Is Credit Suisse the new Lehman Brothers? It looks like the Swiss government will need to alter its flag from a plus sign to a minus, as markets are bracing for the potential collapse of one of the world’s biggest financial institutions. The possible implosion of Credit Suisse is yet another component of the global marketplace that is being broken by the central banks’ tightening crusade following two years of astronomical monetary expansion. Suffice it to say, everyone is paying for the sins of all the pandemic-era free money injected into the international economy.
The Fall of Credit Suisse?
Give the Credit Suisse public relations team a raise! The bank opened its doors and the stock tanked by about 10% at the opening bell in New York and overseas to record lows. However, by the time the trading session ended, shares were up, buoyed by institutional investors dismissing the doom-and-gloom takes on social media and business press.
Investors had risen from their slumber and opened their Robinhood accounts to find that fragility was present at one of the 30 worldwide systemically critical banks. The internet was abuzz when speculation grew that Credit Suisse could collapse amid liquidity troubles. The market homed in on credit-default swaps (expectations on whether a debt issuer will survive or crumble). The five-year CD swap expanded to 250, an unusually high number for a huge bank and the worst figure since 2009. By comparison, Goldman Sachs stood at 143, while UBS hovered around 120.
The belief that something was awry at the bank was heightened after the company delayed a planned capital increase for a real estate fund. It cited extreme volatility in Swiss real estate market funds. Moreover, industry observers think there will be a significant announcement during its quarterly update later this month. Indeed, restructuring efforts by Credit Suisse are not a secret as C-suite leaders noted that they are employing “measures to strengthen the wealth management franchise, transform the investment bank into a capital-light, advisory-led banking business and more focused markets business, evaluate strategic options for the securitized products business, which includes attracting third-party capital, as well as reduce the group’s absolute cost base to below 15.5 billion francs ($15.7 billion) in the medium term.”
The anticipation that something is seriously wrong at Credit Suisse is not entirely surprising. Despite central banks flooding the international financial system in trillions of dollars of liquidity in 30 months, allowing banks to thrive, Credit Suisse has been hemorrhaging for most of 2022. But its CEO Ulrich Koerner tried to calm everyone down before the weekend, sending out two memos. The first affirmed that it maintains an enormous capital base and liquidity position. The second noted that it possesses a capital buffer of close to $100 billion and high-quality liquid assets of about $200 billion.
Not everyone is convinced. A chorus of market analysts avers that Credit Suisse will likely need to raise as much as $6 billion to fund its internal overhaul and endure the capital headwinds.
But while many online are digitally screaming about a Lehman moment, not everyone is convinced that the apocalypse is coming. Eminent economist Mohamed El-Erian told CNBC on Oct. 3 that if anyone is concerned about systemic risks in the banking system, it is critical to assess the non-banks rather than the conventional institutions. “There’s anxiety not only about the things we knew — tightening financial conditions and central-bank mistakes, slowing global economy, all these other noneconomic issues — there’s also concern about [that] market functioning … after years of repressed interest rates, is starting to be an issue.”
Boaz Weinstein, the founder of Saba Capital Management, urged everyone to “take a deep breath” as bankruptcy risks are overstated. He thinks it is “a concerted effort at scaremongering,” mainly because Morgan Stanley’s CDs were double that of Credit Suisse today between 2011 and 2012. Citi analysts also rejected concerns and a contagion effect, writing in a note that “the current situation is night and day from 2007 as the balance sheets are fundamentally different in terms of capital and liquidity, and we struggle to see something systemic.”
The cherry on top is that business media personality Jim Cramer, who is known to hold positions where the exact opposite happens nearly every time, recently tweeted: “Credit Suisse — how the mighty have fallen … ouch.” So, perhaps Credit Suisse’s challenges are being exaggerated after all!
Everything Is Broken
El-Erian, perhaps one of the world’s top economists today, may have had a point: There are widespread fears that the market is functioning the way it should after years of artificially low interest rates. The world has seen this in 2022 as the Federal Reserve and its colleagues slowed down the pace of money-supply growth. What happened? The equities arena has plummeted, the UK bond market has cratered, the housing sector is in freefall, inflation is stickier than many realized, and the global economy is on the cusp of a recession. Something else will inevitably break. But how often can something shatter until the monetary policy cabal blinks, pivots, and restarts the printing presses?