As Credit Suisse Credit Default Swaps Hit Near 2008 Levels, Rumors of Lehman-Style Crash Circulate, Bank Steps in to Allay Worries – Credit Suisse Group (NYSE:CS)
Talks over simmering unrest at Swiss investment bank Swiss credit CS gained traction over the weekend, with Twitterati beginning to raise the specter of a Lehman-style meltdown.
What is Credit Suisse suffering from: Credit Suisse has seen its fundamentals deteriorate rapidly, thanks to a combination of macroeconomic factors and company-specific malaises. The bank has been rocked by a series of scandals and incidents that have impacted its finances, the most notable being the situation that resulted from the collapse of the US hedge fund Archegos Capital, founded by Bill Hwang, early 2021.
The Swiss bank then warned of a significant impact after exiting positions with the fund. Additionally, the bank was fined by a Swiss court in June for lax controls, which allowed one of its employees to help a Bulgarian drug ring launder money. money, reported the New York Times.
In July, Credit Suisse said it posted a loss of 1.59 billion Swiss francs ($1.6 billion) in the second quarter, compared to a profit of 253 million Swiss francs a year ago, while its investment banking business had bled badly.
As resuscitation measures, the company announced a change at the helm, appointing Ulrich Korner as the new CEO, and has also embarked on a strategic review process. Problems at the bank included high-profile departures. The setbacks have begun to reflect in the bank’s share price, which has been in secular decline since March 2021.
See also: Credit Suisse Mulls Splitting Investment Banking Unit, outlines plans
Peak in credit default swaps: Credit Suisse Credit Default Swaps, or CDS, a derivative instrument that allows an investor to swap their credit risk with another investor, jumped on Friday, reflecting market perceptions of growing risk. It is now approaching the heights reached during the 2008 financial crisis, which saw the American investment bank Lehman Brothers go bankrupt.
Houston we have a problem. Market capitalization of $CS is now a rounding error. 35x leverage. This and Deutsche Bank… a canary in a coal mine.
— FOSS – Lehman CDS at 9bp in 2006, now at 41 (@FossGregfoss) September 30, 2022
Following the development, senior Credit Suisse executives walked around, reassuring large clients, counterparties and investors of the bank’s financial health, according to the Financial Times. reported. In an information note sent to customers, the bank said: “Our position on this is clear. Credit Suisse has a strong capital and liquidity position and balance sheet. Changes in stock prices do not change this fact,” the report adds.
Körner reportedly sent a company-wide memo on Friday allaying staff concerns about the bank’s capital position and liquidity.
Lehman-style collapse? Social media has been flooded with rumors of a Lehman-like situation, both at Credit Suisse and at Deutsche Bank AG comics.
A Twitter user pointed out that these two banks are designated as systemically important financial institutions, which means they are “too big to fail”, in the same way Lehman was labeled before its collapse. . Since these banks collectively have more assets than Lehman had when it floundered, the ramifications for the financial system could be far greater, he pointed out.
This development takes place in a context of prolonged market slowdown in a context of uncertainty about the economic outlook and rising rates made necessary by inflationary pressures.
Photo: Courtesy of Gorka Montie on flickr