Speculation about the future of the Swiss banking giant Credit Suisse They have been happening for several months in the markets, in business and political circles, as well as on social networks. It is the second Swiss bank and one of the largest banks in the world.
The entity is in serious trouble and is currently fighting for its survival. In the midst of a restructuring process, it is likely that a negative result will cause a impact similar to that caused by the bankruptcy of the US bank Lehman Brothers in September 2008. This event triggered one of the most serious financial and economic crises since the Great Depression.
Keys to understand the collapse of a giant
1) Crucial restructuring. To avoid filing for bankruptcy, Credit Suisse has promised to present a strategic plan on October 27. This should include the divestment of investment banking activities, the weak link in its balance sheet, according to speculation in the markets.
The bank’s authorities communicated on September 26 that “it is on the right track with its comprehensive strategic review that includes possible divestments and asset sales.” Survival requires a refocus on wealth management, industry sources say.
2) Doubt about liquidity. Executive Director, Ulrich Korner, told his staff in an internal note last week that Credit Suisse has strong capital and liquidity. And Credit Suisse executives spent the weekend trying to reassure large clients, partners and investors about their liquidity and capital position, he reported Sunday. The Financial Times.
Credit Suisse shares have fallen more than 50% this year
The prestigious British outlet noted that a Credit Suisse executive denied reports that the bank had formally contacted investors about the possibility of raising capital and insisted that they were trying to avoid such a move at a time when the bank’s listing is at record lows and borrowing costs are higher due to downgrades.
3) Recent scandals. The investment bank’s blunders have plunged Credit Suisse into a succession of scandals in recent years, reviving speculation about its bankruptcy or merger with its rival. UBS. Two scandals occurred almost one after another in 2021 and caused several billion dollars in losses to the bank.
The first was the bankruptcy of Greensill. Founded in 2011, the British company is a payments and receivables chain lender, specializing in lending money to businesses so they can pay their suppliers. It then transforms the debts of these companies into financial securities that it resells to investors.
Due to the size of the Swiss entity, a bankruptcy is feared that could damage international stock markets, as happened with the collapse of Lehman Brothers in 2008
The “house of cards” began to unravel when these investors, including Credit Suisse, had doubts about the real value of the debts and left Greensill, which then filed for bankruptcy in March 2021. Credit Suisse had invested $10 billion of your customers on Greensill products.
The second scandal, in April 2021, involved the office Archegos Capital Management. Bill Hwang is a South Korean investor based in New York. Tiger Asia, a company he founded in the 2000s, suffered a major setback in 2012 due to allegations of insider trading. Hwang gradually revived Tiger Asia, who became Archegos.
Although his company would manage $10 billion, Hwang convinced banks, including Credit Suisse, to lend him USD 30,000 million to invest more. In 2020, he invested heavily in Viacom CBS, which saw its share price soar.
4) Bad debts. In early 2021, Credit Suisse asked Archegos Capital Management to deposit funds due. Hwang promised to reduce the risks. But in March 2021, the Viacom CBS stock collapsed and the banks asked Archegos to cover the losses, which he was no longer able to do. As a result, Hwang’s company went bankrupt.
“I trust you will not confuse our daily share price performance with the bank’s strong capital base and liquidity position,” said CEO
“The investigation found a failure to effectively manage risk in Investment Bank’s Prime Services business by both the first and second lines of defence, as well as a lack of increased risk,” concluded an independent investigation ordered by Credit Suisse.
“In the same business, there was also a lack of control over limit excesses in both lines of defense as a result of insufficient performance of supervisory responsibilities in Investment Banking and Risks, as well as a lack of prioritization of mitigation. and risk improvement,” added the audit.
5) Talent that leaves. Credit Suisse interrupted professional contracts that are not going to be renewed. Also, just lose one of its main executives, 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 was the head of global credit products, Daniel McCarthy.
“I am aware that there is a lot of uncertainty and speculation both outside and inside the company,” admitted the CEO Ulrich Korner to employees in a memo on September 30. “While you will appreciate that I cannot share the details of our transformation plans before October 27, I also want to make sure you hear from me directly during this challenging period. Therefore, I will send you a regular update until then.”
6) Historical stock crash. A year ago Credit Suisse had a market capitalization of $22,300 and now its market value is just $10.4 billion. Credit Suisse shares fell 56.2% to $3.98.
For many industry sources, Credit Suisse does not at first glance represent a systemic risk because the bank’s problems are specific to the Swiss bank.
It is a real nightmare for the bank that had managed to weather the financial crisis without major damage. At the time of this crisis, Credit Suisse shares had certainly fallen, but had only dipped to the $27 level, which seemed like quite a feat for a bank at the time.
Credit Suisse shares began October as they had ended September, ie in sharp decline. In fact, the actions fell almost 9% this morning, although they recovered part of the loss during the session. The spreads of credit default swaps (CDS) of the bank have increased considerably in recent days. CDS are financial products that are similar to a form of insurance against default, for example.
“I am confident that you will not confuse our daily share price performance with the bank’s strong capital base and liquidity position,” he said. Ulrich Korner. “We are in the process of reshaping Credit Suisse for a long-term sustainable future, with significant potential for value creation,” added Körner. “I am confident that we have what it takes to succeed.”
7) Speculations for a “Lehman Effect”. For many industry sources, Credit Suisse does not at first glance represent a systemic risk because the bank’s problems are specific to the Swiss bank. In 2008, Lehman Brothers’ difficulties were problems experienced by other banks as well.
But it cannot be lost sight of that Credit Suisse is a universal bank, which offers traditional services and products to consumers, mainly in Switzerland. The establishment is known worldwide for its investment banking activities (trading, deals such as mergers and acquisitions, bonds, securities, etc.) and wealth management operations. It is the investment bank that put the company in these difficulties, although it was, for a long time, one of the great sources of income and profits for Credit Suisse.
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