Will Credit Suisse (CS) pull through?
Speculation surrounding the future of the Swiss banking giant has been going on for several months in the markets, in business and political circles, as well as on social networks.
The No. 2 Swiss bank and one of the largest banks in the world is in deep trouble and is currently fighting for its survival. A negative outcome is likely to cause a shock similar to that caused by the bankruptcy of the U.S. bank Lehman Brothers in September 2008. This event triggered one of the most serious financial and economic crises since the Great Depression.
Nightmare
A year ago, Credit Suisse had a market capitalization of $22.3 billion. Today, its market value is only $10.4 billion. Credit Suisse shares fell 56.2% in one year to $3.98.
It is a real nightmare for the bank which had succeeded in weathering the financial crisis without losing too many feathers. At the time of this crisis, Credit Suisse shares had certainly fallen but they were down only to the level of $45, which seemed to be a feat for a bank at the time.
Credit Suisse shares began the month of October on Monday, Oct. 3, as they had ended the month of September, that is to say in sharp decline. Shares were indeed down nearly 8% at last check.
Spreads of the bank’s credit default swaps (CDS) have risen sharply in recent days. CDS are financial products that are similar to a form of insurance against default, for example.
What happened? How did we get here?
In recent days, employee morale has been gloomy. The bank has not yet renewed the contracts of certain contractors. Departures are no longer really replaced, TheStreet has learned. It is austerity cure.
The talent is leaving. The bank has just lost one of its senior dealmakers, Jens Welter, who left to join Citigroup after 27 years with the establishment. Welter was global co-head of banking when he left. Another departure is head of global credit products Daniel McCarthy.
"I am conscious that there is lots of uncertainty and speculation both outside and within the company," Chief Executive Officer Ulrich Körner told employees in a memo on Sept. 30. "While you will appreciate that I am unable to share details of our transformation plans before October 27, I also want to make sure that you hear from me directly during this challenging period. I will therefore be sending a regular update to you all until then."
In this memo seen by TheStreet, the CEO explained that "this is a critical moment" for the bank and warned employees that the rumors and speculations will continue and will become even louder.
Stock Price vs. the Company's Health
He assured them that the stock price does not reflect the financial health of the firm.
"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," he said.
"We are in the process of reshaping Credit Suisse for a long-term, sustainable future - with significant potential for value creation," Körner added. "I am confident we have what it takes to succeed."
For many industry sources, Credit Suisse does not at first sight pose a systemic risk because the bank's problems are specific to the Swiss bank. In 2008, the difficulties of Lehman Brothers were problems experienced by other banks as well.
Credit Suisse is a universal bank, which offers traditional services and products to consumers, mainly in Switzerland. But the establishment is known globally for its investment banking activities - trading, deals such as mergers and acquisitions, bonds, securities, etc - and wealth management operations. It is the investment bank which put the firm in these difficulties, even if it was, for a very long time, one of the big sources of revenue and profits for Credit Suisse.
The Scandals: Greensill, Archegos
Indeed, the mistakes of the investment bank have plunged Credit Suisse into numerous successive scandals in recent years, reviving speculation about its bankruptcy or its merger with its rival UBS.
Two scandals occurred almost one after the other in 2021 and caused losses of several billion dollars to the bank.
The first is the bankruptcy of Greensill. Founded in 2011, the British company is a supply chain and accounts receivables lender, that specializes in lending money to companies so that they can pay their suppliers. It then packages the debts of these companies into financial securities which it resells to investors.
The house of cards began to crumble when these investors, including Credit Suisse, had doubts about the real value of the debts and abandoned Greensill, which then filed for bankruptcy in March 2021.
Credit Suisse invested $10 billion of its clients in Greensill products.
The second scandal in the spring of 2021 involved family office Archegos Capital Management. Bill Hwang is a South Korean investor based in New York. Tiger Asia, a company he funded in the 2000s, suffered a major setback in 2012 because of insider trading allegations. Hwang gradually revived Tiger Asia which became Archegos.
While his company would manage $10 billion, Hwang convinced banks, including Credit Suisse, to lend him $30 billion to invest more. In 2020, he invested heavily in ViacomCBS (VIACA), which saw the value of its shares soar.
Oct. 27: D-DAY
At the beginning of 2021, Credit Suisse asked Archegos to deposit funds. Hwang promised to reduce the risks. But in March 2021, ViacomCBS shares crashed and the banks asked Archegos to cover the losses, which it was no longer able to do. As a result Hwang's company went bankrupt.
"The investigation found a failure to effectively manage risk in the Investment Bank’s Prime Services business by both the first and second lines of defense as well as a lack of risk escalation," an independent investigation ordered by Credit Suisse concluded.
"In the same business, it also found a failure to control limit excesses across both lines of defense as a result of an insufficient discharge of supervisory responsibilities in the Investment Bank and in Risk, as well as a lack of prioritization of risk mitigation and enhancement measures (such as dynamic margining)."
To avoid filing for bankruptcy, Credit Suisse has promised to present a strategic plan on Oct. 27. This should include the divestment of investment banking activities, the black sheep, speculate the markets.
The bank "is well on track with its comprehensive strategic review including potential divestitures and asset sales," it said on Sept. 26.
Survival requires refocusing on wealth management, industry sources say.
