Let’s Hope We Don’t Have To Worry About Credit Suisse

The deluge of bank headlines continued unabated Wednesday, when Credit Suisse returned to the spotlight for the wrong reasons.

Shares of the embattled Swiss institution plunged in Zurich, dragging a broad gauge of European banking stocks lower still, insult to injury during a week when European financials were under pressure from developments in the US.

Credit Suisse is five months into a turnaround effort which, if you’re feeling generous, you might describe as “complex.” A less generous adjective would be convoluted. Wednesday’s 21% rout was worse than the selloff that accompanied the unveil of the new strategic plan in late October.

I played down fears that Credit Suisse was on the brink five months ago, and indeed those fears were wholly unfounded. Now, though, an already tenuous situation is being compounded by the turmoil in the US and reports of internal control lapses.

Perhaps just as importantly, the Saudis emphatically ruled out additional support on Wednesday as the shares plunged. “The answer is absolutely not,” Saudi National Bank Chairman Ammar Al Khudairy told Bloomberg Television, when asked about the prospect of upping the bank’s stake from the 9.9% it acquired late last year as part of Credit Suisse’s restructuring plan.

Al Khudairy cited regulatory headaches that’d come into play if the stake were upped, but it doesn’t help that the bank’s CHF1.4 billion stake is now worth just CHF900 million.

Credit Suisse is no stranger to panic-fueled outflows. Some $80 billion fled in October, when an overzealous Reddit crowd inadvertently sparked a mini-run on the SIFI.

The bank’s Q4 report showed the total outflow during the quarter exceeded CHF110 billion.

The social media frenzy around Credit Suisse in October was inspired in part by an apparent misunderstanding among amateur traders around what can and can’t be gleaned about a company from credit default swaps.

Fast forward to March, and I’d be inclined to say the situation is more perilous. I wouldn’t want to traffic in the same sort of hyperbole I so readily derided just a few months ago, but the bank’s CDS curve is inverted.

That looked entirely different just a few days ago, and the optics aren’t great, to be polite.

One-year senior CDS was quoted well above 1,000bps Wednesday. As Bloomberg helpfully pointed out, “spreads of more than 1,000bps in one-year senior bank CDS is an extremely rare phenomenon.”

The same linked article noted that those levels were consistent with where Greek banks traded during the debt crisis and were 18 times contracts on UBS.


Obviously, Credit Suisse isn’t likely to have the same kind of problem that SVB had (Credit Suisse made a lot of mistakes, but I doubt they’ve forgotten basic banking, nor do I suspect they’re inept when it comes to managing whatever rate risk they have). But sentiment around banks is very poor currently, and the last thing Credit Suisse needs at a time when markets are still skeptical of the turnaround plan is a banking sector crisis.

As you can imagine, management was keen to point out that as a SIFI, Credit Suisse is regulated more strictly. But that didn’t prevent all the missteps (Archegos, Greensill, etc.) that forced them to institute a sweeping overhaul, and when your Chairman has to come out and reiterate that government support “isn’t a topic,” it means government support is a topic, maybe not at the bank, and maybe not among relevant government officials either, but at least among excitable market participants, otherwise the question wouldn’t come up. (You won’t hear Jamie Dimon referencing government assistance today, or at least not for JPMorgan.)

CEO Ulrich Koerner stated the obvious: “Nobody is pleased by the share price development.” And Al Khudairy restated the Saudi position: “There is a glass ceiling [on our stake] and we’re not going to entertain going beyond it.” He was referring to the regulatory concerns, but he also said he could “cite five or six other reasons.”

I’d just say the following. Credit Suisse wasn’t a Lehman moment in October. And it almost surely isn’t one now. But Credit Suisse could be a Lehman moment in a way that SVB couldn’t. SVB couldn’t be Lehman because SVB isn’t a SIFI. Credit Suisse is.

So, my point isn’t to make any claims whatsoever about Credit Suisse’s financial situation, let alone their liquidity (which I assume is ample) or their solvency (which I assume — I hope — isn’t in question). My point, rather, is just that if Credit Suisse were to run into problems beyond those they’ve already run into, contagion would be assured. And the crisis would be real.


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13 thoughts on “Let’s Hope We Don’t Have To Worry About Credit Suisse

  1. The shorts have been unleashed. Credit suisse probably won’t be the last target whether the shorts are successful or not. It shows how smart the fdic and fed was this wrekend.

  2. A bad, poorly managed bank. Parties that do business with bad, poorly managed banks should be prepared to take their medicine when banks like Credit Suisse run into trouble. Capitalism.

    1. With apologies, sometimes your unequivocal statements are misguided. It’s a SIFI. It’s not an entity that everybody in the world can just shun and avoid “doing business with.” And you shouldn’t be hoping for Credit Suisse to run into trouble. Unless you live off the grid somewhere (say, in an abandoned bus in the Canadian wilderness), you’d be affected in a scenario where CS has problems. You can think you wouldn’t, and you can say you wouldn’t, but you’d be wrong. So just bear that in mind.

      1. If you’re right — and I have no reason to think you’re not — then that suggests to me we need a major rethink of the global financial system. If a single poorly managed bank in Switzerland is able, in effect, to hold every person in the world who chooses to live on the grid hostage to its bad decisions, then something is very, very wrong with that system and our assumptions about capitalism, national sovereignty, and individual agency.

        1. Your framing is one sided. It is not a poorly managed bank that is the issue. Yes it was poorly managed in the past, additional equity was brought in to fix that (quite a bit different from SVB) as well as new management. In normal circumstances it could still fail, relatively slowly.

          Now what we see today (and earlier this week) is relentless speculation with trading profit as only objective to see whether more banks can be brought down quickly. That is the issue at hand. You need to wonder who the real hostage takers are.

          If a major rethink of the global financial system would be on the table there is a lot to think about, not just a relatively small Swiss bank.

          1. Completely agree with your last statement. Too much opacity/not enough transparency, too much leverage (and ways to hide it), not enough regulation and oversight of the system, for starters.

        2. Of course he is right, and of course, we need to rethink how we do life around money. There is just way to much money laying around not at work, it’s actually surreal.
          And then of course, we as a society, are losing every day a bit more any form of idea about what it means to lead teams and manage large organisations. In my experience in M&A, I’d say that at least 80% of businesses are poorly managed.
          This has less to do with capitalism then the basic assumptions that people are good at what they do when it comes to organisation above 100 people.

        3. Well said mfn. CS has an approx. $10 billion market cap if I’m not mistaken. We apparently survived much bigger banks failing during GFC and then the pieces being acquired by stronger institutions, once an orderly process was laid out by the authorities. I’m certainly not hoping for CS or any institution, large or small, to fail. Govt should protect the depositors to prevent bank runs, so we can all live happily within the grid and avoid recurring bailouts.

  3. The ECB decision tomorrow is must watch TV, will Lagarde risk it? It is decision time for central bankers in the developed world. I’m starting to think even the Fed might pause next week, not a dull day lately…

    1. Really huge. I had a colleague once who wrote his PhD dissertation on the notional value of derivatives, held by US banks, items not then included on balance sheets. He was aghast to find the total amount ran to something like $100 bil. This study was done about 25+ years ago. Last year, VisualCapitalist.com reported that the global market for derivatives measured by notional value, was over 800 trillion! That’s close to 8 times the total annual global GDP.

  4. Maybe there was fire, causing the smoke at Credit Suisse in October. Really hard to tell with such a convoluted financial system. I don’t wish for a meltdown at Credit Suisse or the banking system (which could easily be a prelude to societal breakdown). I can’t be the only though wishing for a sound money system. No one reading this is old enough to know, but was it ever sound? Was it created for exploitation or has a sound system been exploited? It seems we get further away, sometimes by the minute, from any common sense when it comes to money.

    A house of cards, fractional reserves being the foundation, smoke and mirrors, gamification, weaponization, hide and seek, obfuscate, and any/everything else horrible you can think of describes the financial landscape that regular folks are subject to daily.

    No wonder conspiracy theorists can hold any sway. No wonder at all.

    I am not a conspiracy theorist, but it seems that ever since 9/11, when the world’s financial center was attacked, and the world stopped trading for what seemed like an eternity leading to exposing the fragility of the global financial system, we have gone from one financial catastrophe to another. Almost as if the major players are all in to reap whatever possible before an even larger event shakes things down maybe for good.
    Maybe that’s just me; I know I sound crazy for putting this in writing.

    Getting rich quick(wanting to and also actually achieving it) pervades our culture, Working hard and/or honestly smart is often derided and it comes from thinking the system is rigged. Why wouldn’t you cheat to win? Winning without honor just means you weren’t the sucker. Winning with honor;
    silly notion.

    I think we do have to worry about Credit Suisse and every single other bank operating today. Let creative traders trade, wild speculators speculate, and bankers be boring bankers for a change. And when failures occur, it’ll be ok to let them.

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