The Collapse of Credit Suisse: “No-one saw this coming?” - Balderdash!
Linking to my many, many warnings re CS over the past years. Until the Ides of March put an end to CS in March 2023. Looking into the future: UBS won, Switzerland lost.
Yes, I shamelessly stole my headline from Prof. Steve Keen's accurate forecast list re the GFC 2008. You can still read Steve Keen’s old blog entry from 2009 here.
He listed a number of people accurately predicting the collapse of the housing / sub-prime loan bubble - sometimes years in advance. A few of them even became famous doing so (e.g. Nouriel Roubini who keeps busy writing about looming mega-threats).
I am recycling Steve’s blog title because at least a few observers (including yours truly) anticipated for years that Credit Suisse, CS, - one of the World’s 30 systemically important banks! - was just one confidence crisis, recession or banking crisis away from going under.
The Ides of March made that happen in March 2023.
The Ides of March (Latin: Idus Martiae) is the 74th day in the Roman calendar, corresponding to 15 March.
A disastrous interview from a major shareholder (the Saudi National Bank, not to be confounded with the Swiss National Bank, SNB) along with large counterparties such as BNP Paribas cutting ties or swap lines on the same day probably were the final two nails in the CS coffin on - you guessed it - March 15, 2023:
That interview with the core Saudi investors was widely mocked (rightly so) and contributed to a large drop in share price - prompting the Swiss SNB to step in a few hours later with first re-assurances.
Swiss National Bank says it will provide Credit Suisse with liquidity if necessary
We now know that this first publicly announced liquidity backstop (CHF 50 billion) was only used by the Swiss regulators to save CS into the weekend finish line (in order to cobble together a solution and present it before the markets re-opened on Monday).
These events in early March 2023 were just the home stretch before the final curtain fell for CS - a global bank with a history dating back almost 170 years! - on Sunday.
The strategic problems for CS started well over a decade ago - some market historians argue even far earlier, when CS wanted to become a global player in investment banking (far away from its Swiss roots and traditional Asset and Wealth management services). CS then expanded heavily in North America and IB (CS First Boston etc.).
I already warned about CS 0.00%↑ from 2013-2019 in other publications and posts (I unfortunately can’t publicly quote or share that material here).
Here are a few of my alerts and tweets from 2019 to 2023 re Credit Suisse. In 2019:
In 2020 (covering the ongoing Tesla stock bubble on the side. On that note: I started assigning the “Q” letter - many Tesla skeptics use the TSLAQ ticker - to my CS tweets as well. It indicates a very bearish position on the stock and company outlook):
And in September 2022:
This bank [obviously CS] is just one financial crisis or severe recession away from going under or (at least) being split up with many haircuts.
Ahead of the last (now failed) strategy update in October 2022:
That new strategy was indeed announced by October 27, 2022 only:
Credit Suisse : unveils new strategy and transformation plan
(Source)
The stock market (including myself) wasn’t impressed:
Too late, too little was the consensus in late October 2022. I therefore emphasize once again my key quote from a 2022 tweet above:
$CS doesn’t seem to get that a general confidence loss among its counterparties supersedes all “good” CET1 number mantras.
The market also didn’t like that “only” CHF4 billion were supposed to be raised as part of the new plan - especially since outflows kept growing in 2022 already:
“Credit Suisse has today announced its intention to raise capital with gross proceeds of CHF ~4 billion through the issuance of new shares to qualified investors, including Saudi National Bank, which has committed to invest up to CHF 1.5 billion to achieve a shareholding of up to 9.9%…” (source as above).
Meanwhile, CS optimists kept repeating the “good” CET1 number while largely ignoring other bad indicators:
A high cost structure while assets and deposits were shrinking at a rapid pace - only the Swiss retail unit at CS provided stable returns over the past years.
This was obvious and in plain sight, see e.g. this July 2022 S&P Global MI headline:
Credit Suisse suffers worst Q1 cost-to-income ratio among European banks
(Source)
A very bad ROTE number compared to the local rival (now turned “savior”) UBS:
These were just two obvious examples - along with the aforementioned increasing deposit outflows at CS.
I could point to many additional metrics where CS lagged behind its peers (but I didn’t share those on Twitter at the time).
I concluded that CS 0.00%↑ was on a tipping point after a decade of risk management failures - assets outflows were starting to grow while cost cutting still was timid and the new management failed to communicate its new strategy plan effectively. That was back in October 2022:
The Archegos example (mentioned in my tweet above) did show that CS had the worst risk managers even when other banks were involved. CS somehow managed to lose more money on that scandal than its large IB/prime broke rivals:
I certainly wasn’t the only one predicting a looming disaster at Credit Suisse. Bedrock was/is using algorithms, I simply used old-school analysis:
My final long CS thread from early March 2023:
I also repeated that a collapse can happen immediately once a confidence crisis snowballs - what finally occurred on March 15 (as I outlined at the top of the article).
The headline on March 14 about ‘material weaknesses’ was just an appetizer:
Credit Suisse warns of ‘material weaknesses’ in financial reporting
“Management did not design and maintain an effective risk assessment process to identify and analyse the risk of material misstatements in its financial statements,” Credit Suisse said in its report.
(Source)
Gradually, then suddenly is a classic in financial sector stocks. Bank stocks can start to weaken gradually for weeks and months, then suddenly collapse within hours and days:
I also warned (retail) investors not to jump in at the last minute to take advantage of the (at the time) "record-low" CS 0.00%↑ share price. From March 15, 2023:
I was right. SNB and FINMA did step in the same week. CS shareholders indeed got a huge haircut on Monday when CS shares plunged another 60-70% (based on the final lowball offer from UBS, well below last week’s close, i.e. around CHF 0.76 / CS share).
The result is clear: CS 0.00%↑ is now (late March 2023) a penny stock before it gets de-listed and absorbed by UBS 0.00%↑ .
UBS got the failing bank for next to free thanks to the SNB's and FINMA's liquidity-backstops, ELA and other assurances. UBS got $25 billion in direct aid, not just the reported $9 billion for murky Level 3 assets at CS.
How so? CS CoCo bondholders got wiped out to the tune of $16 -17 billion. This decision will lead to many lawsuits:
Courts will decide on the legality one day:
Why $17 Billion in Credit Suisse ‘CoCos’ or AT1s Got Wiped Out in UBS Takeover
(Source)
Future legal issues aside. The new owner UBS 0.00%↑ must feel very happy about all that. First, they can point to FINMA (the toothless Swiss banking regulator, not really allowed to regulate or even impose fines...) in case liabilities arise in legal decisions:
UBS' CEO Ralph Hamers told analysts that the decision to write down the AT1 bonds to zero was taken by FINMA, so it would not create a liability for the bank.
(Source)
Secondly, this is a substantial and immediate increase in core capital - on top of around CHF 200 billion in additional liquidity assurances from the SNB. Yes, 200 billion (!).
That’s around 225 billion (the CHF and USD FX rates wobble around parity anyway at the moment) in total.
So much for a “private solution/merger” - that’s what the new Swiss finance minister wanted the stunned public to believe on Sunday. No, it was another huge bailout in disguise - exactly what the small country desperately wanted to avoid since 2008:
(The SNB can keep telling us that ELA, ELA+ and PLB are “normal” liquidity instruments for any central bank until their faces turn blue; these HUGE backstop numbers for one bank certainly aren’t “normal” - especially after reaching 50, then 200 billion in volume within four short days for just one bank. In addition, the PLB was only scheduled to be introduced in Switzerlan beyond 2023, the SNB never even talked about this additional backstop instrument before the PR release from March 2022: “The Federal Council has instructed the FDF to prepare a consultation draft [for PLB adoption in Switzerland by the SNB] by mid-2023”! (Same source).
Speaking of billions: The CS fallout on the executive and board level shows the greed while billions in shareholder value were wiped out since the shares peaked in 2007:
One board member deserves a special honorary lifetime award for destroying shareholder value at CS 0.00%↑ : Urs Rohner.
I already noticed this back in 2021 when the left the CS 0.00%↑ Titanic- after an entire decade of failures and lawsuits under his leadership:
And (also in 2021, in German) when Rohner was tipped to leave CS for a new employer in London:
On a side note: The legal team at Credit Suisse apparently had nothing better to do than sue the linked publication (the Swiss financial blog Inside Paradeplatz, IP) after their years of critical reporting on CS and other Swiss banks (IP and its author single-handedly uncovered the huge Raiffeisen CEO banking scandal in Switzerland a few years earlier).
Two ironic notes to finish off my Credit Suisse tweet history summary - since bankers are so fond of bonuses.
Bonus Package I: Blythe Masters is now experiencing a CDS "fire" at CS 0.00%↑ as the co-inventor of these very financial instruments:
Blythe Masters is - probably soon was - a member of the board at CS since 2021, as the Swiss press duly noted at the time:
Credit Suisse s’offre la banquière qui a inventé les «armes de destruction massive» financières
Blythe Masters, proposée à l’élection au conseil d’administration, est à l’origine des CDS. Ces assurances contre le défaut d’une obligation ont joué un rôle particulier dans la crise de 2008.
(Source)
No Swiss publication has pointed out that CDS link since CS collapsed (at least as far as I know, otherwise please let me know in the comment section).
The CDS market did signal or indicate a high risk of a coming collapse months and weeks in advance - see the chart below, with a comparison to another troubled banking giant in Europe ( DB 0.00%↑ ):
Back in October 2022:
And with even wider gaps in mid-March 2023, days before the collapse:
Did Masters look at the CS 0.00%↑ CDS prices as a member of the board? If so, she would have known that "her" bank is in deep troubles many months ago. She co-invented these CDS instruments, after all.
Bonus Package II: Credit Suisse was praising Coco (At1) bonds as very safe instruments on their own homepage back in 2021:
We know how it ended for now - the bonds were marked to zero (but we don’t know how this will end in the courts one day).
I had warned about the perceived “safety” of Coco bonds as far back as 2016, both Deutsche Bank and Credit Suisse were already priced for trouble back then:
These bond constructs now look dead in the water - with higher re-financing costs for financial institutions all over the Europe as a consequence:
Is it all good otherwise after the merger? No, not at all.
The new (post-merger) UBS is a mega-bank that’s too big to save - at least for a small country like Switzerland. Its combined assets are more than twice as high as the current Swiss GDP.
The SNB (and the toothless Swiss regulator FINMA) created a new monster this past weekend.
This forced shotgun marriage will come to haunt Switzerland in the next financial crisis:
Summary: A failure of CS 0.00%↑ was predictable and growing in probability for a long time - all that was needed was a financial or confidence crisis, general macro volatility or a general recession. CS 0.00%↑ was one the weakest banks in Europe, alongside DB 0.00%↑ (for other reasons).
The final doom cocktail ingredients were bad luck (releasing the delayed annual report when smaller banks in the U.S. were on the brink of collapse and a bigger one just had collapsed, i.e. the Silicon Valley Bank) paired with incompetence (the clumsy Saudi investor interview on March 15 I linked to at the beginning).
The emergency “solution”- a CS 0.00%↑ x UBS 0.00%↑ shotgun marriage - is horrible in terms of moral hazard and financial stability for Switzerland long-term.
UBS won (it got a free bank with all kinds of SNB assurances) while Switzerland lost.
UBS should have never been allowed to take over CS (at the maximum, they should have only gotten small parts of CS, keeping competition in Switzerland alive with the Swiss retail unit going to other bidders or nationalized and re-packaged later).
I am certainly not the only warning about the upcoming merged UBS 0.00%↑ mega-bank, see e.g. here (interesting interview with Urs Birchler, a retired finance professor and a former SNB member, in German).
Competition in banking is over in many areas in Switzerland now - the merged banking monster controls most loans to SME organizations and the local housing (real estate loans) market. The bubbly housing market in Switzerland is another ticking bomb:
But that’s a story for another day.
Follow me on Twitter and here on Substack for updates.
PS: Swiss-German / German readers will immediately notice that I barely linked to German or Swiss media sources. Most of those them unfortunately hopelessly behind in covering the CS saga - or even ignoring that Credit Suisse was in real danger until it was too late.
One good exception is this post-mortem article from Swiss online publication Republik, providing answers beyond the fluffy headlines from SNB, FINMA and the Swiss Department of Finance (EFD):
Untergang der Credit Suisse: Was sie sagten, was sie meinten, was sie verschwiegen
Was wollten Bundesrat, Nationalbank und Credit Suisse uns eigentlich mitteilen? Wir übersetzen.
(Source)
Another one was a good interview by themarket.ch with Jim Bianco (in English):
«The Only Winner in This Deal is UBS»
Jim Bianco, founder and President of Bianco Research, shares his take on the Credit Suisse takeover, the banking crisis in the US and the implications for the financial markets.
(Source)
Other than that the venerable FT probably wrote the definitive account on the last days of CS (so far), along with many leaks…
…as well as small anecdotes that are ideal set-ups for some dry and dark humor:
Updates based on new reports:
- The total aid / backstop / liquidity package was 259+ billion, not the previously reported 209 billion CHF. SNB didn’t clearly state that the first liquidity package for CS wasn’t part of the total communicated at the press conference on Sunday (day of the rescue).
- CS apparently already had trouble finding enough “high-quality” assets for that first liquidity package (CHF 50 billion) from the SNB, according to new SNB sources talking to the Swiss press:
https://twitter.com/talesftf/status/1639610998393827330?s=61&t=5jjKGFfi0YLRHaxfDl8eEQ
A good overview on CS promises vs reality (in German):
https://interaktiv.tagesanzeiger.ch/2022/credit-suisse-gebrochene-versprechen/
Trust broken over 20 years ultimately has consequences.