November 30, 2023

Investment Banking

Let Your Investment Banking Do The Walking

What Exactly Is Going On At The Global Investment Giant? Have They Hit Bottom Yet?

Key takeaways

  • Credit Suisse has experienced multiple major scandals since early 2021.
  • These scandals have resulted in billions of dollars of losses for the bank and its investors, causing its stock price to nosedive.
  • Some fear that the company is on the precipice of failure, though Credit Suisse claims it is in a stable financial position.

Credit Suisse, one of the largest banks in Switzerland, has been embroiled in scandal for the past several months. Due to the bank’s size, its failure could lead to a global impact much like the failure of Lehman Brothers—the American bank that dissolved into molecules before our eyes in 2008 and triggered the Great Recession.

But how did Credit Suisse rise to prominence, what’s actually happening to it, and why does it all matter? Let’s explore the details.

A brief history of Credit Suisse

Credit Suisse began in 1856 when Alfred Escher founded Schweizerische Kreditanstalt (SKA) in Switzerland. SKA opened its first foreign office in New York in 1870 and its first bank branch outside of Zurich in 1905. The bank became a leading player in Swiss underwriting and syndication

Over the decades, the bank expanded through mergers and acquisitions. By 2006, it was operating globally in private banking, investment banking and asset management.

What’s happening at Credit Suisse

Over the past year, Credit Suisse’s stock value has plummeted, with the company’s market capitalization dropping over 50%. This has happened due to a series of scandals that began in 2021.

Scandal after scandal…

  • Greensill Capital: British financial services company focused on supply chain and accounts receivable financing. It originated loans, securitized them and sold them to investors. Credit Suisse had $10 billion invested in the company’s products. In March 2021, Greensill Capital failed, causing Credit Suisse’s clients to lose as much as $3 billion on their investments.
  • Archegos Capital: This private company primarily managed the assets of Bill Hwang, an American trader and investor. Credit Suisse provided brokerage services to Archegos Capital, including lending. Archegos Capital reportedly experienced losses of as much as $20 billion in just a few days. A month after the Greensill losses, Credit Suisse lost $4.7 billion due to its involvement with Archegos Capital, and at least seven Credit Suisse executives were removed from their jobs.
  • Drug-related money laundering: In February 2022, Credit Suisse was charged with being involved in money laundering by a Bulgarian cocaine trafficking gang. It was the first criminal trial of a major bank to occur in Switzerland. In June, the bank was found guilty, fined 1.7 million euros, and ordered to pay 15 million euros to the Swiss government. Credit Suisse announced plans to appeal.
  • Information leaks: In the same month, the details of 30,000 customer accounts holding more than 100 billion Swiss francs in accounts at Credit Suisse were leaked to Süddeutsche Zeitung, a major German newspaper. Included in the leak were accounts held by people involved in human trafficking, drug trafficking and torture. One account was also allegedly associated with the Vatican and fraudulently invested in 350 million euros worth of property in London.
  • Ukraine invasion: Following the Russian invasion of Ukraine, Switzerland placed sanctions on Russia. In response, Credit Suisse requested hedge funds and other investors to destroy documents that linked Russian oligarchs to things like loans. This led to probes into the bank’s compliance with sanction requirements.

These scandals have had a major impact on the bank, hurting its image, reducing investor confidence and causing its stock value to drop since these scandals began.

What’s happening now?

After dealing with these scandals, Credit Suisse has seen its stock price drop from a pandemic-era high of $12.30 to $4.42 as of market open on October 11, 2022. This has resulted in its market capitalization dropping by more than 50%.

This major decrease in the company’s value, combined with the series of scandals, has led to concerns about the stability of Credit Suisse. Recently, social media rumors have begun predicting that the bank is on the precipice of failure, though Credit Suisse denies that, claiming it has a “strong capital base and liquidity position.”

The rate for credit default swaps on Credit Suisse debt has spiked this year, rising from less than 1% to nearly 6%. Higher rates indicate that the market feels that bankruptcy is more likely.

What is Credit Suisse Going to Do?

Though Credit Suisse claims that it is in a strong financial position despite recent scandals and losses, it is taking steps to strengthen itself further and to show that strength to outside investors.

For example, the company has offered to buy back $3 billion of its debt securities. It also placed the Savoy Hotel, located in Zurich, up for sale to help raise additional capital. As a result, the company’s stock price shot up by about 4%.

Why it matters

The global financial system is closely interconnected, and Credit Suisse is one of the world’s largest investment banks. If one of the largest investment banks in the world fails, it could send a shockwave through the financial system in the same way that the Lehman Brothers failure precipitated the start of the recession in 2008.

The volatility in the company’s stock price can also be seen as a barometer for market sentiment. With inflation high and many people concerned about a coming recession, the uncertainty of Credit Suisse’s stock price can show the level of anxiety in the market regarding the economy in general.

The bottom line

Credit Suisse has been battling scandal for more than a year and has seen its stock price plummet as a result. While some worry that these losses have left the bank financially unstable and placed it on the brink of failure, Credit Suisse claims that it is financially strong and has plans to recover.

While only time will tell which side is correct, many onlookers will continue to watch to see if Credit Suisse might be the herald of the next financial crisis—or show that we’ve learned from previous mistakes and can weather problems with major global banks.

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