Is Credit Suisse Triggering another 2008 Stock Market Crash?

I don't know if you guys use Twitter to Snapchat with what's going on in the finance world, but I probably checked Twitter maybe two or three times a day. Over the past week, one thing that's been catching my attention is the amount of people talking about Credit Suisse.

Now, to begin with, I didn't bother paying too much attention; reason being, I just really don't care about bank stocks. But over the past few days, it has been really difficult to ignore, especially with tweets calling this another Lehman or Bear Stearns moment. Credit Suisse investors are rapidly losing confidence with this stock, and it's fallen about 20 in just the last couple of weeks. Prices for credit default swaps are through the roof, AKA investors that hold Credit Suisse bonds are now lining up in droves to buy insurance to protect them from a potential Credit Suisse default.

But how do we get here, and is it as bad as it seems? Well, I've spent the last few days bearing my head in reports and articles, and this is what I've found.

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Have you guys ever asked your partner how they're feeling, only to be greeted with the classic "I'm fine"? What do you think when they say, "I'm fine"? Usually, it's a telltale sign they actually aren't fine at all; in fact, usually it's quite the opposite. Well, it turns out Credit Suisse have just played the "don't worry, I'm fine" card, and you guessed it, it's now backfiring.

So let's dive in. It all started a few weeks ago when reports emerged that Credit Suisse may look to do a capital raise. Now, investors haven't been too happy with Credit Suisse for a long time now—really since 2015. The stock has just sucked, and it's no secret that they've definitely been caught up in some pretty bad scandals, from failing to stop money laundering by cocaine traffickers to the Tuna Bond fraud, to the green seal scandal, to coping a whopping $5.5 billion loss through the RK ghost default in March last year.

Fed Estate Management has been questionable at best, and with so many blunders really hampering the company over the last few years, the firm is now set to straighten the record and announce a major restructuring of the business on October 27th. The only problem is they might need a bit more money to make that happen.

Since the reports of a potential 4 billion Swiss franc capital raise hit the press a few weeks ago, the stock has really plummeted. Reuters first reported rumors of the capital raise on the 23rd of September, the same day that Credit Suisse stock shed 12.5 percent. They noted, "Credit Suisse is sounding out investors for fresh cash," two people familiar with the matter said, approaching them for the fourth time in around seven years as it attempts a radical overhaul of its investment business.

"With the potential sale of the securitized products unit and the reduction of risk in the balance sheet, up to 4 billion Swiss Francs is missing for the upcoming restructuring, the growth plans in wealth management, and for the accumulation of equity capital," ZKB analyst Christian Schmidiger said. So it sounds like they need money, but if they resort to raising capital after the stock has cratered 55% over the past 12 months, well, that's painful for shareholders; as beyond the paper loss, they now get the added bonus of massive dilution.

But speaking of investor confidence, beyond the share price tanking, this news has also sent the prices of Credit Suisse credit default swaps soaring. This is where a lot of the 2008 financial crisis comments on Twitter are coming from.

Now, a credit default swap is similar to an insurance product, and yes, they're what Michael Burry bought back in 2005 in anticipation of that financial crisis. So to make sense of credit default swaps, just think about car insurance. You purchase an insurance policy to protect you against financial consequence if your car gets totaled. So, it's the same thing with the credit default swap. In this particular case, we're buying the credit default swap as protection against Credit Suisse's bonds defaulting and thus Credit Suisse not being able to pay us, the bondholder.

Now, as you might expect, if the investors that hold these bonds are starting to worry about the stability of the bank, they might look to buy some of these swaps. Remember, that would give them insurance in case Credit Suisse blows up. Like any financial asset, when there's high demand and everyone is buying, that pushes up the price of the asset.

Now have a look at what's happened in the credit default swap market. This is the price chart for the five-year credit default swaps for Bank of America, Goldman Sachs, Barclays, Deutsche Bank, UBS, and Credit Suisse. One of these is definitely not like the others. Investors are buying Credit Suisse credit default swaps hand over fist, and now they're the same prices that they were in 2009. It's pretty scary, but that in itself isn't an indicator of financial stress; remember, that is just an indicator of investor sentiment.

But this is definitely where Credit Suisse starts to shoot itself in the foot, and this is the "I'm fine, honey" moment because in response to this poor investor sentiment, their CEO Ulrich Körner on Friday decided to send out an unprompted company-wide memo to reassure staff and investors that everything is going to be all right. He said, "I know it's not easy to remain focused amid the many stories you read in the media, in particular given the many factually inaccurate statements being made. That said, I trust you are not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank."

Hmm, now while this could very well be 100% accurate, you can also see why investors took it so poorly; because it sounds like "honey, I'm fine," or the little kids saying, "I didn't do it," or the suspect's saying, "I can't remember where I was that night." It just doesn't sound convincing.

I saw this tweet the other day; apparently, the Lehman Brothers CFO said exactly the same thing as our good friend Ulrich back in 2008, and we all know how that one played out. But just when it all sounded unconvincing, is Credit Suisse stepping in it yet again?

The most recent bit of news we've been seeing in this saga is the Financial Times reporting that "senior Credit Suisse executives spent the weekend reassuring large clients, counterparties, and investors about the Swiss bank's liquidity and capital position in response to concerns raised about its financial strength." Executives hit the phones after spreads on the bank's credit default swaps, which offer protection against the company defaulting, rose sharply on Friday, indicating investor worries over its financial health.

Again, this could all be 100% accurate, but it just doesn't really convince you. After all, when was the last time you voluntarily picked up the phone and called your parents on a weekend just to tell them that nothing's wrong and everything's going to be all right? Exactly, and this is the main problem we're seeing now with Credit Suisse. They may be totally fine, and in fact, many financial institutions are even defending Credit Suisse's position, but the real problem here is there's a growing crisis of confidence.

For a bank, a crisis of confidence can turn into a real financial crisis because clients can start to withdraw their money, and if enough people withdraw their money at the same time, then the bank can find itself in serious trouble. But here's the other thing: even if it never gets to the point where there's a run on the bank, falling investor confidence could still spell big problems because remember Credit Suisse is supposedly trying to raise 4 billion Swiss Francs to plug a hole.

So every day that investor confidence declines and the share price falls, that looming task gets more painful. But that's really the story so far. A lot of people are shouting "Lehman moment" on Twitter, but the truth is the bank just isn't very well managed, and investors are losing a lot of confidence.

In the interest of fairness, I did want to show you the responses we've seen from those on the inside on Wall Street. The general consensus is that Credit Suisse is probably going to be okay. Now, I would also encourage you guys to do your own due diligence on Credit Suisse before thinking about doing anything. For example, one analysis platform I like to use is Simply Wall Street. Full disclosure, they are a channel sponsor, but I will leave their analysis of Credit Suisse down in the pinned comment. If you'd like to check that out further, you can explore valuation, future expectations, past performance, and, importantly for this particular topic, financial health.

Also worth noting, you can get a sweet 40% discount for the first 100 sign-ups through the referral link, so definitely check it out if you're interested. But with that said, here are a few examples of individuals and financial institutions with the opposing view to the Twitterverse. For example, a recent Forbes article quotes Georgetown Finance Professor James Angel saying, "The world is in a very different place than 2008 when there was a sudden realization of widespread losses throughout the entire financial system. There is no big systemic issue that is affecting everyone like it was in 2008."

Vital Knowledge founder Adam Christopholi is also quoted saying that Credit Suisse simply remains trapped in a circular loop of doom where bad news is just sending credit default swaps higher and the stock lower, despite management's efforts to reduce market anxiety. He says, "Investors shouldn't necessarily rush out to buy Credit Suisse shares, but we strongly doubt some type of Lehman moment is imminent."

City analysts Andrew Coombs said, "We do see significant execution risk in any new strategic plan, and the markets seem to be pricing in a highly dilutive capital raise," but he added, "This is not 2008." City managing director Keith Horowitz also chimed in, saying, "We understand the nature of the concerns, but the current situation is night and day from 2007, as balance sheets are fundamentally different in terms of capital and liquidity, and we struggle to see something systemic."

For those interested, Meet Kevin actually did a really cool financial breakdown of Credit Suisse just a day or two ago, so I definitely recommend that video, and I'll leave that linked down in the description below. Finally, even JPMorgan analysts chimed in with a similar sentiment to the rest of them, saying on Monday that Credit Suisse still has healthy capital and liquidity based on financial results from the most recent quarter.

So while it's definitely worthy of a raised eyebrow, it does seem as though the current declines in Credit Suisse's stock price and the substantial rise in the popularity of their credit default swaps are more a result of management being trapped in this nasty feedback loop where the more they reassure investors that nothing is wrong, the worse investors feel.

I like this headline I found by the Australian Financial Review: they said, "Credit Suisse terrifies investors with its message of reassurance." That seems to be where we're at at the moment; less of a full-blown bank in crisis and more of a crisis of investor confidence.

But anyway, guys, that is it for this video. Thanks for watching, and big thanks as always to Simply Wall Street for sponsoring. Reminder: 40% off is yours to claim via the link below. They also have a great free plan if you wanted to check that out. But as always, guys, thank you very much for watching. Leave a like on this video if you did enjoy it, subscribe if you'd like to see more, and I'm about to go get my haircut.

But I think I said that right before I get my hair cut. I do like one video with my hair down, so give me a second and I'll take my hair down before I cut it off.

This is huge, says Claude. This is for the memories so I can look back and see the length of hair that I grew.

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It's pretty impressive effort, right? Anyway, me with my hair done, bye guys.