Credit Suisse and Lehman Brothers: will the Swiss bank repeat the story of 2008?
Swiss bank Credit Suisse is in trouble: its bonds have plummeted to a record low. In addition, the CDS value of these bonds has skyrocketed. This is a kind of "insurance" against default of the issuer, and the greater the market fears about such an outcome, the higher the value of CDS.
Why such pessimism about Credit Suisse?
A string of failures and scandals surrounding Credit Suisse have led to it:
- last year, billion-dollar losses were caused by the bank's major clients - financial services firm Greensill Capital and hedge fund Archegos Capital Management;
- the bank ended the first half of the year with a loss of $1.7 mln, the reasons being an alleged Russian special operation, rising inflation and a tightening of the central bank's monetary policy;
- in February of this year, a journalistic investigation, "Secrets of Credit Suisse", was released about "immoral clients of the bank";
- a Swiss court found Credit Suisse guilty of laundering money from Bulgarian drug traffickers;
- it is also suspected of having links to Russian oligarchs and violating sanctions: it is reported that Credit Suisse asked hedge funds and other investors to destroy documents concerning loans to sanctioned individuals.
These are not all the scandals in which Credit Suisse has been involved over the last 2 years. The bank is not used to scandals. It ruined its reputation long time ago - in the late 90s Credit Suisse and other Swiss banks were accused of having links to Nazi Germany and embezzling deposits of Holocaust victims.
Will Credit Suisse not make it this time?
They have already started comparing it to Lehman Brothers which went bankrupt in 2008 and triggered the world crisis. Indeed, Credit Suisse is also very big, the second largest bank in Switzerland and one of the largest investment banks in the world. The consequences of its collapse cannot be predicted in advance - too many financial chains are tied to it.
However, after the bankruptcy of Lehman Brothers, the authorities all over the world came to the concept of too big to fail. Its essence is in the point that it is easier to save such a bank than pull the whole financial system out. Logically, if Credit Suisse is included in the list of systemically important banks of the world, it means that they will not let it go bankrupt. But this is not certain.
However, the bank itself is already trying to improve the situation. To avoid bankruptcy filing, on October 27 Credit Suisse will present the report for the third quarter and the plan for business reorganization.
It also plans to sell part of its assets. The most radical option is to get rid of the American division. Also among the options to get out of the situation is splitting the investment business into three parts, with a "bad assets bank" being spun off. Cutting 5,000 employees is also being discussed.
Will downsizing and splitting up the business help?
Probably, but the problem is fundamental. After all, Credit Suisse is a universal bank. In addition to traditional commercial banking, it is engaged in investment activities (asset management operations, mergers and acquisitions, securities and derivatives trading). By the way, it was the investment division that led to the problems.
What prompted "Reliable Swiss" to change its risk profile?
First of all, regulatory permissiveness, a period of record-low interest rates and the policy of quantitative easing. After all, in a low-interest-rate economy, it's hard to make money on classic banking - hence the desire to lend to risky hedge funds and dubious investment companies. That's exactly what you can make more money on - especially when the bubble inflates.
Is Credit Suisse the first swallow?
Credit Suisse's problems are bad, but even worse is that it may not have been the only one to follow such a strategy. Now that all the bubbles in the world are deflating, other banks may also announce problems. For example, there are already rumors about problems in CSFB and Deutsche Bank. The most acute situation is with the fall of the bond market, because until recently they were considered a reliable tool and were often used as collateral for many loans.
In fact, the problem of separation of commercial and investment banks is as old as the world. But it seems that mankind keeps stepping on the same rake.