All weekend, Twitter has been abuzz with the story that Credit Suisse is on the rocks.
Apparently senior credit Suisse executives spent the weekend in the office calling up
big clients, counterparties and investors to reassure them after the banks CDS spreads
blew out on Friday.
CDS are derivatives that offer protection against a company defaulting on its bonds.
If we look at the stock price it is down almost 60% year to date, which seems bad, but that
is in US dollar terms, and we know that the dollar has been very strong this year.
In terms of bitcoin, which people on the internet tell me is the best money we have ever had
– it is about flat year to date… so that’s good.
We have seen a lot of volatility this morning in the stock price, initially the shares fell
as much as 12% before turning positive and finally closing up on the day.
So, is the world ending and is Credit Suisse the Lehman Brothers of 2022 as some people
on twitter would have you believe?
Well, a lot of the turmoil that we have seen was sparked by a memo late last week from
the banks CEO, in which he tried to play down speculation surrounding the bank’s overhaul
plans, which he expects to announce near the end of this month – not on Halloween though…
I think a day or two before (it is probably not a good idea to schedule big corporate
announcements for Halloween – or April fool’s day either I guess.).
In the memo he argued that the bank’s capital levels, and liquidity are strong, but said
that the bank was at a “critical moment.”
Little PR Tip for bank CEO’s.
As accurate as such a statement might be, when you start emailing staff to tell them
that your capital and liquidity levels are strong – it just doesn’t look good…
Additionally, when a bank calls its customers on a weekend to tell them that nothing has
gone wrong...
That can spook them a bit...
OK, so I have made so many jokes about Credit Suisse on this channel over the last few years
that I feel a little bit bad about it.
I have a few friends who work there, and I’m not sure that they are talking to me anymore.
So, Credit Suisse has been scandal plagued over the last few years, there has been Archegos,
Greensill, Mozambique tuna bonds, Bulgarian money laundering, corporate espionage…
They have kept themselves busy there at Credit Suisse…
There has also been a lot of turnover in senior positions at the bank.
But just because it is not a great bank, doesn’t mean it is on the verge of bankruptcy.
The CDS prices that everyone has been talking about tell us that the market is pricing in
a 3% probability that the bank defaults in the next year and a 20% implied probability
that it defaults in the next five years.
A 3% probability is not exactly the grim reaper knocking on the door.
The fact that the stock is down a lot this year doesn’t really imply a looming bankruptcy
either.
The stock price is down roughly in line with how much earnings expectations have fallen
over the same period.