Credit Suisse's Fear of Lehman-Style Crash



One of the world’s paramount financial institutions, Credit Suisse, has been protracting in the market spotlight as their share prices continue to tumble - with concerns ranging from mild apprehension over its liquidity to growing fears that a global catastrophe will further exacerbate the situation. The tumult unfolded after Credit Suisse’s (SWX: CSGN) share value plunged 11% and hit its all-time low on Monday (10/3), resulting in a 59% decline from the start of the year, quoted by Goldman Sachs. This quickens the lengthy, slow collapse of CSGN, which is already down 91% from its 2007 peak and down more than 70%, trading at roughly CHF 3.90 on Tuesday (10/4) compared to CHF 14.90 in February of 2021. Said fall adds to Credit Suisse’s series of downcasts, following an accumulation of CHF 4 billion loss over the last three quarters. Credit Suisse had lost US$5.5 billion after being unable to exit Bill Hwang’s Archegos Capital Management when the family office collapsed. The turmoil condition of the current market indicates that Credit Suisse might have difficulties in issuing new shares for a planned restructuring, with the cost of funding also likely to surge significantly. Regarding these circumstances, a regulator in Switzerland, FINMA, and the Bank of England monitor what is currently happening to the global investment bank.


Following the unfavorable coverage and talks regarding the distressed firm, investors are worried that the possible collapse of Credit Suisse could lead to a systemic failure in the economy, reflecting past similar experiences with Lehman Brothers back in 2008. Lehman Brothers were the fourth largest US investment bank at the time and was deemed too big to fail, but it filed for Chapter 11 bankruptcy following a drastic asset devaluation and sharp fall in its stock price. The primary driver of this was the firm’s subprime mortgage exposure, which was at an unhealthy level considering it was a high-risk investment. The collapse of Lehman Brothers was the main factor that pulled the trigger for the great recession and financial crisis in 2008. At the center of investors’ concerns about Credit Suisse are their derivative contract Credit Default Swaps (CDS); trading in their credit default swaps reaches levels not seen since the Lehman Brothers collapse. On Monday (10/3), Credit Suisse’s debt default swap (CDS) soared as high as 355 bps, up from 57 bps at the start of the year, according to S&P Global data. According to Bloomberg, this surge has surpassed the risk of default of similar companies, namely Barclays and Deutsche Bank. An all-time high CDS indicates high demand for the company’s insurance, betting against the health of the company itself. This ultimately means that investors believe the company to be on the brink of collapsing altogether.


As one of the biggest banks in Europe, Credit Suisse is obliged to increase capital, stop buyback shares, and change management after a loss of more than US$5 billion due to the collapse of secretive New York hedge fund Archegos in March 2021. Credit Suisse must undergo a painful restructuring to repair its ailing investment banking arm. In July 2021, due to the investment failure case with Archegos, two-high ranking Credit Suisse officials left the company, announced its second strategy review in a year, and replaced its chief executive with restructuring expert Ulrich Koerner. Although the company will require extra investment and fresh capital, Credit Suisse and its strong and valuable banking and wealth management platforms still provide enough base to rescue and restructure its frugally performing investment bank. Furthermore, the bank is taking initiatives to measure and strengthen the wealth management franchise, transform the investment bank into a capital-light and advisory-led banking business, evaluate strategic options for the securitized products business and reduce the group’s total cost base. Compared to Lehman Brothers' experience in 2008, according to Al-Jazeera, the bank is more tightly regulated and has more capital on hand to manage risk. All things considered, the risk of a Lehman-style event is unlikely to be similar to what is currently happening, as banks are far better equipped to face any problem, conveyed Holger Schmieding, a chief economist at Hamburg-based Berenberg Bank.


Sources:

CNBC

Forbes

IDX Channel


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