Big Short Investors Weigh In On The Banking Crisis (Credit Suisse - Michael Burry, Steve Eisman)

Hello everyone and welcome back to yet another episode of which major bank is failing this week! What a massive season it's been for the show. We've had Silvergate on the program, we had Silicon Valley Bank bite the dust last week, it was all Signature Bank and First Republic. And now we bring you one of the most hotly anticipated episodes of the whole season: yep, Credit Suisse! You heard it here first, Credit Suisse, the bank that once had a market cap of 49 billion dollars in 2018, was just acquired by UBS for a mere 3.2 billion. For ease of comparison, that's less than the size of a small Italian coffee machine manufacturer.

So with that said, go get yourself an extra-large vanilla soy chai latte with two marshmallows, take a seat, and let's talk about what the heck just happened with one of the world's most systemically important banks.

As you would have seen in the media across the past few weeks, banks haven't really been doing so well. In my first video on the banking crisis, we looked at Silvergate and Silicon Valley Bank. The latter, obviously dominating the news cycle about a week ago, experienced a run on the bank from their depositors, causing them to sell their portfolio of government bonds before maturity at huge losses. Ultimately, however, that was not enough, as depositors looked to withdraw 42 billion dollars worth of cash in one day from Silicon Valley Bank, causing the Federal Deposit Insurance Corporation, or FDIC, to sweep in and take control of the bank. It was big, big news! But believe it or not, it didn't stop there.

Since then, we've seen similar issues at two more U.S. banks, Signature Bank and First Republic. But now this week, Credit Suisse has dominated the news after their collapse ended in a 3.2 billion dollar takeover from UBS, alongside lifeline support from the Swiss National Bank. But what on Earth caused this crisis and is it just another domino in the collapse of the global banking system?

Well, interestingly, Credit Suisse's demise actually doesn't have too many similarities to the U.S. banks that we've seen fail. In Credit Suisse's case, it has very much been a slow, long run of scandals and underperformance that have eventually led it to the brink of collapse. As you can see from their long-term stock chart since the recovery from the global financial crisis, the bank has seen nothing but downward pressure on the stock, losing over 95% of its share value.

In fact, this chart by Reuters really says it all—since just 2020, they've seen the aftermath of their spying scandal where they were snooping on employees. There was the green seal lobbying scandal, there were the losses from the Archegos default, and who can forget Credit Suisse failing to prevent money laundering by a Bulgarian cocaine trafficking gang? As you can see from the chart, each one of these blunders just adds more and more downward pressure on the stock price. But more importantly, it puts an increasingly bad taste in the mouth of Credit Suisse's depositors and clients. They built the reputation of being the dodgy bank, and over time, less and less people wanted to do business with them.

This led to the bank appointing a new CEO by the name of Ulrich Kerner in July last year. To try and turn things around, he unveiled a new strategic plan for the business, but unfortunately, he failed to win over investors. The new plan was expected to come alongside a big capital raise, which spooked investors and sent the shares tumbling. This is in Q4 of last year, and across that time period, we now know that they saw net asset outflows of 110.5 billion Swiss Francs and suffered their largest annual loss since the global financial crisis of 7.29 billion Swiss Francs. So, it's about 7.89 billion USD.

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But back to Credit Suisse! So, they're coming off of really poor results in Q4, but then just to make matters worse, last week the chairman of Credit Suisse's largest shareholder, Saudi National Bank, said it would absolutely not buy more shares in the Swiss bank, saying they wanted to keep their ownership under 10%, thus avoiding the extra red tape of having a much larger holding.

This news, combined with obviously the collapse of Silicon Valley Bank the week before and the sudden concern around the strength of the global banking system, caused the shares of Credit Suisse to collapse 20% in one day, at which point they were halted. It was essentially a multi-faceted death spiral from years of scandals, poor performance, and more recently, customer withdrawals, large losses, and investor concern.

But then a lifeline! The next day, so Thursday, the 16th of March, the group put out a press release saying Credit Suisse is taking decisive action to preemptively strengthen its liquidity by intending to exercise this option to borrow from the Swiss National Bank up to 50 billion Swiss Francs under a covered loan facility as well as a short-term liquidity facility which are fully collateralized by high-quality assets.

What does this mean? Well, it means they went and spoke to the Swiss Central Bank, asked for help, and the Swiss bank said yes. I won't lie, this was a very smart move for the bank as what it does is it alleviates the short-term panic around another potential liquidity crisis, which of course, causes a run on the bank. That's what we saw happen last week with the other U.S. banks. So the Swiss bank came to the rescue and you know, all was saved, right? No, the story can't just stop there—no way!

Just three days ago, Credit Suisse announced they would in fact merge with UBS with the help of the Swiss authorities. The Swiss National Bank put out a press release saying UBS today announced the takeover of Credit Suisse. This takeover was made possible with the support of the Swiss federal government, the Swiss Financial Market Supervisory Authority, which is Finma, and the Swiss National Bank. With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation.

Both banks have unrestricted access to the SMB's existing facilities through which they can obtain liquidity from the SMB in accordance with the guidelines on monetary policy instruments. The substantial provision of liquidity will ensure that both banks have access to the necessary liquidity. Overall, the merger will see UBS buy Credit Suisse for 3.2 billion US dollars, with Credit Suisse shareholders receiving one UBS share for every 22.48 Credit Suisse shares. This is actually a pretty good outcome as it means the bank continues to operate.

However, like anything, it certainly isn't perfect. You might have seen headlines recently that some Credit Suisse bondholders are actually pretty angry about this deal, as the Swiss regulator Finma announced on Sunday that the 81 bondholders would be wiped out as part of this deal.

Why that's strange is that usually, bondholders get paid out before common shareholders. But in this case, while shareholders aren't really doing well, they're still receiving something—they've got one UBS share for every 22.48 Credit Suisse shares, whereas the 81 bondholders receive, well, nothing. So it isn't perfect, but the general consensus is that it's probably the smoothest thing that could have happened. I think in this kind of scenario, there was never going to be a perfect option, but actually with UBS taking over Credit Suisse, it does seem to provide probably the smoothest option available.

But that doesn't mean that there won't be some volatility in the meantime. If there had been a failure of Credit Suisse and a complete resolution of that entity, that would have created great instability. But I guess the really big question is: is this another domino falling in a much bigger global banking crisis?

Now, while I'm certainly no expert in the field, it does seem as though the consensus right now is no. Even investors such as Michael Barry have come out and said very similar things lately as well. He said recently on Twitter, "The crisis could so very quickly unravel. I'm not seeing true danger here."

Steve Eisman, another man represented in The Big Short, recently went on CNBC saying he doesn't see another 2008. Do you see any sort of a banking crisis unfolding here in the United States and/or in Europe?

You know, my partners and I look at this really carefully. I would say number one: the large U.S. banks are better capitalized and have less risk than they ever had in anyone's lifetime. The European banks, while they're not as well capitalized, they're certainly better capitalized than they were.

That isn't to say there won't be pain if Credit Suisse goes down, but it's not going to be death-defying losses. It'll be a problem; it's just not going to take down the system. So, it doesn't seem like this will eventuate into a full-blown banking crisis.

I think there are really two reasons for that. Number one, there doesn't seem to be a large systemic issue in the banking system. Yes, interest rates are going up and people are tight on cash, but that's not really a systemic issue. For example, Silicon Bank, Silvergate, and Signature Bank all stuffed up because they operated in very exposed niches of business while they also mismanaged their interest rate risk. So, when their depositors all needed to withdraw funds, they had to liquidate their bond portfolios at big losses to try and meet the withdrawals, which inevitably sank their ships.

In the case of Credit Suisse, the story wasn't the same. But in this example, it again wasn't a systemic issue; rather, it was just a very poorly run bank that had been slowly dying over time, and everything came to a head last week. So that's point number one.

Point number two is that, hey, it's very obvious that the central banks around the world are watching this situation like hawks, and they are willing to step in immediately to ensure there is no crisis of confidence. The FDIC, the treasury, and the Federal Reserve announced last week that they'd ensure all deposits at Silicon Valley Bank and Signature Bank, even though the rules say they should only be insuring the first 250,000 dollars per customer.

In response to the Credit Suisse situation, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank announced coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements. Central banks are taking action to support the banking sector, which helps give investors confidence and avoids a chain reaction of bank runs.

So, I'm certainly no expert in the field, but from my research, it seems less likely that this is a big issue like what we saw in 2008.

But anyway, guys, that is the latest on Credit Suisse. I hope you enjoyed the video! Please leave a like on the video if you did enjoy it and subscribe to the channel if you want to stay updated. Apart from that, guys, I'll see you all in the next video.