One Step Up #37
This week, we look at Greensill, The Economist, Live Audio/Clubhouse, Roblox, Meituan, Reatil trading, the Creator Economy + more
First up - apologies for failing to get the newsletter out last week. Going to make this edition slightly longer to make up for it!
The Best Way to Rob a Bank
This is the story of Greensill’s collapse and why this time it’s no different.
By all rights, Greensill – the eponymously named investment bank started by former Citigroup and Morgan Stanley banker Lex Greensill in 2011 – should have been shot between the eyes in 2019. That’s when their “supply-chain finance” loans, in this case to the steel and energy companies of the UK’s “Savior of Steel”, Sanjeev Gupta, blew up Swiss asset manager GAM’s $11 billion flagship fund, the Absolute Return Bond Fund (ARBF).
It’s a story as old as capital markets … Greensill lent Gupta a lot of money, Greensill wined and dined and private jetted ARBF portfolio manager Tim Haywood, and so naturally Haywood bought as much of the Greensill-originated loans as humanly possible, topping out at 12% of ARBF NAV. LOL. The loans, of course, were not as they seem, Gupta’s companies were nowhere near as solid as they were represented, and GAM ended up firing Haywood and seeing their stock price crater. The GAM CEO got fired, lots of people lost lots of money … end of the road for Greensill, right? Nope.
Enter Masayoshi Son, CEO of Softbank, who ended up putting $1.5 billion into Greensill in 2019 through Softbank and then another $1.5 billion into Greensill through the Vision Fund, becoming Greensill’s largest investor and diluting the prior largest investor – General Atlantic – from a 15% to a 7% position. And then the fun begins.
Since that 2019 rescue, Greensill has lent billions of dollars to Softbank and General Atlantic affiliates (mostly Softbank, but GA looks plenty stinky here), loans that were then bought by Credit Suisse funds and laundered by Greensill’s German bank subsidiary. Now when I say ‘laundered’, I don’t mean that metaphorically. The German banking and markets regulator, BaFin, has suspended Greensill’s banking license and referred the case for criminal prosecution.
Here’s an example of how the scam worked. Again, it’s a story as old as capital markets. In early 2020, Greensill lent Softbank portfolio company Katerra $435 million. The company ran into … errr … operational difficulties, and Softbank ponied up $200 million in additional capital last December. For its part, Greensill wrote off the $435 million loan in exchange for … again, wait for it … 5% of common equity. LOL. The $9 billion valuation for Katerra (I am not making this up) was determined by Softbank, of course, and so the Greensill German bank subsidiary reported on its balance sheet that all was well. A $435 million senior loan, secured by trade receivables, was exchanged for a 5% equity position in a bankrupt company, with no loss reported. Seems fair!
As always, the best way to rob a bank is to own a bank.
Second best way is to find a really big bank to buy up all the crap loans you originate, and that’s where Credit Suisse comes in. After the GAM debacle in early 2019, there was zero question that the loans Greensill had been selling to Credit Suisse for years were just as stinky as the loans they had sold to GAM. And yet Credit Suisse did … nothing. Actually, that’s not fair. They purchased MORE of the securitized loans from Greensill than ever before. They marketed their funds HARDER than ever before.
I’m sure it’s just a coincidence that Softbank put $500 million into the Credit Suisse funds after their 2019 Greensill investment.
I’m sure it’s just a coincidence that Credit Suisse was the lead advisor to Greensill when they raised hundreds of millions in new capital at a valuation of $7 billion all of … [checks notes] … four months ago.
I’m sure it’s just a coincidence that Credit Suisse and Greensill found a Japanese friend-of-Softbank insurer, Tokio Marine, willing to put a wrapper around the Greensill loans so that Credit Suisse could market these Greensill lending facilities as … one more time, wait for it … a safe-as-houses money-market fund.
How Curation Ate The Economist
People can start to feel guilty if they’ve got a pile of print editions or a load of bookmarks. So, rather than enjoying reading the Economist, you’ve got a situation where readers start to feel a bit guilty. We don’t want readers to give up; we want to make it even easier for them to get value from The Economist without feeling they have to read it all. That’s where our focus on curation comes in. It’s our service to make life less complicated and the experience more enjoyable.
Something is Happening in Germany
Such a great article on Clubhouse and the broader “live audio” segment.
Rise of the retail army: the amateur traders transforming markets
Powerful waves of passive and systematic investment long made retail investors largely irrelevant when framing market forecasts . . . until now.
The Complete History and Strategy of Meituan
Roblox and the Creator Economy
Roblox is a call option not only on the metaverse, but the open-source economy. Incredibly detailed and well rounded analysis of what I think was the most talked about company in the last 2 weeks.
For Creators, Everything Is for Sale
Wild article on what’s going on in the creator space.
We’re building an economy of attention where you purchase moments in other people’s lives, and we take it a step further by allowing and enabling people to control those moments.
The Fed Isn’t Printing As Much Money As You Think
The huge majority of the increase you’re seeing in this chart is not money printing or new money creation.
It’s an accounting rule change.
Here’s what happened.
The supply of money is measured a few different ways. M1, which this chart shows, measures money that’s readily available – mostly paper cash, coins, and checking accounts.
Another measure called M2 is a little broader. It includes money in savings accounts and retail money market accounts.
The difference between a checking and savings account is how often you can access your money. That might seem trivial but it explains most of what happened in this chart.
If you put money in a checking account, regulators make banks set aside a cushion as reserves in case they get into trouble. But if you put money into a savings account, regulators tell banks they don’t have to reserve anything. The catch is that it’s only considered a savings account if the consumer is allowed to make no more than six withdrawals per month.
It’s worked that way for years.
But then Covid hit, and regulators realized that having trillions of dollars in savings accounts with limited withdrawals was a burden as 22 million people lost their jobs.
So last April the Fed changed the rules and eliminated the six-withdrawal limit on savings accounts. It wrote:
The interim final rule allows depository institutions immediately to suspend enforcement of the six transfer limit and to allow their customers to make an unlimited number of convenient transfers and withdrawals from their savings deposits at a time when financial events associated with the coronavirus pandemic have made such access more urgent.
It was an obvious and nearly risk-free way to help people. Just let them have easier access to their savings.
But it changed the relationship between M1 and M2.
Savings accounts are measured in M2 and left out of M1. But once the six-withdrawal rule was removed, every savings account suddenly became, in the eyes of regulators and people who make these charts, a checking account.
So M1 exploded higher. Not because the Fed printed a bunch of money, but because trillions of dollars in savings accounts were reclassified as checking accounts.
The Great Rotation: A hundred-year perspective
Value investing has held a structural advantage when considered over multiple market cycles. Its worst-ever performance, therefore, when compared to growth stocks last decade is vexing. The Russell 3000 Growth Index skyrocketed more than 300 percent in the last ten years while the Russell 3000 Value Index was only up 107 percent.
Rather than cheap valuations, the biggest driver of value returns was sector composition. Value outperformed growth for most decades since the 1930’s because of overweighting in energy, materials, and finance, the dominant industries of the past century.
At the same time, technological advancements underpinned the rise of wholly new sectors such as information technology and healthcare, reflecting a new economic reality based on intangibles: IP, data and software.
As long as the global economy becomes more knowledge-based and increasingly reliant on new technologies, growth indices will outperform because of an overweight in the dominant industries of our time.
How To Be Creative: How an Artist Turns Pro
Till next time.
