For the last 14 years, Wall Street has lived in fear that something on the scale of Lehman Brothers’ collapse would come again and that, when it did, we would have no warning about the financial destruction it would reap. This weekend, the markets zeroed in on Credit Suisse as the first major bank to possibly fail during the current global financial turndown.
Based in Zurich, Credit Suisse isn’t exactly a household name here in the U.S., but it is a key part of the New York financial firmament, with a large office in Manhattan and about $1.5 trillion in assets, meaning that a blowup would be about as risky to the financial system as Wells Fargo’s and Morgan Stanley’s — the most visible investment bank to back Elon Musk’s bid to buy Twitter. Credit Suisse has already seen serious trouble in the last 18 months after the investment firm Archegos Capital collapsed, causing the bank to lose about $5.5 billion, close some of its major operations, and issue a mea culpa that laid out how it missed the fact that it was getting fleeced. As the global economy has slowed, traders have been making bets that Credit Suisse wouldn’t be able to make good on its debts, and its stock has fallen to its lowest point ever. But is it actually in danger, or is this just vigilante traders pushing a bank to the brink? And if it collapsed, would it really be that bad?
Here’s what to know:
The Spies Behind Credit Suisse’s Slump
Credit Suisse has seen its reputation splinter since 2019, thanks in part to a corporate-espionage scandal — top brass would spy on bankers, then misled regulators, and one investigator died by suicide — and the shoddy management that led to the bank getting caught flat-footed by Archegos’ collapse. The spying episode had been embarrassing the bank for years — starting off as an isolated incident of a PI trailing a former banker and later ballooning to at least seven different bankers. While this wasn’t illegal, it deeply damaged the bank’s reputation and led its CEO, Tidjane Thiam, to resign in 2020.
The next year, Archegos went under, dragging Credit Suisse with it. Bill Hwang, CEO of the investment firm, had allegedly lied about its positions in the markets to multiple banks, including Credit Suisse, that were funding his outsize bets, according to a criminal indictment filed against him by the Justice Department in April. After that, the bank had to sell its brokerage unit that works with hedge funds and struggled to raise money.
Where’s the Money?
Over the last three quarters, Credit Suisse lost $4 billion, according to Reuters — not a good position for Switzerland’s second-largest bank. Its increasingly precarious situation has led the market to care once again about a financial instrument that shares blame for exacerbating the 2008 financial crisis: the credit default swap. A CDS is like a hedge and acts kind of like an insurance product but for a company’s bonds. If the company defaults, the CDS kicks in and pays the bondholder money that they would have gotten had the company made good on its debts. (In reality, investors buy CDSs for all kinds of reasons, including trying to trade them for short-term profits, not just to make their holdings less susceptible to blowups.) But like the cost of hurricane insurance in the late summer, it gets more expensive to buy CDSs when a company gets riskier. With Credit Suisse, the price of buying that insurance to cover you for the next five years has gone up roughly tenfold.
It’s a big spike — but not everyone thinks it’s actually that high. Hedge fund manager Boaz Weinstein noted that Morgan Stanley has been in a much worse position before.
The Bank Is in a “Critical Moment”
On Sunday, the current Credit Suisse CEO, Ulrich Körner, sent a memo to the company that said it was in a “critical moment.” The bank went on to give its bankers talking points that it still has about $100 billion to pay for any losses and more than $200 billion in assets it could sell if that wasn’t enough. The company’s stock dropped about 10 percent, then recovered somewhat as the bank tried to allay the market’s worst fears.
Is This Another Lehman Brothers?
No, says Mohamed El-Erian. Paul J. Davies at Bloomberg doesn’t think so either. Charlie Gasparino at Fox Business, a reliable barometer of the Wall Street elite, says the mood among top bankers is that the situation is “not as dire” as speculation would make it out to be. Could they be wrong? Sure. But that brings up another question: If Credit Suisse were to fail, would it really be that bad? There’s reason to doubt it would be as bad as the collapse of Lehman:
That decision was made in a very different era. Since the George W. Bush administration, banks have gotten better at holding more capital in case of unexpected financial calamity. They submit plans to the Federal Reserve detailing their potential unwinding. The Fed now has experience in handling these kinds of bailouts, and for all the tough talk coming out of the Fed nowadays about inflation, it’s very unlikely that the central bank would let another large bank take down the whole financial system.