Written by: Alex M. on 31 March 2021
Over the Labour Day long weekend news filtered through that the ‘saviour’ of the Whyalla steelworks, Sanjeev Gupta’s GFG Alliance, was experiencing difficulty with its finances (see Ned K’s 8 March Vanguard article here. ) That is, one of GFG’s key financiers, Greensill Capital, has spectacularly imploded leaving question marks hanging over GFG Alliance’s ability to continue its various operations here in Australia and overseas.
A Bundaberg born businessman, Lex Greensill, founded Greensill Capital in 2011. Greensill went to one of the heartlands of finance capital, the City of London and established a financial firm that specialises in Supply Chain Finance.
Supply Chain Finance is like a lot of financial practice; it’s rather difficult for an ordinary person to comprehend. (The jargon and complexity associated with finance and financial instruments seems to be opaque by design.) Essentially, it is the speeding up of the payment process for companies actually making products. For example, a large manufacturer producing the bourgeois economists’ favourite item, the widget, has orders for the production of millions of widgets. The orders are from a number of companies involved in either using the widgets in their own production processes or selling the widgets (Marx called the latter merchants). Important here is the time discrepancy between the production of the widgets and the payment of the invoices by the companies that ordered the widgets. For the manufacturer it can be crucial to receive payment as soon as possible in order to have capital to start the production process again. However, invoices can have payments stipulated for 30 days or later after receipt of the widgets.
In order to overcome the time delay between production of commodities and payment for same, credit came into being. In volume three of Capital Marx describes the importance of credit and what he termed fictitious capital for the circulation of capital and the production process. Credit helped overcome the constant struggle to amass money for payment of commodities among other things. On the basis of the perceived soundness of a business or an individual, financial entities such as banks extended credit, thus allowing the production process to continue or the purchase of commodities to proceed with little to no delay. Of course the extension of credit comes at a cost; the debtor has to pay back the loan with interest. Marx highlighted the usefulness of credit and what was later called finance capital, while also pointing out the downside, namely the speculation associated with financial practice.
Since Marx’s time there has been an exponential rise in the number of financial instruments and financial corporations. In addition, the fragmentation of production processes has proceeded apace. That is, rather than the production of widgets taking place in a single location, the various parts of the widget making process can be separated out with manufacturing firms specialising in producing a part or parts of the widget. These production plants can be located in various parts of the globe due to lower wages, tax breaks, less stringent environmental laws, higher profits and so on, thus adding complexity to the supply chain. A classic modern example of this is the Apple IPhone where Apple subcontracts the production of parts of the phone out to Foxconn in China and the packaging of the IPhone to other companies in other cities and countries. The IPhone and its packaging is the result of a number of production processes located in various parts of the globe, entailing numerous changes of location, warehousing and shipping, before distribution to retailers. Such complex supply chains have helped drive the rise of Supply Chain Finance.
Greensill Capital as a provider of Supply Chain Finance acted as an intermediary between producers and merchants, buying invoices at a discount. Namely, paying the producer/manufacturer before the invoice is due at less than the face value of the invoice (the discount). The manufacturer is happy to get less than the full price as stipulated in the contract/invoice because they are getting payment quickly before the due date. For the purchaser of the manufactured goods, they don’t have to pay the manufacturer; they now have to pay Greensill when they (the original purchaser) take possession of the manufactured goods.
All very well, but there is a further financial twist; the debt owed to Greensill Capital as holder of the invoices was packaged up as Bonds and sold on the Bond market by Greensill. (Or an entity acting on behalf of Greensill; it is not necessary for the purposes of this piece to ascertain who organized the Bond issue as Greensill is the initiator of the process. One of the purchasers of the Bonds, a major financial capitalist enterprise called Credit Suisse grew alarmed with Greensill’s exposure to one group of companies – GFG – and stopped trading in the Greensill Bonds.)
Such a step was feasible due to the multitude of invoices they held. Amassing a huge amount of invoices with the attendant streams of income coming in from the original purchasers of the manufactured goods, packaging these income streams into a financial instrument (Bonds) helped Greensill fund their continuing operations in Supply Chain Finance and other areas of finance.
From its beginning in 2011, Greensill Capital grew dramatically due in part to its operating in what is called the shadow banking sector. Regulations and prudential requirements that financial institutions like banks are subjected to are evaded in the shadow banking sector. Emboldened by the lack of regulatory oversight and its ever-expanding Supply Chain Finance business, Greensill Capital indulged in some risky practices, or, more appropriately, speculative pursuits. As mentioned above, Greensill was one of the GFG Alliance’s major sources of finance. As well as the supply chain financing provided by Greensill to GFG, Greensill advanced GFG some additional unsecured loans resulting in GFG owing something like $4 billion US dollars to Greensill.
The house of cards started to fall last year, when, with the Covid induced downturn in global capitalism, businesses which owed payments to Greensill Capital began to default in large numbers. Alarm bells rang in insurance companies that underwrote Greensill’s financial business. Insurers declined insurance to Greensill considering it too risky to stay involved. Things snowballed, with Gupta’s GFG Alliance refusing to pay back what it owed to Greensill as much of it was in the form of unsecured loans. Greensill went under in a matter of days in late February, early March and GFG is frantically searching for new financiers.
This sorry tale leaves the Whyalla steel workers and their families wondering what will happen next. Time will tell, as this saga has not finished yet. What is clear though is that capitalism and its parasitical offshoot finance capital are not and cannot be the saviours of working class hopes and aspirations for secure and meaningful work and lives. Only socialist planning of production and finance can ensure the fulfilment of those working class hopes and aspirations.
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