To The Moon

Credit Suisse, with total assets of approximately $1.4 trillion as of the end of 2022, has more than double the assets that Lehman Brothers had when it collapsed in 2008. Despite this, the financial company is teetering on the brink of bankruptcy, and investors need to be aware of the risks.

One of the main indicators of the company's troubles is the severe inversion of its credit default swap (CDS) rates. As of Tuesday, the indicative quote for a one-year CDS on Credit Suisse bonds was 835.9 basis points, according to CMAQ. Other sources indicate that this price rose even further on Wednesday, approaching 1,000 basis points. This high CDS price indicates a higher likelihood of default. Credit Suisse's one-year CDS price is currently about 18 times that of its competitor, UBS, and nine times that of Deutsche Bank.

In addition to the troubling CDS rates, Credit Suisse has been plagued by a series of scandals. In 2019, a departing executive discovered that the then-COO of Credit Suisse had hired a private detective to track him to see if he was poaching Credit Suisse clients. The COO was ultimately fired, and the private detective involved in the surveillance committed suicide. In 2021, two asset management companies caused a total loss of $8 billion. In 2022, Credit Suisse was embroiled in fraud and money laundering activities. And in 2023, the company's annual report revealed that "significant deficiencies" were found in the reporting procedures for the 2022 and 2021 fiscal years, as effective risk assessments were not designed and maintained in the financial statements. Despite these troubling issues, Credit Suisse appointed its third CEO in five years in an effort to turn the company around.

Credit Suisse faces internal and external challenges

Credit Suisse's stock price has fallen by over 80% in two years, wealthy clients are leaving, and the bank's reputation has been damaged. This has led to a 50% drop in the annual bonus pool to CHF 1 billion after 2022, wiping out ten years of profits. Although top executives claim there is no problem, the outflow of client funds has not been reversed. According to Swiss media reports, Credit Suisse clients withdrew CHF 51 billion worth of deposits (about 28% of the total) in one year. Credit Suisse's largest shareholder, Saudi National Bank, has also succumbed to panic and refused to provide more assistance. A scandal-ridden company with low morale internally and a lack of trust externally is unlikely to be able to stand on its own.

In summary, many people blame regulatory agencies for financial problems. However, in an ideal situation, regulatory policies can only optimize risks and try to minimize them. As individual investors, we should not blindly believe that people in power can solve problems perfectly. The risks are evident, and we should try to avoid them. The crisis in the banking industry is cyclical, and the main reason is that people quickly forget the lessons of the previous crisis. I hope this time will be different, but I personally am not very hopeful and have increased my hedging and cash positions.

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