like to lend to comapnies that don't need the money and hate to lend to thise that do. If you are being bold, you are, by definition, risky. To be risky for a well established business model is just taking on riskier business. That is not visionary, and I would not say bold, either. I would say stupid. Then they are disruptive. If you are not fundamentally changing a business model (evenUber changed the business model of minicabs/taxis -  at least in the UK), then disruptive usually only means one thing - attractively priced.  For this, it has to be attractively priced for investors to buy up the debt. The more it is attractely priced for investors, the worse it is for the borrower (supplier).

 

What we have at the moment is persistently low interest rates, and with that, persistently low returns in the fixed inome asset class (bonds, money market, ABS, etc). Investors in these assets are usually professional, insurance companies, etc that seek to reliably match their long term obligations with steady investments (they have equities and probably some crypto now, but they like different asset classes to diversify their risk). There are also some investors, funds, who seek returns as they are proper investment vehicles as well.. So they are on the hunt for better returns and after a while will start throwing caution to the wind..

 

The Supplier Finance market is a competitive market. Most of the big banks do it, and there are a lot of capital companies that do it also. So, as a supplier, I can hunt around. If someone is looking too expensive (i.e. providing the investors a good return), then the supplier will (or should) look elsewhere. The price of the deal will be based on underying funding rate, and the cedit worthiness of the supplier and buyer. Assuming the funding rate is the same, the lower the credit worthiness of one or both, the higher the interest rate that will be charged for taking the risk.  So, if I and/or my supplier is high risk, I may get turned down or taken by a more aggresive firm.

 

Looking at their website, they talk about supply chain financing things like 5g and green energy stuff. This is usually the preserve of project finance.. the bigger suppliers would rarely use invoice financing, but they would use some other form of supplier financing if they needed it (remember, invoice finance is based on an accepted invoice- and as a supplier building plant machinery, well,. if you need finance, you aren'twaiting for an invoice. But looking at their What we do  page (https://www.greensill.com/what-we-do/), they have, in 2020, issued over $143bn, in loans (and the assume they have securitised most of it), with over 10m customers (doubt all in 2020), in over 170 countries. That is one helluva tall order. That later one makes me worry because unless they have offices and appropriately resourced in most of those countries (or have agents, etc that they can trust), then some of the buyers in those countries can thurn their noses up at the debt (and the suppliers too) and they can't recover the money.

 

It all smells of an aggressive firm that is all about the origination of debt. No doubt, Mr Greensill is very clever, but he is undoubedtly a great salesman. I did note in my research that under the David Cameron government, Greensill Captial won some advisroy business for the PM's office.. and David Cameron since became an advisor in the business.. No quid-pro-quo there, I am sure.

 

There is a general concern that ABS are moving again to the complex and aopaque structures that were CDOs and systemic risk is starting to build. But fund managers (companies who manage the invetment decision making and investing for funds) are still smarting from the last rout. The risk is generally considered much lower than the CDO and insurance monolines of days gone by. As far as I can tell, Greenshill Capital borrowers, in general, are not defaulting.. But the problem is, the find managers cannot get insurance for the risk of the investment.

 

This insurance is usually provided by credit default swaps, which are a (relatively) simple device. If you want to hedge your default risk, you go to the market and look for someone who will take a premium from you (much like an insurance premium) and, in the event of a default of whatever was nominated in the swap, that someone will pay you a pre-agreed sum. This is basically inappropriately insurance and is the reason why Lehmans went bust (they wrote too many CDS's against sub prime ABS issuers I think and they used a clever trick to hide it). The reality is, no financial institution seems willing to write CDS's against Greensill - at least at a price that will not wipe out any returns from the investment. The two main fund managers who subscribe to Greensill's ABS, Global Asset Management, and I think Credit Suisse have pulled the plug and won't buy any more. They are running off the existing ABSs (these will be short term) and returning money to the investors. They are doing it at a loss I read, and there is a reason for it.

 

Recall I said, generally, the borrowers are not defaulting. Well, one seems to have stopped making payments from what I read (though the article was ambiguous, so I may have got it wrong).Sanjeev Gupta who was the saviour of the ailing British steel industry obtained a lot of finance from Greensill Captial.. Apparently, about 70% of Greensill's exposures are written against Sanjeev Gupta's companies. This is a massive concentration risk which looks like it may materialise. So, if one fo the fund managers went looking for credit default swaps, the issuer of the CDS will risk assess what they are insuring and they are saying either no, or yeag - the premium is 99% (or thereabouts). The funds can't get reasonably priced hedges, they won't take the investment. If no one takes the investment, Greenshill can't shift the loans from their balance sheet and they go bust. Simples.

Also, there is something about a banking subsidiary in Germany being investigated by BaFin, the German equivalent of ASIC (but much stricter, I can tell you from experience). There seem to be accounting irregularotoes and the latest is that BaFIN has effectively taken over oversight of the banking operation. I am not aware of the alleged issues, except that it is messing with the balance sheet, which for a credit markets bank, means messing about with the regulatory capital they have to hold. Regulators in Europe and the US don't like this one bit..

 

Alex Greensill seems to be a very clever man who has great sales qualities. It appears he has believed his own BS a bit too much. I also noticed Softbank bought in, in about 2019, just before almost all their major investments went pear shaped. I think it was USD$1.9bn investment, which was smallish for Softbank. They just don't seem to be able to back too many winners lately..

 

This was long.. sorry about that. I am not going to proof-read so apols for any typos in advance.

 

Finance is a fascinating world... Wish I started in it...

 

 

[onetrack]

Thanks for the lengthy and informative outline, Jerry. In summation, I think Lex Greensill has been indulging in too much of the American Bankers tope (he did work for  Morgan Stanley and Citibank, and is no doubt very familiar with American-style banking methodologies).

 

Unfortunately, that tope involves "aggressive" practices, continues with some fibbing, extends to lies, then eventually results in fraud - all in the name of keeping up a great financial image to those who never see what goes on at the CEO's desk, where the important decisions are made. There is obviously enough smell of fraud and "irregularities", and lax practices around Greensill Capital, to make the German financial regulator concerned.

 

And the bottom line is, that no-one in the banking industry ever gets charged or goes to jail, as a result of banking fraud or lax practices - because every leader in the world, knows that bankers and the banking industry are untouchable.

After all, the leaders reckon that the lenders all knew what they were getting into, didn't they? - and besides, everyone loses some money now and then, don't they? 

 

What staggers me is how Softbank can write down their US$1.5B in Greensill (possibly with a major, major loss) without turning a hair? It's just amazing to me, the amount of money some finance operations can write off as poor investments.

 

https://www.afr.com/companies/financial-services/how-farmer-greensill-came-a-financial-cropper-20210303-p57790

[Jerry_Atrick]

Greensill's losses for them are a drop in the ocean compared to how much they have lost in other ventures. This provides a bitof an insight: https://www.theguardian.com/business/2019/nov/06/japanese-tech-investor-softbank-hit-by-huge-quarterly-loss-wework-uber

 

Meanwhile the fallout of Greensill doesn't look like it will have a marked effect on the financial system, although the piossible rise of riskier asset backed securities could have. Of the German bank, BaFin has said Greensill Bank, one part of the wider London-based group, is too small to cause serious damage to the wider financial system.  (that last sentence quoted from the FT).

 

 

[Jerry_Atrick]

Greenshill had filed for bankruptcy in the UK... the saga continues. Apollo will take over the lending operations side of the business. There are criminal filings in Germany against Greenshill bank as apparently receivables booked into the balance sheet from Sanjay the Steel Man (can't recall his surname) could not be traced...  The problem is, it is all good while it lasts, but when things turn a bit sour and there was no provision for it souring, people send good money after bad... Nick Leeson of Barings bank is the most notorious of that phenomenem (sp?).

 

[onetrack]

It never ceases to amaze me how large financial operations, such as insurance, and the various forms of banking operate with such a gambling mentality.

So many of these operations today seem to throw prudence to the wind and operate like a problem gambler at the casino.

The story of AIG in the early 2000's (which company was basically the initiator of the GFC problems and losses) should be a warning to all operators in the insurance and finance fields.

The simple fact remains that every one of these huge businesses fortunes, is inextricably intertwined with all the others. Knock the legs out from under one, and the whole pack of cards starts to wobble.

 

https://www.institutionalinvestor.com/article/b150qdkrd30ggk/the-fall-of-aig-the-untold-story

 

Sanjeev Gupta's business models are very opaque, and he's another bloke who has ridden rapidly to the top on exotic financing packages - largely funded by Greensill.

Now, Gupta is telling everyone he hardly knew Greensill, and he doesn't need their money, anyway. It's not a good look, and it makes me wonder what is going to be exposed, as regards Gupta's business problems, once the Greensill operations are fully investigated, and exposed to public and regulatory scrutiny.

 

I have little doubt that Gupta is extremely clever, and has seen opportunities by linking new technologies with old-style businesses. But the bottom line is, basic financial problems of many businesses often remain hidden by fancy financial footwork.

 

Edited March 9, 2021 by onetrack

[Jerry_Atrick]

I think this sumis it up well...

 

 

[nomadpete]

I thought a 'summing up' might be brief!!!

 

It might have been funny if it wasn't so true.

[Jerry_Atrick]

31 minutes ago, nomadpete said:

I thought a 'summing up' might be brief!!!

A complex subject deserves for than a brief summary 😉

 

[Edit] I know who they are portaying as the interviewed.. I spent a good deal of time unraveling his poop! {/edit]

 

Edited March 14, 2021 by Jerry_Atrick

[Jerry_Atrick]

Well, the story unfolds. Greenshill had applied for quite a bit of emergency funding from a COVID relief fund for business struggling as a result of the pandemic. The administrators of the fund assessed Greenshill's application and rejected the funding requests. I guess it is because of the size of the request (compared to the size of the company), and the fact that the pandemic had nothing to do with their woes.  Well, David Cameron, the ex-PM who gave Greenshill a lucrative front job so he could become a paid advisor to the company decided this wasn't fair and decided to text Rishi Sunak (the Treasurer) and ask him to intervene.

 

Well, leaning on old mates - what is possibly wrong with that? Turns out, it is a form of lobbying and under laws introduced by Cameron himself, it is an offence for an ex parliamentarian (opr maybe minister - I am not exactly sure) to directly lobby existing ministers of the crown. There's an article in the Times which I will have to buy to read, but hopefully, if it is true he broke a law he introduced, he will have the book thrown at him.

 

[onetrack]

I like the "Greenshill" moniker. Sounds pretty right. I understand that Sanjeev Gupta's house of financial cards is now looking wobbly, since it's been revealed Gupta's businesses were all funded by Greensill's house of cards.

 

And in the best fashion - once your "huge business conglomerate" faces liquidation, when the house of cards falls over - you go to the Govt, asking for a major financial bailout. Unbelievable.

 

https://www.afr.com/companies/manufacturing/gupta-seeks-170m-lifeline-from-british-govt-20210328-p57eop

[Jerry_Atrick]

Privatise the profilts and socialise the losses is what private bailouts are for. The government in the UK at least wiped out the shareholders when they bailed out the banks.. My £200 investment in RBS became worth £2.85 ater the bailout.

Edited March 28, 2021 by Jerry_Atrick

[Jerry_Atrick]

The fallout of Greensill continues. It moves from purely financial to political corruption of a tall order.

 

As a background, the government borrows money by issuing either short, mid or long term bonds. The precise rules will differ by jurisdiction, but there will generally be an independent department or authority that will manage the raising of government debt. They will normally be at arms length of the government and their job is to minimise the cost of raising the debt, and, of course, the interest payable. In the UK, it is the Debt Management Office (DMO) that is responsbile for at least all national government debtis raised (can't speak of the statutory authorities, regions or the councils - I think most England and Wales councils use them, but not 100% sure).

 

The DMO has a panel of banks and capital markets companies (similar to Greenshill) to issue the debt. It will usually be a specialist "desk" within the Syndicate desk that does this.. often known as SSA (Sovereigns, Supranationals, and Agencies).. and they specialise in issuing public debt. The DMO will publish its annual funding program and pre-qualified institutions will be able to bid for a piece of the action of each bond issue.

 

When bonds are issued, the issue is rarely managed by one bank. It is usually a syndicate of banks .. And they syndicate the bond issue to a number of investors. Hence the name, Syndicate as the desk for issuing bonds.

In the current market in the UK, investment grade corproate bond issues will earn the bank about £0.15 per thousand pounds of the bonds issued. So, a £500M issue of quality investment grade company issued bonds will earn the syndicate of banks a total of £75,000 in fees - give or take. Each bank will receive their chunk in proportion to the amount the investors they brought in to buy the bonds have spent. Pre GFC, the rate charged was on average almost double.  The job of the Syndicate bank is to find demand for the bond issue, and the lowest interest rate possible. They work for the bond issuer.

 

Government debt is slightly different. Countries with long histories of AAA ratings are generally seen as risk-free - especially the USA (despite current problems). Therefore the fee per £1,000 sold in today's market is probably going to be around 1/2 that - so £0.075p per £1,000 raied. That £500m government bond issue is only going to raise the syndicate of banks, say £35K. However, governments tend to issue much more debt than individual corporates, so having a speclalist desk makes sense.

 

BTW - issuing bonds isn't saved for new debt. Often business and government will roll over existing debt that is maturing as well.. New bonds have to be issued to replace the maturing ones (unless the government is happy to pay back the older ones to retire debt - which obviously happens). This means, more fees to the syndicates. Note, in the USA, they are talking trillions in government debt to be raised; here hundreds of billions... so the fees add up and the SSA desks can earn a tidy living. Also, it is easier to find buyers of AAA rated risk free government debt, even if it is lower interest, than riskier corporate debt.

 

Back to the DMO.. They operate independently because of the potential for corruption by allowing companies who are not competitive to be able to participate in distributing the bonds for a higher fee than can be achieved competitively. The idea is that it stops those with a less permanent, but powerful influence over the government, such as - I don't know - the incumbent Prime Minister - to receive kick backs from such firms that can make millions of ££$$££ for easy distribution.. These kick backs could be cash or goods, or even employment with share options - right?

 

Of course, unless you're the prime minister or the treasurer, having an independent DMO means that it would be very difficult for a pollie to influence the decision making of which institutions to award being on the panel of syndicate institutions to distribute debt, because they can't influence your career progression. And, what Treasurer or PM would be dumb enough to try and influence the DMO, as surely they would be found out, right? Well, as it transpires, as far as is known at the moment, yes - that is right. Because that would have been political suicide.

 

So, what is the next best thing to do, to buy you a job after your temporary tenure as PM is up, and someone offering to distribute debt is willing to sell you a job - and £50m of share options? Bypass the DMO altogether.. And not only that, but to make sure you get the worst possible deal from your investors, ensure your favoured institution can pay your salary and options when you come on board by eliminating competition by making them the sole syndication institution. They can set the fee they want, and not be too bothered if the investors demand a bit more interest than normal. And, this appears what David Cameron was hell bent on doing.

 

This very cunning, but illegal plan was hatched by someone, but apparently Greesnills was so confident it was going to come off, he prematurely sent emails to department heads or ministers - I can't remember - informing them of how financing was going to change - explicilty stating he speaks for the PM and does not need their approval. I am not sure if it was for all financing, which I doubt, because even the civil servants/authority employees of the DMO would suddenly be wondering how the government managed to pay off all that debt and buy stuff they don't have the money for without issuing new debt. But it apparently was significant enough for the permanent department heads to take it on their own bat to rein in Greensill, on the basis of it being illegal.

 

To be honest, I am not sure if it broke any laws with respect to bypassing the DMO, but it broke both UK and stricter EU laws of probity of procurement for government and public organisations. There wasn't an open tendering process, and all contracts greater than I think, at the time, EUR50K (though it may have been 500K) had to be published in Official Journal of the EU (OJEU), which it wasn't - unless it was that dodgy cleaning contract no one wanted. But of course, the PM bought himself a job as "Advisor". I am not sure what the salary was, but I think it was a bit more than minimum wage. And then, there was the £50m in options. I may be wrong, but I think it is against the law in the UK for senior ministers to accept such jobs and bribes, er, options, with a company they have had a direct relationship with or awarded a significant contract to..

 

Fortunately for Cameron, violence is erupting in Northern Ireland at the moment and overshadowing corruption on this scale. There is the odd news bit about it, but the talk shows are focusing on the Northern Ireland tensions.

 

[onetrack]

Sanjeev Gupta looks to be in a financial mire that's about the equivalent of being in a canoe that has sunk in a swamp full of crocodiles.

Credit Suisse is obviously greatly concerned with Greensills and Gupta's shenanigans - and heads have started to roll in Credit Suisse, over losses associated with Greensill Capital, and an American Hedge Fund that has gone belly up.

 

Meantimes, Credit Suisse is looking to place as many of Guptas companies into liquidation as they can - while Gupta frantically tells the managers of all his businesses to round up as much of the office furniture they can find, and sell it, to raise cash. And not just the office furniture, either - he's instructed them to sell anything that they can lay their hands on, that isn't needed immediately. Talk about living in "interesting times"!

 

Meantimes, it appears Gupta has done a deal with Greensills liquidators to access cash in accounts controlled by Greensill, that was supposed to flow to Credit Suisse.

This may be why Credit Suisse is using the "nuclear option" to try and bring Gupta and his businesses to a halt, and recover as much as they can, before Gupta manages to fleece them thoroughly. 

 

https://www.smh.com.au/business/companies/credit-suisse-moves-to-liquidate-whyalla-steel-mill-tahmoor-coal-20210406-p57gya.html

 

https://capital.com/heads-roll-at-credit-suisse-following-4-7bn-achegos-collapse

 

Cameron is turning out to be a real morals-and-ethics-challenged individual, isn't he? But so many of the upper echelon in the finance world, are just like him.

[Jerry_Atrick]

33 minutes ago, onetrack said:

and an American Hedge Fund that has gone belly up.

Boo Hoo! A hedge fund going belly up... They are usually the parasites of the financial services industry - and given it is an industry with many parasites, they are pretty bad.

 

Credit Suisse has been suffering a bit over the years  - I guess they say this as one of the ways out... Heads will roll over this, but I can't help but think there will be collateral damage as it makes it easier to fire others they have been wanting to get rid of.

 

Gupta's claiming his businesses are cash flow positive - that could mean they are a penny better than they spend. I am sure that they are actually cash flow positive on a normal basis, but with extraordinaries and debt, it is going to be a tough ask.

 

Re the Aussie assets, if they are running with an operating surplus, once it does into administration, well, it could be an opportunity for savvy investors. It doesn't matter what the debtis, unless the debtors think they can do better by selling assets, they may take a reasonable offer for the value of the business..

 

Re liquidators providing Gupta access to Greensill's cash - unless that cash was held on trust (and met all the conditions for holding cash on trust) for the benefit of Gupta's company, the individial liquidators would be facing jail time and the partnership (or incorportion, if incorporated) would lose their insovlency license. If the cash is indeed held on trust, the Credit Suisse (CS) has no claim to it - it is Greensill that is being liuquidated - not Gupta, yet.

Edited April 7, 2021 by Jerry_Atrick

[old man emu]

How is it that a coal mine that for years was able to generate profit from smaller sales suddenly starts running at a loss when sales and prices for its product boom? Who is skimming the pot? The same goes for the steel mill. Demand for steel has never been so high, yet another business that used to be profitable is now losing money. You can't blame wage demands for that.

[spacesailor]

C.E.O.

No more to be said !.

spacesailor

[nomadpete]

If they sell Whyalla steel mill, what chance do we have, that an Australian snaps it up at that fire sale?

[old man emu]

17 minutes ago, nomadpete said:

If they sell Whyalla steel mill, what chance do we have, that an Australian snaps it up at that fire sale?

9/10ths of bugger all.

[Jerry_Atrick]

The LATAM (Latin America) management of Greenshill bought out the LATAM Greenshill business it has been announced. So, the assets are being sold off now - no doubt there will be bargains to be had.. Hedge and equity funds will be circling; if you can get hold of their offers (which will be about 25 - 30% of the true valule), you can pick yourself up a bargain.

 

 

[Jerry_Atrick]

This popped up in my yootoob feed, and this fella has done a lot more research on Greenshill than I have (and there is no way I could afford a suit that expensive!!! But I would trash the tie)

 

[Jerry_Atrick]

Hi Jeff, and welcome to the forums.

 

This is an area that has kept me employed for some time, now.. The regulations have tightened in three main ways; 1) there are far stronger data control requirements in risk management as a function. This was something that was wanting, which I could not believe when I entered the industry; 2) There are stronger regulatory requirments in tterms of the risk management that must be performed and goverrned within the firm and violations in responsible jurisdictions can meant loss of licence for the company and jail time for those responsble - look up the senior managers regime. In addition, the types of risks that have to be monitored have expanded signinfcantly. Thirdly, the amount of regulatory capital that has to be held against riskier products makes them almost uneconomic unless the firm has enought volume in those products. Most European banks are moving away from equity derivatives and exotics (complex non-linear products), because the regulatory capital (money or money like instruments) that must be held to cover the losses are steep, and that is captial that can't be deployed to make momney.

 

And regulators in responsible jurisdictions are no longer light-touch.. as it was in the UK.. leave a huge money makling industry to more or less regulate itself and guess what happens? Actually, this is where Australia shone because they were never light touch.. and Aussie banks fared reasonably well in the crisis.

 

Running internal models to optimise risk is no longer approved over a quick bite at lunch.

 

There are still systemic risks in the indistry - some that are hard to predict. For example, the collapse of Silicon Valley Bank was a mis-managed portfolio; they were overweight on US Treasuries and Notes, which are considered risk free. Normally cocentration risk limits should have kicked in, but this was considered a prudent holding at the time. The problem was they were slow to see the signs of rising interest rates, and that meant the US treasuries especially that they held dropped in market value as the rates rose and new treausries and notes were being issued at higher rates. This normally wouldn't have been a huge issue, however, SVB were using these holding to fund daily liquidity requirements. With theie outflows increasing thanks to rates, their inflows from andy money markets deposits or any varioable rate credit loans was not enough to cover the gap, and eventually the money would run out. Of curse, a run didn't help them.

 

The other risks are more macro in nature; The level of sovereign and personal/corporate debt is very high across teh world. The equities markets seem to be valuing companies at well above their historical intrinsic value. Apple has a P/E ratio of 27; Tesla 32 (after touching 300); a good long term P/E ratio historically is about 12 - 15:1. This may well be the new norm since much more of the population is investing via super/pensions, etfs, etc... there is more cash to splash and with more demand and equal supply, the cost is going to go up.

 

The world seems to have, at the moment, survived a macro scare... but there are more bumps to come. We have to run stress tests on a monthly basis taking into account all manner of scenarios and ensure that we have the capital to withstand the worst stress. That, too is a regulatory requirement.

 

Having said that, any risk management function is only as good as a) its data; b) its systems; and c) its management buy in at the top. There are plenty of examples of where the latter was comromised and it all eventually ended in tears.

 

Edited April 15 by Jerry_Atrick