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Wednesday, June 19, 2024

Policy Myopia: How wishful thinking, perverse incentives lead to disaster

"What do Greensill Capital’s bankruptcy and India’s second Covid-19 surge have in common?"

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At first blush, the two tales seem to have little in common. The collapse of global supply chain finance firm, Greensill Capital, and India’s second COVID-19 surge seem to be worlds apart. And yet they are both about the irrational exuberance, poor judgment calls, and risky behavior brought on by victory, and the disasters they can create.

It is a question that keeps cropping up. How can so many intelligent human beings allow these tragedies to happen? This week, our discussion turns to the challenges of decision-making in situations where incentives exist for risk taking.

Collapse of a Unicorn

As late as December 2020, Greensill Capital was still headed towards an initial public offering with valuation estimates ranging from US$7 to US$40 billion. By March of 2021, the company had filed for bankruptcy. Greensill’s closure threaten the existence of companies who availed of Greensill’s more exotic financing products, the largest among them Sanjeev Gupta’s GFG Alliance, an international group of companies, which owns, among others, Liberty Steel. Credit Suisse, which had been associated with both Greensill and GFG, has sustained heavy reputation damage and executive heads are rolling as a result.

Greensill Capital was founded in 2011 by Lex Greensill. It began convincing the UK government to use supply chain finance (SCF) for most of its contracts. For those of you in business, SCF is essentially receivables rediscounting. Banks or other financial institutions provide loans to suppliers against its receivables. The supplier gains liquidity which allows it to mobilize more quickly which in turn benefits the client. Provided the customer is creditworthy, the bank makes money on interest and recoups its principal once the customer pays. In the early days of Greensill, the customer was the UK government, which is extremely creditworthy. This meant that the interest rate charged to the supplier companies taking out loans were very low making it attractive for the supplier.

Now, SCF is not a newfangled tool. It has been around for a long time. What did Greensill do differently? The funds Greensill loaned out came from Greensill Bank, a bank within the Greensill group. And here lies the twist. Greensill Bank sold the loans to other companies and investors, typically in the form of bonds. In finance terms, Greensill securitized the supply chain loans. This allowed Greensill to then take the money gained from selling the loans to lend to other suppliers. Thus able to keep renewing its cash, Greensill began to expand business to other suppliers, those with customers not as creditworthy as the UK government. Greensill continued to securitize its loans by purchasing credit insurance to cover credit losses on these receivables.

Greensill’s official corporate communication was that it owned state-of-the-art credit analysis technology that allowed it to maintain the quality of its loan portfolio–technology which would later turn out to be non-existent. In 2019, Greensill won a US$1.5-billion investment from Softbanks’s Vision Fund, a US$100-billion fund dedicated to making investments in disruptive technology.

Along the way, Greensill began to take more and more risk. In one headline-grabbing situation, Greensill lent US$780 million to US coal miner Bluestone on the strength of what it called future receivables, essentially receivables which did not as yet exist.

This risky behavior was no doubt fueled both by the seemingly unending flow of cash gained from Greensill’s securitizing activities, and the profit and growth imperative that always lie at the heart of any business enterprise. Under normal circumstances, this risky behavior would have been stemmed by good corporate governance. Unfortunately, in a company that claims to have technology it does not have, it is likely that conservatism would take a backseat to aggressiveness.

Insurers eventually woke up to the numerous red flags that began popping up and declined to renew Greensill’s credit insurance, This caused Greensill’s creditors, among them Credit Suisse, to freeze involvement with Greensill. By early March, failing in its plea for a government bailout, Greensill filed for bankruptcy.

Festivals and Politics

Now on to India’s COVID-19 story. A little over a year ago, in mid-March of 2020, India’s daily new COVID-19 cases was at 20. This did not last long. Following the pattern of many countries with dense populations, India’s COVID-19 cases began to rise. After hitting a peak of over 97,000 in mid-September of 2020, India’s daily new cases slowly dropped until, in the second half of January, daily new cases dropped below 15,000 and stayed there. Encouraged by the low numbers and the fact that India is home to one of the largest vaccine manufacturers in the world, the government declared victory over COVID-19 in mid-February. The mass euphoria was shared by government, media and citizens alike.

India began to allow mass gathering and gather people did, in many cases in very large numbers, with little to no physical distancing, and with no required personal protection. Cricket matches filled stadiums and the shores of the Ganges in Haridwar in Uttarakhand were filled by people bathing for the festival of Khumb Mela. The country held elections in five states and did nothing to prevent crowded electoral rallies. By the beginning of March, India’s 7-day average of new cases had topped 16,000 ending at over 59 ,000 by end March. By the 25th of April, India’s new cases had topped 350,000, breaking the global record for daily new cases.

As the world watches in horror, India’s second wave is overwhelming India’s health care system. Patients are dying in the streets waiting for hospital beds. Crematoriums are overwhelmed and skies are lit by mass funeral pyres. Experts do not expect the current wave to peak until mid-May, at which point daily new cases are expected to reach 500,000.

Contemporary Foolishness

Conemporary American Stupidity, an article by James Welles, was published in May of 2020. In it, Welles explores the systemic incentives and disincentives that reinforce what can be thought of as systemic foolishness. Essentially, if incentives exist to push decisions or policy a certain way and no disincentives are strong enough to push it back, then a cycle of foolish behavior prevails.

In both companies and countries, what we have learned is that good news can turn into irrational exuberance. It is especially dangerous and tempting when people have been in a state of frustration or languishing. Foolish behavior can often be tempting.

Clearly, check and balance cannot just be built into written policies and processes. In the end, they must come from people. A government that has a strong two-party system. A free, intelligent and brave media. Engaged and reasoning citizens.

The battle for our country is ultimately fought in our own minds and in our own homes, in how we think and how we engage. We cannot afford to be seduced by fool’s gold.

Readers can email Maya at Or visit her site at


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