The Worst Economic Collapse Is Coming (How To Prepare)

What's Grandma? It's guys, hear you. And if it hasn't already become obvious, the banking system is in deep trouble.

Now, I know there's been a lot of talk about major banks over-leveraging themselves to the point of failure. But as of a few days ago, two of the world's largest banks are currently rumored to be on the brink of collapse. We're beginning to draw the comparison that potentially this could lead to a repeat of 2008. After all, the previously too-big-to-fail Lehman Brothers managed $600 billion and took down the entire economy during the Great Financial Crisis. Now, both Credit Suisse and Deutsche Bank managed $3 trillion right at a time when they’re facing a critical moment after seeing their stock decline 90% from their peak.

So given just how big of a mess, I mean story, this is turning out to be, let's discuss exactly what's going on, what this means for the entire market, if there's a chance of them actually going under, and then finally how you could use this information to make money.

On this episode of Elon Musk buying Twitter again, although before we start, if you want to be kept up to date with everything involving the markets, feel free to subscribe. It's totally free, takes you just a split second, and as a thank you, I'll do my best to answer as many comments as possible.

All right, so in order to grasp the magnitude of what's happening, you first have to understand how the banking system works. To do that, I'd like to introduce you to Credit Suisse, or Credit Suisse, depending on how you want to pronounce it. They’re one of the world’s most prominent global banks with more than one and a half trillion dollars under management, offices throughout the entire world, and a designation as one of the systemically important financial institutions of 2022. Or I guess more simply put, they have a major impact on a variety of money-related transactions.

Because of that, they've been ranked as one of the necessary operations that keeps our economy going, basically being too big to fail. However, a look into their past gives us a little bit of a different picture. For instance, in 2017, Credit Suisse agreed to pay a $5.3 billion fine for overvaluing mortgage-backed securities during the 2008 Great Financial Crisis, which resulted in—and I quote—"the loss of billions of dollars of wealth and a painful toll in the lives of ordinary Americans."

In fact, the settlement denounced that the bank knew it was peddling investments containing loans that were likely to fail and did it anyway. But that's just the beginning. In 2009, they forfeited $536 million for violating the International Emergency Economic Powers Act. By 2014, they pled guilty to assisting U.S. taxpayers in filing false returns, while paying another $2.6 billion fine. In 2021, they lost $4.7 billion from a failed investment that defrauded its clients. And in 2022, their clientele was leaked to include individuals that would literally get this video demonetized.

But then we have their counterpart, Deutsche Bank. Similar to Credit Suisse, they're also one of the world’s largest banks controlling over one and a half trillion dollars and making it to the list of companies that are integral to the smooth functionality of our economy. Except they've also had run-ins with the law. For example, in 2007, they were fined $7.2 billion for misleading investors with irresponsibly issued mortgages. In 2015, they were ordered to pay $2.5 billion for rigging interest rates. And from there, they faced a variety of legal battles from tax evasion, sanctions violations, and money laundering.

Although in terms of what's happening today and why people are calling for the possibility that both of these banks could collapse, here's what you need to know. All of this began just a few days ago when the CEO of Credit Suisse made a statement that the bank was at a critical moment and tried to reassure employees not to confuse the day-to-day stock price with the firm's strong capital-based liquidity position. Why would they say this, you might ask?

Well, in addition to their stock price having declined 90% in the last decade, they're about to undertake a major restructuring to try to return the company back to profitability. But in doing so, they need to raise a lot of capital, and some see this as a last-ditch effort to stay afloat, much like Lehman Brothers did right before their widely publicized downfall.

So in order to operate, banks must pass what's known as a stress test to ensure that they could survive a wide variety of financial conditions, and their latest results were less than optimal. Yahoo noted that their tier 2 capital is lagging behind regular requirements, which means the bank lacks the necessary capital to restructure successfully.

Shortly after that was released, everything broke loose. Over the weekend, Credit Suisse employees began reassuring their customers that everything was okay. As you would expect, that had the opposite effect. After all, if your bank suddenly calls you out of the blue on a weekend to say, "Hey man, I just want to give you a heads up here. You know, everything is totally fine here at the bank. There's no need to withdraw all the money; we need—that’s right, everything, just trust me, just trust."

Okay, cool, all right, have a great weekend, bye. You'd probably panic. And that's what's leading the internet to build up into a frenzy. Once investors began digging deeper into company financials, critics warned about their path moving forward—declining financials and dwindling returns that could have a significant impact on the entire market.

And all of that starts with the term known as credit default swaps. Now, I know this sounds complicated, but just imagine it like this: anytime a bank issues a loan, they have the option to purchase a credit default swap, which acts like insurance in case they don’t get paid back. In this case, one bank is able to transfer the risk to another bank for a small fee, and then that second bank takes on all the risk.

Now, in the event the second bank has to pay back the first bank, they aren't completely out of luck because they'd assume all the rights of the underlying investment, and they're collecting enough for premium from other credit default swaps to offset the risk. However, if the bank issues too many credit default swaps and they don't have enough cash on hand to cover all of the insurance payouts, then potentially they would have to raise a lot of cash to cover all of those losses.

And if they can't, they go under. This is similar to what we saw throughout the 2008 Great Financial Crisis, where banks like Lehman Brothers collapsed from a lack of capital once they couldn’t pay for non-performing loans. And now the concern is that history is beginning to repeat itself. Besides looking identical to Lehman Brothers in 2008, investors are pricing in the strong likelihood that one of the largest banks is about to go under.

So in terms of what this means for you, your money, and the market, here's what you need to know. Now, in terms of what's happening today, I never thought I would say this, but this threat on Wall Street bet summarized the situation perfectly. So I'll be linking the seed to the sea down below in the description for anyone who wants to follow along.

But in terms of the most recent events, it was found that they might not be able to meet their credit default swap obligations, which, as I explained before, means they might not be able to pay off their debts. Second, their co-CEO of global banking is suddenly leaving after only nine months of being promoted and over 27 years of working within the company. They've also continued to be on the losing end to bad trades, with their most recent deal resulting in a $6.5 billion debt that they'll be stuck with indefinitely.

As a result, they've been scaling back in their entire operations by potentially cutting 5,000 employees. But with an $800 million pending lawsuit and other potential upcoming issues, they're at the point of needing to make a pivotal move—fast—if they want to survive.

Deutsche Bank is in a similar position as well. Their share price has been steadily declining after a series of poorly timed investments and buyouts, and now concerns are growing again about their future and whether or not they can make it through.

So in terms of how this might play out and the impact for the overall markets, hear my own thoughts because hopefully, this should provide a lot of context. First, should either one of these banks fail, there would be a rather devastating effect throughout pretty much everything. For example, in 2008, when Lehman Brothers collapsed from over-leveraged bad mortgages, their bankruptcy resulted in 26,000 job losses, a complete credit freeze, loan strife, and losses across the entire market as people worried about how their own investments would be impacted.

On top of that, more than 75 other bankruptcy proceedings followed the bankruptcy of Lehman Brothers, so the collapse wasn’t just limited to one company. Not to mention people are starting to draw some eerily similar comparisons between 2008 and today, including the fact that Lehman Brothers also announced a new survival strategy just a week before its collapse. Credit default swaps also spiked in the moments leading up to their bankruptcy, and they were only one-fourth the size that Credit Suisse and Deutsche Bank managed today.

Meaning if either one of those banks were to collapse, it would have a catastrophic effect throughout the global economy. In fact, both of those banks are even listed as systemically important financial institutions, meaning they’re deemed to pose a serious risk to the economy if something were to happen to them.

As a result, it's theorized that these would be the banks deemed too large to fail and would quickly be bailed out as a last-case resort, only because their bankruptcy would have an even worse impact throughout the market.

Although in terms of what's actually happening and the chance of either one of these banks going under anytime soon, just keep this in mind: even though the stock price has absolutely plummeted, investors are concerned and credit default swaps have skyrocketed to the highest level ever. Some analysts believe that a Lehman-style moment is unlikely and that internet speculation has gotten out of hand.

For example, JP Morgan went on record to say that the bank’s capital was healthy. Other analysts say they're in a tight spot but unlikely to fail, and Citibank says this isn’t 2008. However, at the end of the day, it seems almost like a self-fulfilling prophecy where the more people believe them to fail, the lower the price goes, and the less likely they are to be able to restructure in order not to fail.

After all, they're beginning to lose private bankers in Hong Kong; turnover’s increasing. Even a former Credit Suisse trader himself tweeted that all rumors are false until officially denied. That leads me to believe that despite the sensationalized headlines, there is a risk that the world’s largest banks could be in trouble.

But let's also be realistic: they've grown to the point where they can also be supported by government funding in the event that their downfall would lead to a global catastrophe. It's also said that they currently have $100 billion worth of buffer capital, and even though they could only go so far, there's nothing to say they can't receive additional money should they need it.

So all in all, yes, there is a chance at the bank defaulting, the global economy falling apart, and all of us looking to Credit Suisse and Deutsche Bank as the culprit. But realistically, it's undetermined if the government would even allow that to happen in the first place. And honestly, the most we could do at this point is simply wait to see what happens and subscribe, because I promise I'll keep you updated.

So thank you guys so much for watching! Also, feel free to add me on Instagram, and thank you so much for watching. Until next time.