A more basic and fundamental point to be made concerning this lovely Greenshill and Gupta story. The difficulty is not in finding new ways of lending. Rather, it’s in finding people who are worth lending to.
Just to give the background, Greenshill insisted it had found a new way of lending. Which, to be fair to them, they had. Gupta – the miasma, not the person – insisted there was a business opportunity out there, a roll up of clapped out metals businesses. This could have been true, Lakshmi Mittal showed that it had, at one time, been true. Whether it was true now, with these assets, well, we’re about to find out.
Greenshill has just found out the hard way that the problem is not, in fact, in devising new ways of lending. It is in finding people worth lending to:
Greensill is a pioneer in “reverse factoring” – a form of cash advance where a company pays its suppliers early using loans. It also sold stakes in these advances to banks such as Credit Suisse. Its rapid rise meant that within a decade it was providing about $150bn to businesses around the world, had its own fleet of private jets (reportedly put up for sale last year) and made its founder a billionaire. Its model packages up the invoices it acquires into bonds which it sells on to investors.
There’s nothing wrong with that idea at all. I think it’s a rather cute one in fact. So, yes, firms need working capital. Why not lend it to them? Doing it by syndication of bonds is, well, why not?
Can’t see any reason at all why, properly done, it won’t work. Could even be cheaper than bank lending given the capital requirements for a bank to lend to an actual company these days.
But then comes the problem:
On Monday Credit Suisse froze funds linked to Greensill, which provides finance to firms including steel magnate Sanjeev Gupta, citing “considerable uncertainty” about the valuations of some of the holdings.
The uncertainty, it is said, is that the British government has withdrawn some of the guarantees on loans to Gupta – the miasma.
Which shows, again, our base analysis. New methods of lending, why not? But the difficulty is in finding the people worth lending to, not the mechanism by which lending is done. As Adam Smith pointed out two and a half centuries ago. The people eager to borrow at high rates are exactly those you don;t want to be lending to…..