Tag Archives: Credit Suisse

Time to Bail on Credit Suisse

tl,dr: Get out of Credit Suisse.

The Swiss bank is suffering severe stress today, with its stock and bond prices plummeting. Depositors and investors are questioning its ability to survive.

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The Swiss National Bank has pledged to offer liquidity to CS if necessary, per Bloomberg.

However, the stock has barely reacted as of Wednesday afternoon in New York. Investors seem unconvinced.

What has gone so wrong at Credit Suisse?

Just about everything. Again from Bloomberg:

Credit Suisse’s failings have included a criminal conviction for allowing drug dealers to launder money in Bulgaria, entanglement in a Mozambique corruption case, a spying scandal involving a former employee and an executive and a massive leak of client data to the media. Its association with disgraced financier Lex Greensill and failed New York-based investment firm Archegos Capital Management compounded the sense of an institution that didn’t have a firm grip on its affairs. Many fed up clients have voted with their feet, leading to unprecedented client outflows in late 2022. 

Problems came to a head today as CS’s largest investor, the Saudi National Bank, refused to provide more capital to CS.

Credit Suisse appears to have ample reserves to pay depositors.

It has enough cash and highly liquid assets to pay back half its liabilities quickly. It even has 62 billion Swiss francs of cold, hard cash on deposit at central banks.

Yet its stock is in the toilet, and its bonds trade at levels implying a strong possibility of default. The cost to insure its bonds through credit default swaps is also sky high.

Are all 3 of these markets wrong? Maybe, but I wouldn’t want to make that bet.

For companies and individuals, there is little downside to pulling your money out.

Even if the Swiss National Bank, Federal Reserve, or others bail them out, there could be delays in getting your money. That was the case with SVB.

Can you afford that delay?

In the end, I doubt central banks will let CS collapse. But things could get very messy in the mean time.

What do you think of the problems at Credit Suisse?

Leave a comment and let me know!

More on markets:

SVB Fallout

Where Should Startups Put Their Money Now?

SVB Fails

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This Is Why Credit Suisse Keeps Getting Punched in the Face

Credit Suisse keeps getting smacked. Let’s review a few of their recent scandals:

  • $4.7 billion charge for losses in trades with Archegos Capital Management, the imploding hedge fund
  • $1.5 billion loss likely in dealings with collapsed supply chain finance company Greensill Capital, just three weeks prior
  • Bonus scandal: Former CEO Tidjane Thiam spied on employees and was forced out in February 2020

So they’ve been busy! Why is this one company stumbling from cliff to quagmire?

A major factor appears to be its bifurcated business, which focuses on both asset management and investment banking, but is too small to be a big player in either market. So, in order to win business from its bigger competitors, it has to offer better terms and do worse deals.

In reality, the asset-management unit, which brought in Greensill, and the investment bank, which handled Archegos, were too small to square off with Wall Street giants. The bank tried to make more money from fewer clients than rivals with larger balance sheets and ended up overlooking risks, the executives said.

There were clear warning signs on both Archegos and Greensill.

There were clear warning signs on both Archegos and Greensill. Archegos founder Bill Hwang had been sanctioned by the SEC for insider trading and banned from handling client money, which is the entire reason he started Archegos in the first place. It was a family office, managing just his own family’s money, due to that SEC ruling. Credit Suisse thought the risk was limited because he wasn’t managing client money, but failed to consider what would happen to its own funds!

Greensill too had come under scrutiny early enough to avert problems, but nothing was done:

In 2019, members of the credit-structuring team escalated its alerts about Greensill to the bank’s reputational-risk committee, the person familiar with the funds said. They had become concerned Greensill might be taking operational shortcuts.

Interestingly, the dynamic of Credit Suisse agreeing to anything in order to win business from larger competitors was played out by its client Greensill as well:

Mr. Greensill signed up some big, credit-rated companies. To wrest those customers from big banks, Greensill had to offer competitive terms that didn’t make it much money, according to people familiar with Greensill’s business.

Credit Suisse seems to lack any internal controls whatsoever, and I strongly recommend investors avoid

Credit Suisse seems to lack any internal controls whatsoever, and I strongly recommend investors avoid it. We can also gain a broader lesson from this fiasco. If you’re a smaller company trying to get into a market, don’t do disadvantageous deals just to get some market share. You expose yourself to too many problems that will blow you up before you ever get a chance to compete with the big boys.

For more on Archegos, check out these posts:

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Photo: “Punch to the Face” by Ninja M. is licensed under CC BY-NC-SA 2.0