Talks of trouble brewing at Swiss investment bank Credit Suisse CS gained ground over the weekend, with Twitterati beginning to raise the specter of a Lehman-like collapse.
What Ails Credit Suisse: Credit Suisse has seen its fundamentals deteriorate rapidly, thanks to a combination of macroeconomic factors and company-specific malaise. The bank has been rocked by a string of scandals and mishaps that impacted its financials, with the most notable being the situation that arose from the collapse of U.S. hedge fund Archegos Capital, founded by Bill Hwang, in early 2021.
The Swiss bank had then warned of a significant impact after it exited positions with the fund. Additionally, the bank was fined by a Swiss court in June for the lax controls it had, which allowed one of its employees to help a Bulgarian drug ring launder money, the New York Times reported.
In July, Credit Suisse said it reversed to a loss of 1.59 billion Swiss francs ($1.6 billion) in the second quarter from a profit of 253 million Swiss francs a year ago, as its investment banking business bled heavily.
As resuscitation measures, the company announced a change at the helm, appointing Ulrich Körner as its new CEO, and also embarked on a strategic review process. The problems at the bank included some high-profile departures. The setbacks began to reflect on the bank’s stock price, which has been on a secular decline since March 2021.
See also: Credit Suisse Mulls Splitting Investment Banking Unit, Outlines Plans
Credit Default Swaps Spike: Credit Suisse’s Credit Default Swaps, or CDS, a derivative instrument that allows an investor to swap their credit risk with another investor, surged on Friday, reflecting the market perception of increasing risk. It is now approaching the highs seen during the 2008 financial crisis, which saw U.S. investment bank Lehman Brothers go bankrupt.
Houston we have a problem. Market cap of $CS is now a rounding error. 35x leverage. This and Deutsche Bank…a canary in coal mine.
CDS on Credit Suisse now at GFC highs. #btc pic.twitter.com/cVTOavkBv2
— FOSS – Lehman CDS at 9bps in ’06, � now at 41 (@FossGregfoss) September 30, 2022
Following the development, senior Credit Suisse executives have been going around, reassuring big clients, counterparties and investors about the bank’s financial health, the Financial Times reported. In a briefing note sent to clients, the bank said, “Our position in this respect is clear. Credit Suisse has a strong capital and liquidity position and balance sheet. Share price developments do not change this fact,” the report added.
Körner reportedly sent a company-wide memo on Friday to allay concerns of the staff about the bank’s capital position and liquidity.
Lehman-Like Collapse? Social media was awash with rumors of a Lehman-like situation, both at Credit Suisse and Deutsche Bank AG DB.
One Twitter user pointed to the fact that both these banks are designated as systemically important financial institutions, meaning they are “too big to fail,” similar to how Lehman was labeled ahead of its collapse. Given that these banks collectively have more assets than what Lehman had when it floundered, the ramification for the financial system could be much more, he pointed out.
The development comes against a backdrop of a protracted downturn in the market amid uncertainty over the economic outlook and rising rates necessitated by inflationary pressure.
Photo: Courtesy of Gorka Montie on flickr