Institutional Risk Analyst On Brokered Loans and The SoftBank Connections of Recent Frauds

From The Institutional Risk Analyst, March 15:

Greensill, Wirecard, Deutsche Bank & the Rising Tide of Financial Fraud

March 15, 2021 | In this issue of The Institutional Risk Analyst, we reflect on some reader comments about the growing number of financial frauds littering the global landscape, particularly in Europe. And we can’t help but notice the number that have ties back to those savvy investors at Softbank.

Alan B on the Left Coast reflects that this near-bank called Greensill bears a striking resemblance to Penn Square Bank, an Oklahoma-based lender with offices in a shopping mall that failed in July 1982.

“That crappy bank was funded by brokered deposits, ended up taking down some bigger banks and causing a bit of embarrassment among regulators,” notes Alan, who always tends toward understatement. In fact, when the Federal Deposit Insurance Corporation repudiated the loan participations sold by Penn Square, it caused five other banks to fail because of – wait for it – participations in leveraged loans.

We wrote in American Banker in May 2016:

“The investor exodus away from leveraged loans with exposure to the petroleum sector brings back memories of the 1970s oil bust, an economic shock that led to the failure of Penn Square Bank in 1982, the subsequent failure of Seafirst Bank later in that year, followed by Continental Illinois Bank in 1984. Before its failure, Penn Square technically continued to "own" — and service — loan interests held by other banks with participations. As receiver for the failed bank, the Federal Deposit Insurance Corp. deemed those investors to be nothing more than general creditors of the failed bank's estate. Those participating banks lost their entire investment.”

Aside from the lack of stable funding, Greensill was doomed to fail for the same reason that most nonbank finance companies fail, namely that the originate-to-sell model for private loans is inherently unstable and often unprofitable. Only by adding more risky assets to the mix of “supply chain” finance was Greensill able to construct the appearance of profitability and then only temporarily.

“Time to turn on the lights and find the rest of the cockroaches,” notes Alan B, reflecting the judgement, which we share, than more revelations will be forthcoming in this latest Softbank project. There is never just one cockroach in a financial mess this large. As more counterparties of Greensill acknowledge their error, the financial loss is likely to grow.

The fact that the folks at Softbank reportedly injected $2 billion into Greensill should come as no surprise. Another famous fraud that exploded all over EU regulators last year, Wirecard AG, also featured a large investment by Softbank. Indeed, the Japanese investment fund seemingly facilitated the earlier fraud. The $1 billion invested by Softbank in 2020 allowed Wirecard to raise almost $4 billion in debt leading up to its eventual declaration of insolvency last year.....

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