InvestorQ : Is it true that Credit Suisse is going bankrupt and what caused this problem?
Dawn Cherian made post

Is it true that Credit Suisse is going bankrupt and what caused this problem?

Mitali Bhutta answered.
1 month ago

These are early days still but you are right that Credit Suisse appears to be in a lot of trouble. People are drawing parallels with the global financial crisis of 2008, when Bear Sterns and Lehman went bust and other big names like Morgan Stanley, Merrill Lynch and Goldman Sachs were on the brink. If you go by the credit default swaps (CDS) rates, then Credit Suisse appears to be worse off than it was in 2008. In fact, back in 2008, Credit Suisse had come out largely unscathed while most of its other industry peers in Europe were in deep trouble. The latest grist to the mill came from an internal memo sent by the new CEO of CS.

In fact, the newly appointed CEO of Credit Suisse, Ulrich Koerner, had written to his staff assuring them that Credit Suisse had a strong capital buffer of $100 billion and high quality liquid assets of $238 billion. The story got leaked to the press and it backfired as the markets interpreted such internal memos as a sign of desperation. The impact was evident in the CDS rates as it widened to 250 and then to 335 points, indicating that there was almost a 33% probability of Credit Suisse going bankrupt. The CDS swaps of Credit Suisse are more than twice that of other investment banks across the globe.

The reasons are not far to seek. In the last 3 quarters alone, Credit Suisse has lost close to $4 billion. That too, at a time when all other investment banks are raking in the moolah. But there have been a lot of awful decisions that led to this situation. It lost $5.5 billion in the fraud family office fund, Archegos, run by Bill Hwang. It continued to fund them very late in the day. Then there is the unfinished loss in Greensill capital, where they funded the supply chain financer, who went bankrupt without the knowledge of Credit Suisse. Losses could be more than $2-3 billion. Credit Suisse just escaped losing money in Evergrande.

That is only part of the story. As it expanded its investment banking franchise in the last few years, it started funding Mozambique tuna bonds to cocaine traffickers to Russian oligarchs for their purchase of private jets and yachts. Many of these possessions are likely to unravel as the crisis in Russia deepens and sanctions get steeper. Not surprisingly, the stock price of Credit Suisse is down to SFR 3.50 and its market cap is now below $10 billion, just about one tenth the market value of HDFC Bank. That is not a very encouraging story. Credit Suisse and Deutsche Bank represent the two biggest risks for European markets today.

However, it is very likely that a relief package and capital infusion will come through as Credit Suisse with its 160 years pedigree is considered too big to fail. Remember, not every capital infusion demand is akin to bankruptcy. Switzerland has the deep pockets and it can easily save Credit Suisse like Germany has gone out of the way to save Deutsche Bank. The most likely outcome is hiving off the investing banking division and focusing more on its core banking and wealth management business. But for that we need to await details of the grand plan that the board is likely to announce on 27th October this year.