Rolling US Economy Into The Shitbin Thread

Matt Levine did a Greensill explainer in his column today, but my eyes still kind of glazed over. It sounded like basically small company suppliers are used to waiting 90 days to get paid for stuff they sell to big companies - kind of sucks, I guess, but that's business. But if they don't want to wait, Greensill offers to pay after only 30 days but at a slight discount. So now the big company owes them the money, the small company gets paid, and Greensill gets a cut. Except instead of using their own money Greensill usually set up funds to invest in these big company accounts payable and sold them to investors, who often turned out to be some of these very same big companies.

some of the payment deadlines are longer than 90 days too ... depending on the contract/contractor ...

b2b payday loans

the main contagion risks I see are (1) the notes themselves (the securities created by Greensill) -- I thought I read that there were hundreds of billions of dollars of these floating around out there. Some of them were in Credit Suisse funds but a lot more must just be like randomly on corporate and bank balance sheets. In fact, I have a theory that if any of them are maturity <90 days, they are probably being treated as "cash or cash equivalents" when they are in fact risky securities that could blow up. (2) the degree to which various companies may have been dependent on these financing arrangements with Greensill to manage their cash, disguise debt, etc., and what happens if they can't find another supply chain financer to take up the slack.

IDK if that's enough to be the start of another 2007/08, but it's such a freaky company and situation that I worry there's more under the surface.

Just saw a reference to "by 2019" Greensill having claimed to have arranged over $140B in finance for its customers, and presumably that amount has grown, but OTOH occurs to me that it can hardly be true that all of that is out there at the same time, so it may be more like tens of billions.

can hardly be true bc they are short term notes I mean

Another supply chain finance fund going down
https://www.bloomberg.com/news/articles/2021-03-10/another-trade-finance-fund-implodes-in-echoes-of-greensill

But to go back a few posts: I'm not sure whether or not there's something *inherently* wrong with supply chain finance, but it seems like there was something deeply wrong about the way Greensill did it

Any Greensill notes sold on to investors should have been "bankruptcy remote" though, such that the bankruptcy of Greensill shouldn't have any material impact on those notes. There is still a risk that Greensill going under might destabilize some of the companies whose accounts were being securitized, I suppose, but it shouldn't create a direct risk.

I don't think the concern is that Greensill bankruptcy directly impacts the notes, it's more that Greensill's bankruptcy is a symptom of what are also likely problems with the underlying notes. For the same reason that CS has frozen its supply chain finance funds that invested in the notes due to concerns about their valuation.

E.g. just read that 90% of revenue came from just 5 customers, the biggest being Sanjeev Gupta's web of companies, which appears to be in some trouble. Presumably that means 90% of the notes Greensill sold were backed by payment streams from those five companies.

revenue came from just 5 customers, the biggest being Sanjeev Gupta's web of companies, which appears to be in some trouble.

yeah, that detail was present in all of the articles I read the other night ... it seems like less of an issue with the structure of supply chain financing, and more an issue of the quality of the notes -- which is what was the key problem with the mortgage-backed securities in 2008. There was also a problem with how the revenue was being valued (asset valuation) ... all of that was paywalled enough that I gave up on researching it and looked at pictures of dogs iirc

b2b payday loans

― Joe Bombin (milo z), Wednesday, March 10, 2021 7:27 PM (yesterday

like, in essence, that's what this is ...

And it *could* turn out that Greensill wasn't the only firm using questionable methods to underwrite its securities, something we will presumably find out. And then who knows whether we will find out about more derivative products based on these securities, or these securities being used as collateral for other things, or for reg capital, or who knows what the fuck else. Not at all saying "this is it," just can see ways it could turn out to be an it.

Although I have seen some claims that there is a problem with the supply chain finance model itself, or at least with the way it's accounted for -- i.e that it enables companies who use it to inflate their cash/working capital. I have to be honest that I don't 100% understand the mechanism for why that's true -- does it extent the payment time? Does it enable the companies to roll over their obligations into new obligations?

Like there are two scenarios:

A) Company agrees to pay supplier $10,000 within 90 days. Company has cash on its balance sheet until it pays that supplier
B) Company makes agreement with supply chain finance, supply chain finance pays supplier $9800 on day 10. Company now owes supply chain financer $10,000. Company has that cash on its balance sheet until it pays.

What has changed? Does the supply chain financer give the company longer than 90 days to pay?

i think there are non-profits that do this type of financing (kinda) for government contractors ... where it can really take a long-ass time to get paid. Like, if there is a need for this financing for smaller non-profits or small businesses, the non-profit sector could step in and expand, and maybe those notes would have a lower yield, but they wouldn't be as risky

B) Company makes agreement with supply chain finance, supply chain finance pays supplier $9800 on day 10. Company now owes supply chain financer $10,000. Company has that cash on its balance sheet until it pays.

What has changed? Does the supply chain financer give the company longer than 90 days to pay?

in one of the articles I read, companies are not including this properly as "debt" ... or categorizing it as longer-term vs. shorter-term debt? ...

here it is:
https://www.behindthebalancesheet.com/blog-1/greensill-softbank-and-cooking-the-books

I'll read, but I'm aware of the argument that they're not characterizing it as debt. But my question is: wouldn't an account payable owed directly to the supplier also not be counted as debt? That's why I asked what's changed. Will take a look at the link though.

Ok, so sounds like it is that it stretches the time without reclassifying it as debt:

"It’s something the accounting bodies are looking into. Last October, the Big Four accountancy firms wrote to the US Financial Accounting Standards Board pointing out that whereas typical payment terms with suppliers historically might have been 60 to 90 days, some entities today seek to negotiate payment terms with suppliers of up to 180, 210, or even 364 days, using supply chain finance as the bridge. Indeed, many companies using reverse factoring fail to disclose this, and those that do often have a single line buried deep in the notes, often without quantification."

I.e. once you get into the territory of having six, nine, or twelve months to pay, it no longer looks like an account payable and looks more like debt, but you don't have to call it debt, and you get to keep the cash for longer. Maybe the line between accounts payable/debt is arbitrary to begin with but I see how that can stretch things within the arbitrary framework.

More fallout:

https://www.reuters.com/article/uk-britain-greensill-germany/from-black-forest-to-cologne-german-towns-fear-greensill-losses-idUSKBN2B30HR

Still probably on the small side contagion-wise, but what if those towns in turn have municipal bondholders whom they now can't pay?

Also maybe more appropriate for a european than a US economy thread, it occurs to me, all of this

Maybe the line between accounts payable/debt is arbitrary to begin with but I see how that can stretch things within the arbitrary framework.

I think it's something that is really clear cut, but there is a whole industry that gets paid to muddy the waters and find loopholes that could be argued as a reasonable position without getting any lawyer, accountant, or other person with professional ethics requirements into major shit.

i imagine you also have to take continuing education and have to take units of ethics where they instill in you why it could be very very very bad if you violate those ethics requirements ... it's like watching those awful car crash movies in driver's ed

oh yeah for sure, I'm cynical as hell about auditors

Yeah, this Greensill thing definitely reminds me of Enron in the making numbers look better by assigning them to different entities that are basically the same company

matt levine basically said the accounts payable thing was just clever accounting

Supply chain finance is arguably preferable to other ways of borrowing the money—like having a revolving credit agreement—because it doesn’t show up on the big company’s balance sheet as debt; it shows up as “accounts payable.” When the big company owes the money to the supplier, it’s an account payable; when Greensill pays off the supplier, it buys the receivable, and the big company still owes an account payable to Greensill.

A basic dumb rule of thumb for big companies is that investors (1) do not like debt (ooh, scary debt), but (2) love accounts payable (ooh, you’re so powerful and so efficient with your cash, you can get your suppliers to wait a long time for payment so you can hang on to your cash). So transforming “debt” into “accounts payable” is a good accounting trick; it makes a company look more valuable, without actually changing anything of substance.

That makes sense if Greensill was letting companies stretch out repayment times or accrue larger amounts of accounts payable than they otherwise would have. Then it's hard to distinguish from short-term debt.

Greensill was letting companies stretch out repayment times or accrue larger amounts of accounts payable than they otherwise would have.

well yeah, that's what it sounds like was the case with Gupta

FWIW bigwigs at Goldman and other IBs are saying this is "contained" "microproblem" etc. May very well be the case. But I always remember stuff like this when I hear that:

https://www.cnbc.com/id/19363728

Here's a US angle -- WV Governor Jim Justice's coal company is in deep shit due to reliance on Greensill financing

https://www.wsj.com/articles/bluestone-resources-sues-greensill-capital-for-fraud-11615907626

WV Governor Jim Justice's coal company is just the most hearbreaking noun phrase

the financing arrangement described in the complaint seems absolutely insane, still trying to get my mind around it tbh

must be 4/4 #onethread

I'm not completely sure I understand this, but it sounds like Greensill was both (1) paying Bluestone's (the WV gov's coal company) suppliers (supply chain finance) and (2) purchasing Bluestone's "future receivables," i.e. basically just pumping cash into Bluestone left and right and passing the IOUs along to Credit Suisse and GAM. Greensill just kept rolling over these obligations until it couldn't anymore (because CS turned off the capital spigot). Now Bluestone is complaining that it can't survive without Greensill's injections, and Greensill is in insolvency. So Bluestone is fucked, and I'm guessing some of its suppliers will get hurt as well.

Even crazier, Greensill arranged business between Bluestone and Sanjeev Gupta's GFG group -- Greensill's main client, who was responsible for the largest part of Greensill's bad loans that it sold off -- and had Bluestone start selling to GFG, with GFG getting "extended payment terms" (that it still failed to meet).

Of course everyone involved, including Jim Justice, is a complete POS. Bluestone owes $3 million in penalties for not complying with a water pollution settlement, just reported a few days ago.

https://www.propublica.org/article/this-billionaire-governors-coal-companies-owe-millions-more-in-environmental-fines

this story doesn't make any sense, it needs a Redwall

🤮

Hillbilly Eligy guy JD Vance, who advised the Mercers about fundraising for Parler AFTER the deadly insurrection, is running for Senate. There's already a super PAC for him that's got tons of cash from the Mercers and Peter Thiel. https://t.co/v59PsqWPk1

— Alex Kotch (@alexkotch) March 16, 2021

uhh wrong thread sorry

at least it doesn't involve Yellowcake (that we know of)

xp

lol I bet we could get from JD Vance's PAC to Greensill in like two steps if we tried.

this story doesn't make any sense, it needs a Redwall

― map ca. 1890 (map), Tuesday, March 16, 2021 12:51 PM (twenty-two minutes ago) bookmarkflaglink

I mean, IIRC, Greensill made an arrangement with Bluestone where it said "We will pay your suppliers for you and you can pay us later" and AT THE SAME TIME also said "We will advance you money on coal you don't have a contract to sell yet." And of course didn't give a shit if that made any sense because it was just passing off the loans onto Credit Suisse. And Credit Suisse in turn passed this off on a bunch of pension funds claiming it was all "fully insured" when it actually wasn't.

I don't think this is 2007/08-sized, but it def has a similar flavor.

*IIUC

I expected the Hillbilly Elegy guy to look more like the rapist SEAL Missouri governor and less like an adult baby tbh

yeah he looks like he'd be the jared kushneresque failson of a tobacco exec or something

adult baby is quite a common scots-irish genotype #calipers

You mean phenotype

he looks a little like mike lee. chubby little chins

xp. oh yeah, phenotype caused by genotype.

that the sort of NPR chin stroking liberal op ed set took (takes?) this guy seriously is nearly as galling to me as ‘intellectual’ conservative MAGA apologia

and over the long haul may be more damaging

I expected the Hillbilly Elegy guy to look more like the rapist SEAL Missouri governor and less like an adult baby tbh

that book was fucking awful, and even its polical-economic antipode (Neel's 'Hinterland') is racist trash afaic.