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Why is Credit Suisse in Trouble? All You Need to Know

Stock Markets Oct 04, 2022 11:25AM ET
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By Vlad Schepkov

If you followed the markets even slightly over the past few weeks, chances are good there’s one story you heard over and over - that of Credit Suisse (NYSE:CS) and all the trouble it’s gotten itself into.

Switzerland's second-biggest bank, and one of the world’s premier and paramount financial institutions is getting a lot of bad press and commentary, with rhetoric ranging from mild concerns over the bank's liquidity and quickly escalating to fears of inevitable downfall and the global crisis that will follow (think Lehman Brothers and Bear Stearns).

Wherever the truth lies, the story is surely keeping many traders and investors up at night. Here's all you need to know about the market's latest woe.

A String of Mishaps

Due to famous "bank secrecy" laws, Switzerland, the tiny country of 8.7M people, has historically been a global banking powerhouse: it headquarters banking giants such as UBS, Credit Suisse, Swiss National, Raiffeisen, as well as countless smaller outfits.

At the same time, the very same secrecy has always raised inevitable ethical concerns and speculations of malpractice – exactly the things Credit Suisse has excelled at lately.

Throughout much of its 160-year-old history, the bank saw many accusations of unethical dealings, manipulations, and money laundering. And, as of the past decade - multiple major mishaps too.

Some mistakes prove harder to recover from - between a $2.65B write-down in 2007 over trade mismarking, a $2.6B fine for U.S. tax fraud in 2014, and a series of high-profile management departures in 2020-2022, the two latest ones topple them all.

In March 2021, a supply-chain financing-focused firm Greensill Capital collapsed, costing Credit Suisse over $3B of clients' money.

When one thought things couldn't get worse, just a month later, the bank found itself at the epicenter of the infamous Archegos Capital Management scandal.

The overleveraged $10B family office of Bill Hwang, formerly a Tiger Asia Management trader, got a massive margin call when its biggest bets on ViacomCBS (NASDAQ:PARA) and Discovery (NASDAQ:WBD) turned sour - when the dust settled Credit Suisse was short another $5.5B.

Restructuring Efforts, Capital Shortfall Worries

All said and done, Credit Suisse's losses topped $4B over the past 3 quarters alone - or nearly as much as the bank had made over 3 preceding years!

As a result, in July 2022, the troubled company decided to bring on board a restructuring expert - Ulrich Koerner joined as CEO and launched a second strategic review within a year.

The new CEO took to 'reshaping Credit Suisse for a long-term, sustainable future - with significant potential for value creation,' noting 'I am confident we have what it takes to succeed.'

The analysts, however, aren't fully convinced - despite the efforts, some expect the firm to post capital shortfalls of up to $4B-$6B, depending on how successful the bank will be at lowering costs and divesting assets.

Such dire outlooks have prompted the most scary question of all.

Can Credit Suisse Collapse?

Opinions vary widely and wildly.

Some claim the bank will make it through just fine, while others see a need for significant state intervention or massive equity raise - the $5B figure is often mentioned, echoing the midpoint of predicted capital shortfalls range.

But doomest-and-gloomest predictions see inevitable collapse that may easily crumble financial markets worldwide, much like Lehman Brothers and Bear Stearns did in 2007-2008.

The answer is both nearing and looming - in what will likely be its 'make it or break it' moment, Credit Suisse is expected to present a new strategic plan on October 27th and provide a comprehensive update on success or lack of thereof in its cost-cutting and asset sales efforts.

One major indicator, the market, is not enthusiastic - CS shares are down nearly 60% YTD, with 15% in the past month alone.

In the bigger picture, things aren't better either - with a current market cap of ~$10B, a mere tenth of the $100B the company enjoyed in 2006-2007, the bank seems just a shadow of its former self.

One other indication of waning investor confidence is Credit Default Swaps - instruments used to insure exposure to the lender's debt.

For CS, they stood at 250 bps on Monday, a drastic increase from the 57 bps early in the year, and far higher than any other major bank.

Can we See Another 2007-2008?

But the biggest question of all is - can and will Credit Suisse’s potential downfall, take everybody else with it?

As with any other potential 'black swan' event - this one is impossible to make a judgment call on.

Optimists point that Credit Suisse’s issues seem to be fairly limited to Credit Suisse - whilst troubles of Lehman Brothers and Bear Stearns were 'systemic' and persisted in most major U.S. banks.

Skeptics and pessimists are quick to counter that another European banking giant, Deutsche Bank (ETR:DBKGn), is experiencing similar problems and warn the collapse of one may trigger the other and have a domino effect on other banking players worldwide.

One thing is obvious - between a war in Europe, record-high inflation worldwide, and a looming economic recession, a potential major banking failure is the last thing investors want to see.

Why is Credit Suisse in Trouble? All You Need to Know
 

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Comments (3)
Todd Carlisle
Todd Carlisle Oct 04, 2022 2:28PM ET
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Always funny when articles like this drop when a stock is up 10% on the day and 15% on the week..
Romulus Son of Mars
Romulus7 Oct 04, 2022 2:21PM ET
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Should have let this thing fail along time ago.
Je Ezy
Je Ezy Oct 04, 2022 1:58PM ET
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Credit Suisse is always in the right place at the wrong time
 
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