Credit Suisse is facing a difficult re-structure in the wake of numerous scandals. (Photo by Fabrice … [+]
After all the talk about the crashing British pound last week, it seems that the trouble in Europe doesn’t end there. This week there’s been a growing murmur of problems within one of the worlds largest investment banks, Credit Suisse.
It has all begun to come to a head with London’s Financial Times reporting that executives at the Swiss bank have been putting in calls to major investors in an attempt to calm the growing nervousness.
These swirling rumors have caused the bank’s stock to tank, dropping 10% in early hours trading on Monday morning. This caps off a massive fall of over 60% since the start of 2022.
The main concern is that this can’t just be chalked up to the macro economic and political environment like much of the volatility being felt in markets. Some analysts are considering whether Credit Suisse might actually be a Lehman Brothers moment that could send shockwaves through not only Europe’s financial system, but the world’s.
So what is actually going on here and is Credit Suisse going bust a realistic possibility?
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One of the main causes for concern in addition to the falling stock price has been the rising price of Credit Suisse credit default swaps (CDS). These financial instruments are an agreement that see the seller of a CDS compensate the buyer if the underlying company goes bankrupt.
The higher the chance of that happening, the higher the price a seller is going to want for a CDS because it means that it’s more likely that they’ll need to pay out.
At the end of 2021, Credit Suisse 5 year credit default swaps were trading at just over 50 basis points. This has increased dramatically and they’re now at their highest level since 2009, hitting 250 basis points on Friday.
These numbers are high for an investment bank as large as Credit Suisse.
Credit Suisse has been involved in a large number of scandals in recent years, and they’ve been making efforts to restructure as a result. The controversy has involved some high profile collapses including UK lender Greensill Capital and US hedge fund Archegos Capital.
Both of these failures were surrounded by allegations of misconduct and potential fraud, with the UK taxpayer required to foot a bill of between £3 to £5 billion ($3.37 to $5.61 billion) in the fallout of the collapse of Greensill Capital.
Credit Suisse was also fined almost $400 million by regulators for wire fraud as part of their involvement in the Mozambique “tuna bonds” loan scandal, but the list of discretions doesn’t end there.
They’ve been outed by investigative journalists for assisting banking clients who have been involved in drug trafficking, torture, corruption and money laundering. The notoriously hands-off Swiss regulators have also found them guilty of laundering money for the Bulgarian mafia.
It’s clear to see why the bank has been looking to draw a line under the history and move forward in a more positive and investor friendly direction.
As part of this plan they replaced their chief executive in the middle of last year, in a move that caught many by surprise. They’ve been looking to scale back their investment banking arm and pivot further towards wealth management, in a move that puts up to 5,000 jobs at risk.
A restructure of this magnitude isn’t easy or cheap. Exiting positions and deals is a multi-year process that often comes at a hefty cost, as do the severance package for high flying bankers who are shown the door.
It’s a situation which has seen Credit Suisse buck the recent trend for Wall Street banks, losing money consistently for the past three quarters.
Credit Suisse’s stock price has been sliding for some time, but it’s the circulation of a staff memo from CEO Ulrich Koerne late last week that has really fired up the rumor mill.
Ironically, the memo was sent to reassure employees that the company was in a stable financial position with sufficient liquidity and capital to see through the current volatility. This set Twitter and Reddit alight, with commenters drawing parallels to a similar memo that was sent out by Lehman Brothers right before their collapse.
With all that said, there’s plenty of reasons to believe that the doom is overblown. Credit Suisse currently has a capital ratio of 13.1%, which is higher than the 9.6% that they’re legally required to hold. The capital ratio is basically a measure of how much capital the bank has on hand, and therefore how much security it has against the risk of a default.
This isn’t to say that Credit Suisse is a safe bet by any means, but the capital adequacy regulations that were brought in on the back of the 2008 financial crisis, means an overnight collapse like Lehman Brothers is unlikely.
Existing investors in Credit Suisse have been having a bad time for a while now. The stock has continued to slide for months, and unless CEO Ulrich Koerne can pull a major rabbit out of the hat when he releases his full restructuring plan at the end of this month, it could continue for some time.
It highlights again the challenges that face investors looking to pick individual stocks. No one can predict when a scandal might appear to crash a share price, let alone multiple scandals over many years.
It’s why the magic word in investing circles is always “diversification.”
Credit Suisse may not be a great bet right now, but the European market is huge and gaining some exposure to it is often a good diversification play for investors. But we know that it can be challenging to invest overseas. You don’t necessarily understand the market and which companies or assets are the best to go into.
That’s why we created the Global Trends Kit to do the hard work for you. This Kit uses the power of AI to create a portfolio with an optimal risk adjusted balance of assets that include international stocks, foreign exchange, commodities, bonds and even the volatility index.
It’s a great way to gain additional diversification, without having to worry about whether you’re investing in the next Credit Suisse or Lehman Brothers.
Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $100 to your account.
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