A series of financial scandals are taking Swiss banking giant Credit Suisse perilously close to the tipping point. Amid an unprecedented liquidity crisis and a torrid plunge in market value, there is increasing chatter about impending bankruptcy or a humiliating merger with rival UBS.
Current Status and Lehman Brothers Comparison
Some analysts are comparing the looming Credit Suisse crisis to the Lehman Brothers liquidation in 2008, which triggered the global financial crisis. The bank's credit default swap spread surged to a 14-year high and its stock has been nearly wiped out. The top executives have said the bank's liquidity is stable but all eyes are on October 27, when the second largest Swiss bank will unveil a revival plan.
The first major shock for Credit Suisse was the bankruptcy of Greensill, a British supply chain company to which the Swiss banking major was heavily exposed. When Greensill filed for bankruptcy in 2021, Credit Suisse lost a whopping $10 billion of its investor money.
The second crisis to hit Credit Suisse later in the same year was the unraveling of Archegos Capital Management, which was promoted by Bill Hwang. While Hwang managed $10 billion, he convinced Credit Suisse and other banks to approve a $30 billion investment.
The crisis unfolded when Archegos engaged in the fire sale of about $20 billion of assets after it defaulted on a margin call by Credit Suisse and others. Shares of Nomura and Credit Suisse plunged, erasing a combined $9 billion in market value on the back of the market chaos following the collapse of Archegos Capital Management. Major investment banks like Deutsche Bank, UBS, Morgan Stanley, Goldman Sachs etc were also hit by the liquidation of Archegos.
Eroding Market Cap
Credit Suisse had a market capitalization of $22.3 billion just a year ago. This has crashed to just $10.4 billion as of now, even as shares plunged 56 percent in one year to $3.98, according to The Street.
Credit Suisse CEO Ulrich Korner has sounded the warning bell, saying the company is going through critical moments. "I am conscious that there is lots of uncertainty and speculation both outside and within the company ...While you will appreciate that I am unable to share details of our transformation plans before October 27, I also want to make sure that you hear from me directly during this challenging period. I will therefore be sending a regular update to you all until then," the CEO said.
Is Turnaround Possible?
Though Korner says he is committed to 'reshaping Credit Suisse for a long-term, sustainable future' the market is unsure about the future. The Financial Times reported that senior Credit Suisse executives tried to reassure large clients, counterparties and investors over the weekend about the bank's liquidity.
However, the mood around Credit Suisse is of gloom. Employee morale is down, contract staff have not received their new job offers, and staff departures are happening at a brisk pace, according to The Street. For a company that weathered the financial crisis of 2008, the new crisis has posed acute challenges.
October 27 D-day
The worst-case scenario is for the bank to file for bankruptcy, but Credit Suisse is digging in and fighting it out. The bank will unveil a strategic plan on October 27, and global investors and financial market analysts will be glued on to the event. The bank is expected to almost certainly announce the divestment of its investment banking activities, which was at the core of the current crisis.