One of the largest banks in the world is in deep trouble and is currently even fighting for its survival. Very negative events are likely to cause a shock similar to that caused by the collapse of the US bank Lehman Brothers in September 2008. I would point out that this event triggered one of the most serious financial and economic crises since the Great Depression.

Credit Suisse

What has given rise to much speculation and concern about the future of Credit Suisse? Credit Suisse's credit default swaps, which offer protection against the company's default, have risen sharply in the past week. Credit Suisse's five-year credit-default swaps jumped 6 basis points on Friday to nearly 247 basis points, the highest level in at least 10 years. The underlying CDS contracts were written at very high levels on Friday, indicating a gradual increase in refinancing costs.

• Credit Suisse CDS started the year at 57bps!

Credit Suisse $CS+1.0% currently trades at 0.23 times tangible book = tangible book value. This is a very worrying valuation for the bank, and for the European market and the banks here.

• Tangible book - The definition of tangible book value, also known as net tangible equity, measures the net asset value of a company excluding intangible assets and goodwill. In other words, it is how much all the physical assets of a company are worth.
• To understand the current issue, we need to go back in time a bit and look at certain events.

Credit Suisse is in deep trouble because of a steady stream of risk management scandals at its investment bank, including the Archegos Capital fiasco that cost it more than $5 billion.

Problems with Credit Suisse's business model

On the face of it, $CS+1.0% has a very attractive business mix, which relies on a capital-light wealth management business (up to two-thirds of the bank) and is complemented by an appropriately sized investment sector ( one-third of the bank). It sounds almost similar to the European version of Morgan Stanley, but of course there are differences and quite rapid ones at that.

Credit Suisse is an investment bank that focuses primarily on credit markets and capital markets issuance. These are areas that are quite challenging in the current macroeconomic environment.

• Because of the Archegos Capital debacle, $CS+1.0% was forced to pull back from the Prime Finance business, which is usually a very lucrative and profitable business line for investment banks. Also, in the current environment, its strong areas of leveraged finance, M&A and SPAC business are very subdued. CS has also taken material (but as yet unquantified losses) from the Citrix buyout.

Coupled with colossal risk management failures, Credit Suisse's investment bank is now in big trouble. This is driving up the cost of funding and could easily turn into a death spiral, plus key executives and creators are literally trying to flee the bank.

Let's take a deeper look at the aforementioned issue 👇

The Credit Suisse crisis - or I would definitely not buy this dip

Besides the financial loss, there are other significant downstream implications for $CS+1.0% in the short and medium term. While the current share price seems attractive in the context of the long-term valuation of the stock, I'm not willing to invest here. The investment bank appears to be plagued by major problems and risk management issues = correcting them is likely to be a lengthy and expensive process.

Problems of gigantic proportions

Credit Suisse is in deep trouble. The Swiss banking giant is embroiled in a series of financial scandals that now threaten its future. Speculation about the future of the Swiss banking giant has been going on for months in the markets, in business and political circles and on social media.

The Swiss bank and one of the largest banks in the world is in deep trouble and is currently fighting for its survival. A negative outcome is likely to cause a shock similar to that caused by the collapse of the US bank Lehman Brothers in September 2008. This analogy makes it clear how serious the situation is.

• A year ago, Credit Suisse had a market capitalisation of USD 22.3 billion. Today, its market value is only USD 10.28 billion. Credit Suisse shares have fallen 60.48% in one year to $3.92.

Do you know how this giant loss is surprising? The bank is a world leader that even managed to weather the financial crisis without losing too much. At the time of this crisis, Credit Suisse shares fell, but only to the $45 level, which seemed like a great performance for the bank at the time. So the current loss of more than half of its market capitalization is really a shock.

What happened?

Employee morale has been dismal in recent days. The bank has not yet renewed the contracts of some suppliers. Leavers are no longer being compensated, which CS comments is a remedy and a cost-saving measure.

Talent and professionals are leaving the bank. The bank has lost one of its top traders, Jens Welter, who left for Citigroup after 27 years in the establishment. Welter was global co-head of banking when he left. Another departure is global head of credit products Daniel McCarthy.

"I am aware that there is a lot of uncertainty and speculation both outside and inside the company," CEO Ulrich Körner told employees in a Sept. 30 memo. "While you will appreciate that I cannot share the details of our transformation plans before October 27, I also want to make sure that we reach out to you directly during this challenging period. That's why I'll be sending you all regular updates until then."

The CEO explained that "this is a critical time" for the bank and warned staff that the rumours and speculation will continue and get louder.

Greensill, Archegos

The investment bank's mistakes in recent years have plunged Credit Suisse into a succession of scandals, reviving speculation about its bankruptcy or merger with rival UBS.

• One scandal occurred in 2021 and caused the bank several billion dollars in losses.

Greensill

The first is the Greensill bankruptcy. The British company, founded in 2011, is a supply chain and accounts receivable lender that specializes in lending money to companies so they can pay their suppliers. It then packages the debts of these companies into financial securities that it resells to investors.

But the house of cards began to collapse when these investors, including Credit Suisse, doubted the true value of the debts and abandoned Greensill, which then declared bankruptcy in March 2021.

• Credit Suisse had invested up to $10 billion of its clients' money in Greensill products.

Archegos

The second scandal in the spring of 2021 involved the family office of Archegos Capital Management. Bill Hwang is a South Korean investor based in New York. Tiger Asia, a company he funded in 2000, suffered a major defeat in 2012 due to allegations of insider trading. Hwang gradually revived Tiger Asia, which later became Archegos.

While his company would manage $10 billion, Hwang persuaded banks, including Credit Suisse, to lend him $30 billion for further investment. In 2020, he invested heavily in ViacomCBS, which saw its stock value soar.

In early 2021, Credit Suisse asked Archegos to de-risk and deposit funds. Hwang promised to reduce the risks.

• What happened next? In March 2021, ViacomCBS shares collapsed and the banks asked Archegos to cover the losses, which could no longer be done. As a result, Hwang's company Archegos went bankrupt.

Another scandal from the past - Mozambique's tuna bonds

A laughable title, but a catastrophic story. Swiss bank $CS+1.0%, which has been recovering from costly scandals and lawsuits in recent years, agreed to pay a sum to investors who bought debt to help finance a tuna fishing project in the southern African country.

Credit Suisse and Russian investment bank VTB negotiated $2 billion in government-backed loans and bonds between 2013 and 2016 to allegedly develop the country's tuna fishing fleet and maritime security projects. The companies took out loans to purchase equipment using state guarantees that were not approved by the Mozambican parliament. The size of the debt was not disclosed to international donors until 2016. The revelation of the loans, the collapse of the companies and subsequent defaults led to years of financial crisis in Mozambique.

• However, Credit Suisse agreed to pay $22.6 million in restitution to investors who were defrauded in connection with the Mozambique loan scandal.
• This article may seem long to you, but believe me, this issue cannot be summarised in a nutshell, and I note that I have not yet mentioned several other issues.

Is there any solution to these problems?

The company cannot deny that it needs to raise capital, but it has no good options to do so. CEO Koerner has a plan to move on from years of scandals (Archegos, Greensill Capital, Mozambique tuna bonds, Bulgarian money laundering, corporate espionage, etc.) that start with an investment bank bleeding cash. Another problem is the firing of bankers, but this has a large upfront cost, and a bank that promises to self-fund its turnaround rarely wins the confidence of investors.

To avoid declaring bankruptcy, Credit Suisse has promised to present a strategic plan on 27 October. This would include, in particular, divesting investment banking activities - but details are not yet known.

• The problem is that restructuring an investment bank is long, drawn-out, risky and expensive. Moreover, the confidence of all $CS+1.0% creditors is very fragile.

Conclusion

In short, this is likely to be a multi-year story with no guarantee of success. Importantly, shareholders will be last on the list of priorities as Credit Suisse will have to balance the demands of other stakeholders. This is indeed a very big issue that could lead to really hard consequences and a Lehman Brothers 2.0 scenario.

• What is your opinion on this?
• Are we going to see a Lehman Brothers 2.0?

Please note that this is not financial advice. Every investment must undergo a thorough analysis.