Talks about trouble at the Swiss investment bank CreditSuisse CS gained ground over the weekend and twitterati began to raise the specter of a Lehman-like collapse.
What Credit Suisse is missing: Credit Suisse fundamentals have deteriorated rapidly thanks to a combination of macroeconomic factors and company-specific malaise. The bank has been rocked by a series of scandals and mishaps that have affected its finances, the most notable being the situation resulting from the collapse of US hedge fund Archegos Capital, founded by Bill Hwang, early 2021.
The Swiss bank then warned of a significant impact after exiting positions in the fund. In addition, the bank was fined by a Swiss court in June for lax controls that allowed one of its employees to help a Bulgarian drug ring launder money, the New York Times reported.
In July, Credit Suisse said it posted a loss of 1.59 billion Swiss francs ($1.6 billion) for the second quarter, compared to a profit of 253 million Swiss francs a year earlier, as its investment banking business plummeted .
As a revival measure, the company announced a change at the top, the appointment Ulrich Korner as the new CEO and also initiated a strategic review process. Problems at the bank included some high-profile departures. The setbacks began to affect the bank’s share price, which has been in a secular decline since March 2021.
See Also: Credit Suisse Considers Splitting Investment Banking Unit, Outlines Plans
Credit Default Swaps Peak: Credit Suisse credit default swaps, or CDS, a derivative instrument that allows one investor to trade their credit risk with another investor, rose sharply on Friday, reflecting market perceptions of rising risk. It is now approaching the highs of the 2008 financial crisis, when the US investment bank Lehman Brothers went bankrupt.
Houston, we have a problem. market capitalization of $CS is now a rounding error. 35x leverage. This and Deutsche Bank… a canary in the coal mine.
CDS on Credit Suisse now at GFC highs. #btc pic.twitter.com/cVTOavkBv2
— FOSS – Lehman CDS at 9 bps in ’06, � now at 41 (@FossGregfoss) 09/30/2022
After the development, senior Credit Suisse executives went around reassuring major clients, counterparties and investors of the bank’s financial health, the Financial Times reported. In an information letter to customers, the bank said: “Our position in this regard is clear. Credit Suisse has a strong capital and liquidity position and balance sheet. Stock price developments do not change this fact,” the report added.
Körner reportedly sent out a company-wide memo on Friday to address staff concerns about the bank’s capitalization and liquidity.
Lehman-like collapse? Social media has been awash with rumors of a Lehman-like situation, both at Credit Suisse and Deutsche Bank AG DB
A Twitter user pointed out that these two banks are labeled as systemically important financial institutions, meaning they are “too big to fail,” much like Lehman was labeled before its collapse. Given that these banks collectively have more assets than Lehman did when it faltered, the impact on the financial system could be much larger, he stressed.
The development comes against the backdrop of an ongoing downturn in the market amid uncertainty about the economic outlook and rising interest rates necessitated by inflationary pressures.
Photo: Courtesy of Gorka Montie on flickr