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Cameron had a point: SCF would have been a good rescue tool

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David Cameron’s involvement with Greensill Capital blew a financial scandal into a political crisis, as details emerged of the close contacts between the company, civil servants, ministers and the British establishment. Last week, UK lawmakers had their chance to grill Cameron directly, in a session which can’t have been too comfortable. But amid the self-exculpation, the ex-Prime Minister had a couple of good points.

Appearing in front of the Treasury Select Committee is a tough gig. Part political theatre, part forensic cross-examination, there’s a lot that can go wrong — but it’s hard to refuse an invite. So it was time to get the popcorn out last week, as the Committee heard first from Lex Greensill and then from Cameron for its inquiry, “Lessons from the collapse of Greensill Capital”.

Cameron’s work for Greensill as a “senior adviser” has catapulted the collapse of the supply chain finance firm from the business pages to the front pages of the UK’s national press. The former PM attended Greensill board meetings, lobbied the chancellor of the exchequer and the health minister on Greensill's behalf, and used the extensive contact book built up during his years at the head of government to pitch the company wherever he could.

Under interrogation by MPs, Cameron spent a lot of time evading questions about how much he was paid by Greensill, noting that he would have been well remunerated wherever he decided to work. He also defended his lobbying of civil servants, and the lobbying disclosure rules his government introduced. Under those rules, he did not feel compelled to reveal his work for the company, which was instead uncovered by investigations by the Financial Times.

But whatever the strengths or weaknesses of his justification for how he carried out the lobbying or what he was paid for it, the case he laid out for the thing he was lobbying for — using supply chain finance to help businesses weather the pandemic — did raise an interesting point.

Cameron argued that, during the tough times of March and April 2020, the government ought to have looked to use supply chain finance to channel credit into small businesses — ideally through Greensill, or at least along the lines of the Greensill model of packaging SCF obligations into bonds.

According to Cameron, the failure of this scheme to get off the ground was partly down to slowness on Greensill’s part in putting together a solid proposal. Senior treasury officials were interested in the idea, he claims.

As well they should be. In previous rounds of financial crisis, as well as the Covid crisis, officials have strained every nerve to push credit out into the small business sector. Supporting big business is easy and well understood by now — simply buy their bonds, or commercial paper, as the Bank of England did last year under the Covid Corporate Financing Facility.

But it is hard for any central institution to quickly and effectively channel cash to small businesses without doing all the credit work involved in individually analysing the recipients. Instead, government must work through intermediaries in the banking sector. The bank liquidity support schemes of both the European Central Bank and the Bank of England give extra credit to banks that expand small business lending, while guarantee schemes from the European Investment Fund and British Business Bank aim to offer banks capital relief.

Subsidies for small business lending are built into the very architecture of bank regulation through the SME supporting factor — which allowed banks to pretend SME lending was 25% less risky than it looked.

The major route through which the UK chose to support SMEs during the Covid crisis was the CBILS (Coronavirus Business Interruption Loan Scheme) guarantee, which covers 80% of an SME loan with a government guarantee. But these were slow to get off the ground — banks still had to take risk on 20% of the loans — and expensive. At first, lenders often still wanted personal guarantees from SME founders. This was a huge stumbling block, as business owners facing the indefinite shutdown of their industry were often unwilling to put their home on the line to obtain a still-costly loan to cover the gap.

The best and fastest way to support many businesses through a short sharp shock is indeed to help them with working capital — get their invoices paid instantly, and pay their suppliers instantly, using financial markets and government support.

The overriding impulse among corporations large and small last spring was a “dash for cash”. Many of the largest firms drew down their revolvers, renegotiated payment terms and froze discretionary spending and capex. This, unfortunately, has a knock-on effect. Every firm that delays payments to suppliers protects its own cash position at the expense of longer invoice terms for someone else, worsening working capital conditions down the line.

If the government were to insert itself in the process, making sure everyone was paid on time, it would prevent this negative spiral and support business confidence.

Designing such a scheme would not have been easy, especially in the crisis atmosphere of March 2020. It is not clear that the right approach would necessarily have been to repackage supply chain financing obligations, or even ordinary receivables, into bonds — as Greensill did for its clients — and sell these to the Bank of England or elsewhere.

It is also far from clear, if such a scheme were to have been put into place, that Greensill should have been anywhere near it. Quite the reverse.

Subsequent revelations about the scale of Greensill’s lending to the Gupta empire, the criminal investigations into Greensill Bank, the frailty of the credit insurance contracts which wrapped some of the Greensill facilities, to name just the most prominent scandals, suggest UK authorities would have been better off working things out on their own, rather than taking Cameron up on his kind offers.

But inside the self-interest is the kernel of a good idea. Greensill might have tarnished the sector, but supply chain finance, whether through banks or not, still offers a potent crisis-fighting tool.

That is unlikely to be one of the official “Lessons from the collapse of Greensill”, but some of the brightest sparks at the Treasury and Bank of England should consider adding SCF to their toolkit so that it’s ready for the next crisis.

 

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