Rumors are swirling on social media: Indicators on massive international bank Credit Suisse have been flashing code red.
The controversy-engulfed investment bank’s stock is down nearly 57% year to date, stoking rumors of insolvency. The company’s stock price briefly dropped below $4 a share in late September, marking an all-time low.
Credit Suisse has be exposed in an onslaught of embarrassing scandals that have cost it billions in losses. Could the sum of these blows leave Suisse insolvent?
In March of 2021, Credit Suisse found itself at the center of an embarrassing scandal when Bill Hwang’s hedge fund, Archegos Capital, imploded.
Archegos had been hiding its risk exposure through a clandestine “financial product” known as total return swaps. Total return swaps allow financial institutions to hide risk in other financial institutions’ portfolios, a “tool” that fundamentally, is designed to manipulate balance sheets.
Hwang reportedly leveraged the same portfolio of assets with several large banks in the form of total return swaps. The banks, either via failure to risk manage or willingness to overlook risk, were reportedly unaware other banks were crediting Hwang with margin accounts. All the banks looked the other way when Archegos’ portfolio swelled by 2400% in one year. Archegos was able to play a hand of poker at 15 different tables on the same ante.
The stock market moved against Archegos’ bets and numerous margin calls came in. By the time Credit Suisse caught on, Archegos’ real portfolio had already mostly been liquidated by earlier movers. Credit Suisse was left holding a $5.5 billion dollar loss.
As a result of the Archegos meltdown, Credit Suisse closed its prime brokerage business.
At the same time, another gasket was about to blow at Credit Suisse.
As with Archegos, Credit Suisse failed to ask questions and risk manage for another high-profile account on its books, Greensill Capital.
Greensill billed itself as a fintech company that was revolutionizing supply chain finance.
Greensill inserted itself between suppliers and buyers with the promise of expediting the invoicing process which usually takes anywhere from 30-90 days. Greensill would pay the supplier a negotiated amount upfront. The buyer now owed Greensill in lieu of the supplier; Greensill became the buyer’s creditor.
But, like the suppliers, Greensill didn’t want to wait for repayment either. They enlisted the help of Credit Suisse. Credit Suisse packaged up the outstanding invoices as debt securities. The securities were then sold to the bank’s customers.
Thanks to this pipeline, not only did Greensill recoup the investment, they offloaded the risk from their books.
But the speed of global trade proved too slow for Greensill, whose early success revved their risk appetite. Reportedly, Greensill started adding future invoices — that is, potential transactions that hadn’t actually occurred — to the books. Throwing caution to the wind, Credit Suisse merrily packaged up debt securities with potential future invoices and sold them to their customers.
When debt payments were missed, the securities were scrutinized by Greensill’s insurer. Refusing to renew the policy, Greensill’s book-cooking, imaginary invoice-backed securities were finally given proper due diligence. Greensill was liquidated, the insurance companies denied the claims, and Credit Suisse was left with angry customers and down a few billion.
While the situation is still being unwound to this day, Credit Suisse estimates $3 billion in losses to investors.
Client list leak
In February 2022, a leak of some of the bank’s clandestine clientele revealed Credit Suisse’s idea of privacy laws really meant not asking questions. The list included direct family members of dictators while under international sanctions, corrupt politicians leveraging their position to funnel state funds into their private bank accounts, a convicted human trafficker, and a billionaire under suspicion of a high-profile murder.
A collective work of dozens of journalists across numerous news orgs, the Suisse secrets report was so widely published, the bank was obliged to issue a press release denying wrongdoing.
But several European regulators disagreed. Credit Suisse was later found guilty of illegal money laundering in June. A slew of other fines and lawsuits were brought against it in the wake of the leak.
High profile exits
Recent departures of high-profile executives, including co-head of global banking Jens Welter and head of credit markets, Daniel McCarthy, further shook confidence in the bank.
Both Welter and McCarthy were both high-ranking, decades-tenured insiders.
In the court of social media
Rumors of trouble at Credit Suisse gained momentum on social media late last week.
CEO Ulrich Körner, who was appointed in August and is the third Credit Suisse CEO in less than three years, sent mixed messages about the company’s condition. In an internal memo, Körner advised employees not to confuse stock price with the company’s performance and underscored the bank’s “strong capital base and liquidity.”
But Körner also said the bank was at a “critical moment” and that senior leadership would present a turnaround plan on October 27th.
Critics on Reddit and Twitter weren’t convinced. ABC reporter David Taylor, former Credit Suisse trader Naseem Taleb, and popular finance YouTuber Graham Stevens all weighed in on Credit Suisse’s woes.
One topic of discussion was the Federal Reserve’s closed-door, emergency Oct. 3rd meeting. Though the agenda was not officially announced, social media speculated that it had to do with a potential imminent collapse of Credit Suisse and controlling the fallout.
Credit Suisse’s credit default swaps go exponential
With scandal after scandal, many of which are still being sorted through, Credit Suisse has challenged the notion that no publicity is bad publicity.
Credit default swaps — insurance against a bankruptcy — for the bank have skyrocketed this week. Currently, the price of CDSs on Credit Suisse are even more elevated than they were in 2008 before the Great Recession.
“I trust that you are not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank.” Credit Suisse CEO Sept 30, 2022.
“Our capital position at the moment is strong.” Lehman Brothers CFO Sept 8, 2008. pic.twitter.com/WBTgqb1APa
— Spencer Jakab (@Spencerjakab) October 1, 2022
In other words, the market is insuring itself against a Credit Suisse default and paying top dollar to do it.
Is Credit Suisse the next Lehman Brothers?
Collectively, while these losses have cost Credit Suisse billions, its a hit the bank’s trillion-and-change portfolio can take. Against a backdrop of rising interest rates, a bearish market, and high inflation, the biggest threat the bank faces is a crises of confidence, already reflected in its share value and surging credit default swap market.
If investors take their money out, Credit Suisse could become insolvent. But in this area, Credit Suisse has risk managed. After all, there’s only so many places drug cartels, human traffickers, and dictators’ families can keep their enormous amount of wealth.
EU Parliament briefly flirted with the idea of blacklisting Credit Suisse, classifying it as a high-risk financial institution right alongside North Korea and Myanmar, but predictably failed to take any meaningful action.
The fall of a bank this size would have global reverberations. Though Credit Suisse is in the spotlight, whispers abound that Deutsche Bank and UBS may be in similar straights.
While Lehman may have paid the biggest price for the 2008 Financial Crisis, they were hardly alone in creating it. In fact, many of the usual suspects — Morgan Stanley, Goldman Sachs, Bank of America — were shaking the same hands on many of the same deals.
Likewise, while Credit Suisse may have been the biggest bag holder in many of these dealings, they certainly weren’t alone.
And if they go down, there will be losses to go around.