No, Credit Suisse Isn’t A Lehman Moment

I hesitate to give more airplay to the Credit Suisse “story.”

Over the weekend, finance-focused social media was alive with hyperbole, quite a bit of which bordered on the ridiculous.

The fact that Credit Suisse is struggling is the furthest thing from a secret. The bank is beset, and has been for some time. Mini-crisis after mini-crisis — from Greensill to Archegos — eroded confidence and everyone with even a passing interest has long been acutely aware of the need for a sweeping overhaul. CEO Ulrich Koerner is attempting just that. Results from a strategic review are due on October 27.

Among other things, Koerner may unveil a major overhaul of the investment bank and could divest assets, including wealth management operations in Latin America. Markets are plainly positioning for a capital raise, with some estimates putting the gap at 4 billion Swiss francs. A sale of the securitized products business could help, but it’d amount to trading profitability for capital. Job losses are very likely as Koerner looks to cut costs. The bank has denied reports it plans to exit the US market.

Until then, Koerner is penning regular memos to employees, ostensibly to shore up confidence. As these things go, the memos turned into an “own goal” of sorts for Koerner. Markets parsed them for the “best” lines and the media effectively used Koerner’s own words against him, turning his memos into headline fodder.

Late last week, Koerner said the bank was at a “critical moment.” Some media outlets tacitly suggested (although they’d never admit as much) that Koerner’s characterization was an oblique reference to a possible collapse.

Finance-focused social media, including the verified account of a Reddit message board, picked up on the story and ran with it. By Monday, Credit Suisse was a trending topic, and the word “bankruptcy” was bandied about with reckless abandon.

Social media appears singlemindedly obsessed with the bank’s CDS spreads (figure below), which hit a record high Monday, as the shares slumped to a record low (figure above), on track for their worst year ever.

Credit Suisse credit default swap spread

At one point, traders quoted five-year tenor CDS 100bps higher, up around 350bps. The bank’s AT1s were hit too. But, as Boaz Weinstein was keen to suggest, the social media crowd might not fully understand what they’re quoting. He called one CDS tweet from an account with more than 10,000 followers “unintentional scaremongering.” “It’s confusing steeply falling equity with default risk,” he said, of the same post. Later, Weinstein chided a Reddit community account with more than 325,000 followers. “Oh my, this feels like a concerted effort,” he wrote.

And that’s the problem. Orchestrating a coordinated squeeze in meme stocks using message boards and social media is one thing. Going after a wounded SIFI is another, particularly when you may not know what you’re talking about. The movement in CDS is just a reflection of market speculation. It’s not necessarily an indication of problems beyond those everyone already knows about (it’s no accident that the shares are down 60% in 2022, after all), it’s not indicative of a liquidity crunch and it’s certainly not a harbinger of an overnight collapse.

None of the five people on Wall Street I spoke to Monday morning had heard rumblings of any imminent default. Two of them would most assuredly be privy to such rumblings were they circulating. I’d go further and suggest the most bombastic of the Credit Suisse rumors are nothing short of absurd.

Unlike the Financial Times, I won’t dignify wildly irresponsible tweets from random netizens. What I would note, though, is that “systemically important bank blows up, all counterparties screwed” isn’t a thing anymore. There’s no chance (none) that the Fed would allow some manner of “event” at Credit Suisse to start a chain reaction that imperils the functioning of the US financial system, and neither would the ECB allow such a thing.

Post-Lehman, central banks serve more as dealers of last resort, not just lenders of last resort. The implied backstop entails accepting a dizzying array of collateral in a crisis. Considering everything else that’s going on (from the crisis in the UK to the myriad risks posed by the war in Ukraine to the ongoing tumult associated with the dollar’s inexorable surge), the idea that the Fed would sit idly by as a SIFI imploded on the excuse that fighting inflation means avoiding even the appearance of liquidity provision, is laughable.

Bottom line: This isn’t 2008. And this ain’t Lehman.


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8 thoughts on “No, Credit Suisse Isn’t A Lehman Moment

    1. I mean, I don’t want to suggest there’s absolutely no risk of a systemic event here whatsoever under any circumstances. My main point, rather, is that Credit Suisse isn’t just going to implode overnight (as thousands of people on Twitter seemed convinced it might) and that central banks would do everything in their power to prevent the counterparty risk from turning into a nightmare in the event the situation deteriorated. We have some experience with this sort of thing now, after all. More importantly, I wanted to remind everyone that getting information on a SIFI restructuring from random Twitter accounts is manifestly insane.

  1. The central banks learned from Lehman. If a run started they would throw inflation fighting to the back burner. They would not like it but they would do it.

    1. Of course they would. And that’s really my whole point. I don’t doubt (at all) that things are potentially worse at CS than CS is letting on (but even there, that’d be the case at any business that was having trouble, from a local sandwich shop all the way up to a SIFI — nobody is going to publicly say just how bad things are until they have to). What I do doubt, though, is that the systemic risk is as acute as it would be were it not for the Lehman experience. Central banks know how to deal with this now. Of course, stocks would absolutely crash for a day or two in the event of CS “event.” But that’s something different from suggesting funding markets would freeze and counterparties would stop dealing with each other, etc.

  2. I’m glad you posted on this, not because of “concerns” about CS, but because I saw this blowing up on Reddit and Twitter and immediately thought, “I bet Heisenberg has a funny hot take.” It’s one of those moments when I have to resist the temptation to slide into your Twitter DMs fishing for laughs.

    1. I actually wish I had more to say, but I mean… if this were actually as bad as several thousand random Twitter folks seem to believe it is, you’d literally be able to feel the panic. And it’d be all anyone was talking about in sales and strategy notes today. It’s not that I think there’s “no there, there,” so to speak, it’s that I think what is there is something different from what the Twitter crowd thinks. I think what’s there is another disappointing turnaround effort, and what’s ahead is a long, arduous trek back to respectability, with episodic bouts of speculation like what you’re seeing today. If CS is ever really “on the brink,” the Reddit / Twitter crowd won’t be the first to know, I can promise you that.

  3. The Lehman moment taught the Fed a lot and I feel strongly that any big bank will not be allowed to go under because of unknown counter party risk. I always thought that Lehman had a chance when they were working with the Korean Development bank, but in retrospect Dick Fuld was too greedy and couldn’t accept that the market valuation of the real estate portfolio had gone down that much. After checking this morning Credit Suisse is ranked 116 by size so their are plenty of banks that could buy them out if need be willingly or not.

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