Machiavelli in the ruins of Greensill Capital

PRINCETON — The collapse of Greensill Capital, a London-based financial services firm, offers a timely but costly warning about a number of contemporary trends. Clearly, we should be wary of the hype around financial innovation. But we also need to shine a brighter spotlight on the shady world of corporate lobbying, the regulation of risk, and other issues at the intersection of capitalism and government.

Greensill reportedly tried to use former British prime minister David Cameron to entice the Saudi government to press investors to contribute more funds to SoftBank so that SoftBank could increase its backing of Greensill. Then, following the start of the pandemic, Cameron reportedly lobbied for Greensill to secure access to an emergency loan scheme and pressed the National Health Service (NHS) to adopt an app owned by Greensill to pay NHS staff daily instead of monthly.

But the fact that Greensill was pedaling an advanced-payment app doesn’t mean that it was a genuine financial innovator. In reality, its financing activities were largely limited to a narrowly focused steel business: Indian businessman Sanjeev Gupta’s GFG Alliance.

Why would government officials from Saudi Arabia to the United Kingdom place their trust in such a company?

The superficial answer is that Greensill was selling glitzy new financing models that promised to help the Saudis modernise their handling of the annual Mecca pilgrimage, and the NHS to streamline its payroll.

And yet, these offerings were nothing new. The great push of financialisation that began in the late twentieth century has long been driven by securitisation, which allows firms to devise an endless array of “new” products. The process involves bundling together a diverse set of assets to create an apparently safer or more transparent set, which can then be carved up and remarketed according to various criteria. Ultimately, types and levels of risk can thus be disaggregated and sold to those willing to hold them.

After the 2008 financial crisis, securitisation was blamed for amplifying, rather than reducing, risk and the euphoria around the process duly evaporated. But the practice didn’t end. In the case of the financier Lex Greensill’s eponymous firm, it was used to package and sell loans to major financial institutions like Credit Suisse.

Greensill was a major player in the niche market of supply-chain finance, whereby a lender advances payments to a major buyer’s suppliers in exchange for a fee. Supply-chain finance will be unfamiliar to most readers; but it isn’t new. In fact, historians see it as the oldest application of finance, born at a time when merchants generally lacked the money to pay for their shipments until their inventories had been distributed or sold. Financing the transaction by giving the merchant a credit on the security of an invoice or a promise to pay thus satisfied an unmet need. There is evidence that the process was familiar even to the ancient Mesopotamians.

Above all, though, supply-chain finance was the centerpiece of late medieval and early modern banking and finance. Here, the decisive innovation was the bill of exchange, a document requiring payment of a specific amount at some point in the future. Merchants would buy a bill of exchange and send it to the country from which they wanted to import, where it could be used to secure the ownership of a product — say, a bale of wool — by another merchant who would then present the bill to the agent of the original issuer.

Crucially, this process eliminated the need for transporting large quantities of cash. But it also acted as an early credit instrument: Since the issuers of bills often worked with large customer deposits, they could engage in other banking activities at the same time.

Greensill — but especially his credulous creditors (above all SoftBank and Credit Suisse) — would have done well to study some of these medieval banks, the best documented being those based in Florence. Among these, the most famous Florentine bank to this day was the House of Medici (who were also patrons of the arts, politicians, and even popes).

In “The Rise and Decline of the Medici Bank: 1397-1494”, the twentieth-century Flemish historian Raymond de Roover explains, among other things, how the bank managed branches not just in Rome, Venice, Naples, and Milan, but also, through partnership agreements, in Avignon, Geneva, Bruges and London.

The branches in Bruges and London were the most problematic, in part because of the geographical distance, but also because they needed to interact constantly with strong and unpredictable states. As a consequence, the Medici bank’s local agents needed to lobby intensively, offering concessions to rulers in exchange for favours, such as permission to export the goods (wool) whose trade they were financing. This led them to lend more and more to governments, which used the money for their own purposes.

But the Medici bank’s financing of the English Wars of the Roses introduced a critical financial weakness. Because the London branch needed to lend ever-larger amounts to Edward IV for wars and dowries to secure political alliances, the first branch agent gave up in disgust. But he was replaced by Gherardo Canigiani, who became a devoted follower of the king — at the expense of the bank’s interests. In the end, the partnership had to be wound up in bankruptcy.

The Medici bank — which failed completely a few years later — served as an exemplary lesson for Niccolò Machiavelli, whose “History of Florence” attributed the bank’s downfall to the fact that its branch managers had started to act as princes themselves. This story was then repurposed by Adam Smith to show how government enterprises (as the Medici bank had become) were corrupt and wasteful, allowing Lorenzo the Magnificent to use “the revenue of the state of which he had the disposal”.

Shakespeare also offered a word of caution. “The Merchant of Venice” begins with the merchant Antonio boasting about the extent of his portfolio diversification. “My ventures are not in one bottom trusted/Nor to one place; nor is my whole estate/Upon the fortune of this present year:/Therefore my merchandise makes me not sad.” But soon enough, his ships and their cargo are lost at sea, leaving him with nothing to repay his debts.

The lessons of the intersection of finance and politics were not lost on Machiavelli, Shakespeare and Smith. Will we continue to ignore them?

Harold James is professor of History and International Affairs at Princeton University and a senior fellow at the Centre for International Governance Innovation. A specialist on German economic history and on globalisation, he is a co-author of “The Euro and The Battle of Ideas”, and the author of “The Creation and Destruction of Value: The Globalisation Cycle”,  “Krupp: A History of the Legendary German Firm”, “Making the European Monetary Union”, and the forthcoming “The War of Words”. Copyright: Project Syndicate, 2021. 

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