Will Credit Suisse Go Bankrupt? Online speculation surrounding investment firm Credit Suisse suggests the company may be about to collapse in a manner similar to that of Lehman Brothers in 2008.
Indeed, the bank’s share price has performed poorly throughout 2022, having fallen more than 50% at the time of writing. And while the financial industry has also had a bad year thus far – the Fidelity MSCI Financials Index ETF is down almost 20% – CS’s fortunes clearly lag behind the broader sector by quite some way.
However, when Lehman Brothers eventually fell to pieces, the disintegration of one of America’s oldest and most storied banking institutions helped precipitate the Great Recession, leading to severe economic hardship that was experienced the world over.
Naturally, the prospect of another catastrophe on that scale has gotten investors and policymakers worried. In fact, Credit Suisse is a global banking megalith, and, given the interconnectedness of the markets today, its demise would send shockwaves across the entire planet.
But what got Credit Suisse into this mess to start with – and, more importantly, is there any way the company can fight its way out?
From One Scandal To Another
Credit Suisse has been afflicted by a number of quite serious scandals over the past five decades.
One of the more recent and high-profile of these was the collapse of Greensill Capital, whose securities – worth around $10 billion – were contained in funds managed by the Zürich-based company.
This led to questions about the role of Credit Suisse in the bankruptcy of Greensill, with the affair taking a political slant when the then Prime Minister of the UK, David Cameron, was found to have lobbied for Greensill after receiving millions of pounds from the disgraced supply chain financing outfit.
Moreover, the Archegos scandal is another embarrassment that Credit Suisse has had to deal with.
On this occasion, the bank’s risky business practices were once again exposed, this time with disastrous consequences. In this incident, CS acted as a lender to Archegos Capital Management, a family office that collapsed after making large and reckless bets on a variety of stocks.
The exposure in the Archegos case cost Credit Suisse $5.5 billion in losses, while the bank revealed in 2022 that litigation pertaining to the Greensill matter could go on for years.
Consequently, these scandals prompted comparisons to Lehman Brothers and the role it played in the financial crisis of 2007–2008. However, there are important differences between these events.
First, Lehman Brothers’ bankruptcy was, at the time, “the largest in United States history,” and its failure had a correspondingly more significant impact on global financial markets.
Second, Lehman’s collapse was caused by bad investments that turned sour; in contrast, both Greensill and Archegos collapsed due to fraud and mismanagement, and the magnitude of those losses pale in comparison to the U.S. housing bubble that presaged Lehman’s downfall.
Nonetheless, this has called into question Credit Suisse’s risk management practices and the extent to which it is exposed to potentially insolvent clients.
This has led to renewed calls for stricter regulation of banks, particularly those with expansive investment operations. It remains to be seen how these events will affect its business in the long run, but for now, they remain a major source of concern for investors.
Lehman Brothers And Credit Suisse Similarities?
Although it’s been 14 years since the Lehman Brothers bankruptcy caused turmoil in the global financial system, there are still some eerie parallels between the demise of the investment bank and the current predicament of Credit Suisse.
For instance, both companies saw big losses in their share price in the months leading up to their respective crises, with credit default spreads rising rapidly as investors grew increasingly cautious.
Furthermore, worries about the banks’ loan quality and funding sources are another parallel feature that both institutions unfortunately share.
How Can Credit Suisse Avert An Imminent Disaster?
Teetering on the edge of disaster, Credit Suisse is in a precarious position right now. Its less-than-stellar history weighs down on the Swiss banking giant, which makes finding new sources of growth a struggle.
But there may be a way out. Credit Suisse is still highly liquid and has a strong credit position. The firm can restructure the company, and it’s already taking measures to buy back $3 billion of debt securities now that its bonds are cheap. This would give Credit Suisse some breathing room to rebuild the business and avoid an imminent collapse.
In fact, the firm has announced that its comprehensive strategic review is well underway, and that further details will be released when it reports its third-quarter results. The bank is aware of the “heightened level of media and market speculation,“ and appears resolute in tackling these issues head-on.
Indeed, Credit Suisse has already floated many radical and transformative ideas. It intends to turn its Investment Bank into an advisory-led, capital-light Banking service, and has signaled its willingness to move forward with more prosaic measures too, such as raising additional third-party capital and selling off its less profitable segments.
What Now For Credit Suisse?
The bank’s problems haven’t just appeared overnight, and Credit Suisse has been struggling for a while now. While the business is attractively valued – it has a forward P/E multiple of 7.7x – there’s a real possibility that the firm might not recover its stock price for quite some time to come.
On top of that, the company faces an immediate set of challenges, including a difficult operating environment and mounting regulatory pressure. The recent spate of high-profile scandals doesn’t help either, and those headwinds are unlikely to go away anytime soon.
Indeed, it wasn’t just the Archegos and Greensill debacles that have plagued the company of late. For years, CS has been embroiled in a series of scandals, including money laundering for a Bulgarian drug lord, to information leaks uncovering the bank’s association with clients involved in unsavory interests such as human trafficking and torture.
Undoubtedly, the firm’s reputation has taken a massive hit, and rebuilding trust with investors will be a gargantuan task just on its own.
However, having dropped to its all-time low in the last few weeks, some investors with a high tolerance for risk might see this as an opportunity to buy at the bottom. And Credit Suisse still remains a key player in the finance world, despite its checkered past.
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