Why the UK ‘shadow bank’ collapse is similar to the subprime mortgage crisis

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Businesses around the world are still digesting the collapse of London-based specialty financial technology firm Greensill Capital, which has gone into receivership, leaving businesses and thousands of jobs at risk, especially in industry. steel industry.

Justin Urquhart-Stewart, co-founder of Seven Investment Management, said the Greensill collapse is reminiscent of the 2007 US subprime mortgage crisis, which contributed to the 2008 global financial crisis.

The company, founded by Australian Lex Greensill in 2011, told the UK’s High Court on Monday it was in serious financial distress, with no way to repay the $ 140 million demanded by the lessor. Credit Suisse funds. Greensill’s troubles began a week earlier, when its main insurer withdrew from credit insurance on $ 4.1 billion in debt in portfolios it had created for clients including Credit Suisse. .

Without it, he was unable to sell debt-backed notes to investors. In response, Credit Suisse froze nearly $ 10 billion in funds.

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So how did we come to this?

Urquhart-Stewart, told CGTN Europe: “It’s amazing, because actually when you look at the business it’s really really simple. We used to call it ‘factoring’.”

Factoring is when a company buys a debt or an invoice from another company, at a reduced rate. This allows the company issuing the invoice to repay the debt quickly, allowing funds to flow through the companies. The indebted company can then make a profit, with each settlement of an invoice that it has bought back.

The Greensill Bank in the German city of Bremen. / Fabian Bimmer / Reuters

The Greensill Bank in the German city of Bremen. / Fabian Bimmer / Reuters

For the shareholders and clients of Greensill, this is a time of nervousness. Among them is Sanjeev Gupta, who had been called the savior of the steel industry after his industrial empire took over ailing factories. According to court documents from Greensill, Gupta’s company, GFG Alliance, had started to default on its debts to the ailing financial firm.

Now Sanjeev Gupta is facing his own funding crisis.

“This industry is not properly regulated like a bank,” Urquhart-Stewart explained. “This is why they are called ‘shadow banks’.

“The same rules don’t apply and the same investigations weren’t going on. So what was inside of these things, which turned out to be toxic and would end up killing him, n was not seen or understood by the suppliers. “

In a meeting with British union officials after the Greensill collapse, Gupta admitted that his conglomerate, which includes the UK’s third-largest steel producer, Liberty Steel Group, was facing “a difficult situation “. Five thousand jobs are at stake in the UK, and more jobs in the steel industry are at risk in France.

Meanwhile, in Germany, where Greensill runs a bank, the company faces criminal prosecution. Several German municipalities say they have invested millions of dollars in Greensill and want the government to cover any losses.

Urquhart-Stewart maintains that regulators did not fully understand what Greensill was doing and allowed the billed structures to be packaged as bonds, for sale to pension providers and other investors.

“No one looked at it from start to finish to figure out where the risks were,” Urquhart-Stewart said.

“Now someone should have done it and that was the banks. In this case you have Credit Suisse, they went through a banking crisis, you would think they would understand that risk. Well, they should have. do and if they didn’t understand this risk, then someone should be blamed for it. “