What's up guys and welcome back to wall street millennial on this channel, we cover everything related to soccer. Investing in this video we're looking at one of the biggest and most complicated financial disasters of recent years, founded by the australian finance here at lex, greensville greensville promised to democratize the supply chain, finance industry and help small businesses around the world. Get access to much needed working capital, they promised to deliver their investors, low risk and high returns by harnessing the powers of machine learning and artificial intelligence. In 2019, they raised 800 million dollars from the technology conglomerate softbank.

They gained credibility by signing on a star-studded list of advisors, including former british prime minister, david cameron and former australian foreign minister julie bishop. Both of those people were well respected on the global stage, but had zero experience in supply chain, finance or ai. This is eerily similar to theranos, which had a similar star-studded board of former politicians and generals, also with zero experience in the medical field. As of early 2020, everything was looking good for green sill.

Their investment bank credit suisse was mulling, a 30 billion dollar ipo. For this disruptive ai company, they planned to position it as a once in a generation company worthy of a premium valuation. This would have put lex screen so comfortably into billionaire status. Just one year later, the company filed for insolvency, wiping out their entire equity value.

Investors who bought green sales. Financial products are on the hook to lose billions of dollars and their previous insurance provider is now calling them a fraud in this video. We'll look at how green cell capital became the hottest fintech company in europe and how it all came crumbling down. The downfall of green souls shows how even billionaires can lose everything in a matter of just weeks, whether or not you're a billionaire one of the most valuable things that anyone can have is peace of mind in the event that something happens to you.

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Typically, life insurance gets more expensive as you get older, so the time to get coverage is now head to policygenius.com wall street millennial. To get your free life insurance quotes and see how much you could save and now back to the video lex greenzo was born in a small rural town in australia. His parents owned a farm that grew melons, sugarcane and other plants lex saw firsthand how much his family farm struggled with financial issues even after they sent the harvest to the customer. They would often have to wait months or even years to receive cash payment.

This is a big problem for many farmers, because they need the cash today to pay their day-to-day expenses and plant. The next crop. Many business transactions function with a delay. For example, if a farmer ships some watermelons to a supermarket, they might not get the cash immediately.

Instead, they give the supermarket an invoice saying that they must pay within a certain period of time, maybe 6 months. These arrangements are far more favorable to the customer, as they don't need to come up with the cash until a few months later. The suppliers often have to accept these unfavorable terms. If the customer has some sort of bargaining power, for example, it might be the only big supermarket chain in the area.

If the supplier needs the money immediately, they can use something called supply chain finance. When the supplier delivers the product to the customer, they sell the invoice to a bank who gives them money up front. The bank then waits to six months and collects the cash from the customer. The bank will buy the invoice for a discount to its face value.

This compensates them for the time value of the money, as well as the risk that the customer defaults on the invoice supply chain. Finance is risky because there's some chance that the customer just doesn't pay because of this banks typically only extend credit to large companies that they know well and have high confidence how the invoices will eventually be paid. This effectively excludes many small businesses from the system, making it difficult for them to grow or even maintain their day-to-day operations. Lex saw this problem and eventually wanted to democratize supply chain finance for all types of businesses.

Before he could do this, he would first have to make a name for himself in the financial world. So he left a small, australian hometown and moved to london, the financial capital of europe. He learned the ropes of the financial world by working at the multinational investment banks, morgan stanley and citigroup in 2011. He quit his high paid investment banking job to found his own supply chain finance company, which he named green cell capital supply chain.

Finance has been around for thousands of years and many traditional banks offered these services to their large corporate customers, but green cell promised to completely disrupt the industry. They employed the latest advances in machine learning and artificial intelligence technology to predict the credit worthiness of potential borrowers. With these novel methods, they could identify small businesses who have a very high probability of being credit worthy but had been neglected by the traditional banks because of lack of credit, history or other similar reasons. Supply chain finance is a very capital intensive industry.

You have to give money to the borrower up front in exchange for payments that come months later. If you need to grow, you need to access capital. If you want to grow fast, you need access to a lot of capital. Lex met a man named david solo.

The former ceo of the swiss asset management company gam solo personally gave green seal a 9 million loan to get them up and running, but solo also had something more valuable than money connections. Around 2016 solo introduced lex, the company that he used to help gam investments based in switzerland. Gam was a massive asset management company with over 100 billion dollars of assets under management. At the time specifically, lex met tim haywood, a rising star within gam haywood, managed the firm's absolute return bond fund under haywood's leadership.

The fund invested in various debt instruments in an attempt to maximize returns for their client assets. This fund invests in all types of debt instruments. Haywood eventually invested about 1.5 billion dollars of gm's client money into green sale, bonds, green sole would lend money to end customers using their invoices as collateral. They would then sell the invoices to gm's absolute return bond fund.

This would free up capital, so greensell could lend money to new end borrowers as gam poured more and more money into green sill. The company grew rapidly in 2018. They gained further credibility by raising a 250 million dollar equity investment by the massive private equity firm general atlantic. By this point, green seal was a rising start within the financial world.

They spent millions of dollars to buy multiple private just for corporate use, while private jets are often viewed as vanity items. Green sills jets may have had an important business purpose. In 2018, one of tim haywood's colleagues at gam, notified the british financial conduct authority or fca about a potential conflict of interest in or around 2017 haywood, took a free trip on greensoul's private jet to the italian island of sardinia, which is a popular vacation destination for Rich people, the fca estimates, the private jet trip to be worth fifteen thousand pounds. In addition, greensell gave gam equity warrants that could increase in value substantially.

If green sales valuation rose, the private jet rides and warrants could potentially cause a conflict of interest for haywood, making him far more likely to invest client money into green sill supply chain finance scheme, even if they don't provide the best risk adjusted returns. The fca did not find evidence to suggest that the private jet trip influenced haywood's decision to invest in green sales supply chain finance scheme, but they did find that he failed to properly disclose the private jet trip and other gifts that greensell gave to him. In light of the scandal, game fired haywood and wound down the absolute return bond fund, clients lost confidence in gam and started withdrawing their money to this day. Gam's reputation has still not recovered and their share price has fallen more than 90 percent.

Since the haywood scandal was exposed, while gam continued to offer green sale backed funds to their clients, the level of funding decreased dramatically if green still want to sustain its growth. Greensell needs to find a new source of funding, while the gam debacle tarnished green sales reputation within the industry, there was one investment bank still willing to work with them. The swiss bank credit suisse is one of the largest wealth management companies in the world. Their ultra high net worth clients have hundreds of billions.

If not trillions, of dollars of personal assets, they rely on credit scores to give them financial advice and access to investment products. Credit suisse started pitching their clients on green sole, backed funds. They had very little risk and offered greater returns than traditional bond investments. They were lending money collateralized by sales, which had already been made.

All they had to do was wait for the cash to come in and in the unlikely event that they can't collect on the invoice. Greensell purchased insurance against potential losses. So, from the perspective of credit, suisse's clients, the money might as well already be in the bank, with green sill being so safe credit suisse's, wealthy clients started pumping money into their supply chain finance funds hand over fist with the total investment eventually soaring to 10 billion Dollars the 10 billion dollars from credit suisse dwarfed, the 1.5 billion dollars that they raised from gam and greensell rapidly expanded their operations by 2019. They looked unstoppable.

They raised 800 million dollars from the technology conglomerate softbank. This not only gave them a war chest to fund their growth, but also credibility as a disruptive technology company. They used this money to expand rapidly into countries all across the world from brazil to india. In addition to funds from credit, suites greenstill found another creative method to raise capital.

They bought a small german bank, called nord finance and rebranded it as green cell bank. Nord finance was a proper bank, so they could raise deposits insured by the german banking regulator at very cheap rates. As of 2019, the bank had about four billion dollars of total assets. Being a registered german bank, greensville bank was regulated by baffin, the german financial regulator, as we will see later, this eventually became very important by this point.

Everything was looking good greenseal had disruptive technology allowing them to make supply chain finance loans much more efficiently than the legacy banks. They also had access to billions of dollars of cheap capital from credit suisse's, wealthy clients in their retail bank. In germany by january of 2020. Things were going so well that credit suisse was already planning to take the company public with an ipo.

They planned to position it as a once in a generation company at a premium valuation of 30 billion dollars. That would make them the most valuable fintech company in europe by far, but underneath the facade of artificial intelligence, green cell's business model was a lot more risky than many of their investors believed liberty. House is a multinational company operating steel and aluminum plants around the world. It was founded by an indian british businessman by the name of sanjiv gupta liberty.

House was part of gupta's larger industrial conglomerate called gfg alliance, which had revenue of 20 billion dollars and employed more than 35 000 workers, as it turns out, gfg funded a large part of their rapid growth by tapping green sold for supply chain financing. By the end of 2020, they had borrowed an estimated 5 billion dollars from the fintech firm lex, framed the mission of green sill as democratizing supply, chain finance and extending credit to previously neglected small businesses. In 2019 he tiled the fact that they had over 8 million customers, but a large proportion of the total value of their loans was the gfg alliance, a far cry from a small business. But this shouldn't be too bad.

Remember that green cell only made loans backed by invoices, the sales were already made. They were just waiting for the cash to come in, so even if they had a large concentration on one customer. The business model was so safe that the chances of large losses were very low, and even if there were any problems, the loans were guaranteed by the japanese insurance company, tokyo marine. So, under any circumstance, it should be almost impossible for green sales investors to incur any losses, at least that's what they thought.

In 2020, the german financial regulator baffin launched an investigation into green sole bank, their german banking subsidiary that same year, media reports came out suggesting that sanjeev gupta's industrial empire was relying heavily on greenfield bank to fund its expansion. The german regulators got suspicious and commissioned an investigation into the bank. The results of the investigation were shocking. Germany has a system equivalent to the fdic in the u.s, where retail banking deposits are insured up to 100 000 euros in the event that the bank goes bankrupt.

The government is the one holding the bag because of this, they enforce strict regulations limiting risk on bank balance sheets to minimize the losses from deposit insurance. Greensville bank told the regulators that their loans were extremely safe because they were backed by invoices for sales that were already made, but the regulator could not verify the existence of these invoices, while green still started off providing traditional supply chain financing, they eventually moved on to So-Called future accounts receivable lending. They would use their ai models to predict future sales of the borrowing company. They would then use these future expected sales as collateral for their loans.

This completely changes the risk profile. If they make a steel product, they may or may not find a customer to buy it and there's tremendous uncertainty about the price they can get for it and even more importantly, this is not what they told the regulators they were doing. In early 2021, the regulators forced the bank to shut down and to control these assets. At the same time, green cells ensure tokyo marine was getting suspicious about the risks related to the supply chain, finance loans.

In march of 2021, they decided to end their coverage of green sales debt. Remember that by this point, the majority of their funding came from credit, suisse's wealth management, clients who thought that they carried almost no risk with the insurance con. The loans became extremely risky and credit suisse froze the funds effectively halting the flow of new money into the embattled fintech company. With this, the house of cards finally came crumbling down.

They lost their sources of financing and could not write any new loans. This was a huge disaster for gfg finance, which relied on greensell's credit to fund its day-to-day operations, unable to refinance their loans. They didn't have the cash on hand to make the payments and filed for insolvency greenseal also filed for insolvency and shut down its operations. This put close to 1 000 of their employees out of a job and likely means a total loss for the more than 1 billion invested by softbank and general atlantic.

These venture capital investors knew that they were making a risky bet and there's always a possibility of losing everything. But what about the investors who bought the supply chain, finance loans, thinking that they are risk-free? There are two main parties who stand to lose money from the collapse. The first is greenfield bank, which is owed significant money by gfg alliance and other borrowers, who are unlikely to pay back the loans in full. Most of the deposits of green cell bank were held by local depositors in germany.

Their deposits are insured up to 100 000 euros per person, so most of them will be fine. The banking regulator has already paid out about three billion dollars to these depositors. These funds will ultimately be borne by the broader german banking industry, as all german banks pay contributions to the deposit insurance fund, there's another roughly 3 billion loss related to credit, suisse's wealth management, clients. These funds are not covered by deposit insurance, but they were insured by the japanese insurance company tokyo marine.

However, tokyo marine is now saying that green still applied for the insurance under a fraudulent pretext, making the insurance contract void. Credit suisse is currently locked in a legal battle with tokyo marine as to who will hold the 3 billion bag of green cell losses. The swiss bank warned that it could take up to five years for the case to be settled, regardless of who wins the case. Somebody is going to lose a lot of money.

The next question is: if there will be any criminal liability for lex greensell or any of the high-ranking executives at the company, the question is: did they knowingly defraud tokyo, marine, the german banking regulator or any of their counterparties if they said that their loans were all Backed by invoices for sales that already been made, but in reality the sales had not yet been made, this could be a criminal fraud. German authorities have already filed a criminal complaint related to the non-existent invoices. This could be considered balance sheet manipulation which is punishable by up to three years in prison. These types of white-collar criminal cases can take a long time to play out theranos, for example, collapsed in 2016, but founder elizabeth holmes wasn't convicted until six years later in 2021, and the case of greensell may be even more complicated.

Unlike theranos. Greenseal was a real company with real revenue in operations. They may have misrepresented the riskiness of their loans to investors, but even if they did, this is not nearly as blatant as theranos completely fabricating their technology. The main problem with greensell is that their ai technology wasn't as good as they thought it was at the end of the day.

They were a bank that lent money mainly to industrial companies, no matter how much machine learning you apply to this, you could never eliminate the risk of default. After a 10-year bull run for technology companies. Venture capital investors seem to think that any industry can be disrupted by technology. That's why you saw softbank pouring billions of dollars into companies like greensteal and wework, both of which ended in disaster.

The story of greenseal is a cautionary tale for all investors. While technology has the potential to disrupt many areas of the economy, it is not a panacea for all the world's problems. Alright, guys that wraps it up for this video. Do you think green cell was a fraud or were they just trying to expand too aggressively? Let us know in the comments section below as always.

Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.