It has been almost 15 years since the fourth largest merchant bank by volume in America went bankrupt following the 2007/2008 crisis, the episode could have served as a lesson but apparently two more of the world’s most important banks are moving dangerously close to default.
The Credit Default Swap is the most important indicator for determining the solvency of a given credit institution and last week it came back in a bitter way to the limelight because of the level reached by some of the most important merchant banks in the world, Deutsche Bank, Barclays, Intesa Sanpaolo and especially Credit Suisse recorded bad data limited to this indicator.
What worries clients and markets most about the danger of Lehman-style financial contagion or worse is the data reached by Credit Suisse.
Credit Suisse and Deutsche Bank following in the footsteps of Lehman Brothers?
The Swiss investment bank reported 255 CDSs compared to 55 performing at the beginning of the year, the figure is at the highest since 2009 and means that insurers to protect the bank’s default risk are demanding much more as the risk of failure has increased fivefold in just three quarters.
Insiders at the Swiss bank, according to the Financial Times, report that Credit Suisse executives spent the weekend reassuring larger clients from default risk as analysts clamor for a capital increase and restructuring of the bank.
The hypothesis put on the table by analysts is that of a 4 billion Swiss franc capital increase while the investment bank’s newly appointed CEO Ulrich Koerner announces a strategic plan for 27 October admitting that he is concerned but at the same time confident that the bank’s capital and liquidity can offer ample assurance to investors.
When it rains, it pours around Credit Suisse, and so it turns out that not only in 2021 the bank’s market capitalization was 30 billion and today it is down to only 10 billion, but also that according to KBW analysts the only way to salvage what can be saved is to initiate a joint capital increase and reorganization with immovable points.
The plan centers on the creation of a Bad Bank, the divestment of Latin American asset management without regard to Brazil, and the return of the First Boston brand, but without extensive staff cuts and a shorter chain of command the institution will not stand a chance.
Performance and the upcoming quarterly report
While waiting for the next quarterly report, the bank is doing the math and it can be seen that in the first quarter it had posted losses of 273 million while in the second, the chasm had widened to bring the net loss to 1.59 billion francs.
The net loss figure is in stark contrast to the previous year’s showing, which saw the bank make a profit of 253 million.
Wallstformainst’s CEO states that:
“Anyone who fully trusts Credit Suisse accounting also believes in unicorns and the tooth fairy.”
Gurmeet Chadha, managing partner of Compcircle, despite everything is not very worried and in this regard stated:
“Since 2008, once a year Credit Suisse [and] once every [two] years Deutsche Bank is going to default. With every correction, this speculation starts to come. In my little experience, a black swan event doesn’t never announces.”
The “Wall Street Silver” Twitter account with its 320,000 followers has been vocal in its criticism of the investment bank:
“The collapse in Credit Suisse’s share price is of great concern,” said Wall Street Silver. “From $ 14.90 in February 2021, to $ 3.90 currently. And with P / B = 0.22, the markets say it is insolvent and probably bankrupt.”
A hand outstretched toward the Swiss Bank’s fellow misadventure (Deutsche Bank) comes from the author of Seeking Alpha who states:
“[Credit Suisse] is trading at 0.23 times the tangible book value [and] Deutsche Bank is trading at 0.3 times the tangible book value. Investors should avoid [Credit Suisse] and buy [Deutsche Bank].”