The Next Bank To Fail (What Just Happened)

What's up? Grandma's guys here, and as it turns out, the entire banking system could be in a lot more trouble than we initially expected. That's because just days after the collapse of three national banks in a federal reserve bailout, another domino could soon begin to fall, except for this time it's one of the largest banks in the world: Credit Suisse. After all, the situation is getting so bad that their share price has collapsed 97%, down to two dollars. Their largest investors have just refused to give them more cash, and some believe this to now be the start of a slow-rolling crisis with the bank contagion just beginning.

So, given these claims and just how interconnected the entire banking system is, let's break down exactly what's happening, what this means for the entire market, if there's a chance of more banks possibly failing soon, and then finally what you could do about this to make sure you're best protected. Although before we start, if you want to be kept up to date on everything happening in the markets, feel free to subscribe. It would mean the world to me; it helps with the channel tremendously, and as a thank you for doing that, I'll do my best to respond to as many comments as possible, so thank you guys so much! Also, a big thank you to Wealthfront for sponsoring a portion of this video, but more on that later.

Alright, so in order to grasp the magnitude of what's going on, you first have to understand how the banking system works. And to do that, I gotta introduce you to Credit Suisse. They're one of the world's most prominent global banks, with over one and a half trillion dollars under management, more than 50,000 employees, offices throughout the entire world, and a designation as one of these systemically important financial institutions of 2023. Or, I guess more simply put, they have a massive 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 as pretty much being too big to fail.

However, a quick look into their past gives us a slightly different picture. For instance, in 2017, Credit Suisse was fined 5.3 billion dollars 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 took 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 they did it anyway. But that's only just the very beginning.

In 2009, they forfeited 536 million dollars 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 2.5 billion dollar fine. In 2019, they were caught spying on their top executives, resulting in the forced resignation of their CEO. In 2021, they lost 4.7 billion dollars from a failed investment firm that defrauded its clients. In 2022, their clientele was leaked to include individuals that would probably get this video demonetized right after being found guilty for money laundering, and just before the year ended, they paid 500 million dollars to settle a mortgage fine.

Although in terms of what's happening today and why people are calling for the possibility of a second, much worse collapse, here's what you need to know. All of this begins at the end of 2022 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 base and liquidity position. Why would they say this, you might ask? Well, in addition to their stock price having declined over 90 percent throughout the last decade, they were about to undertake a major restructuring to try to return the company back to profitability. But in doing so, they needed to raise capital, which some saw as a last-ditch effort to stay afloat, much like Lehman Brothers did right before their highly 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 previous results were less than optimal. Yahoo noted that their Tier 2 capital is lagging behind regulatory requirements, which means the bank lacks the necessary capital to restructure successfully. Shortly after that was released, everything broke loose. Once investors began digging deeper into the company financials, critics warned of their path moving forward: declining revenue and dwindling returns could have a significant impact on the entire market, which only ended up getting worse throughout 2022.

Customers of Credit Suisse withdrew billions of dollars from the bank, contributing to the bank's biggest annual loss since the financial crisis in 2008. Then again, in February of 2023, the Federal Reserve stress test revealed that Credit Suisse was exposed to both global market shock and counterparty defaults with connections throughout the entire world. Finally, as if things were not bad enough, on March 14th, the bank said that it had found material weaknesses in its financial reporting over the last two years because of ineffective internal controls. Essentially, this could be material misstatements in account balances or disclosures, and when one of the largest banks in the world says this, their customers justifiably begin to panic.

As reflected in what's 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 what's called the credit default swap, which acts kind of like an insurance in the event the borrower doesn't pay it back. In this case, one bank is able to transfer their risk to another bank for a small fee, and then that second bank takes on all the risk. Now, in the event that second bank has to pay back the first bank, they aren't completely out of luck because they've assumed the rights of the underlying investment, and they're collecting enough of a premium from other credit default swaps to offset the risk.

However, if a bank issues too many credit default swaps and they don't have the cash on hand to issue all of the insurance payouts, then potentially they would be forced to raise a huge amount of cash to cover the deficit. If they don't, then they could 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.

Now the concern is that history is beginning to repeat itself, except this time with a bit of a twist. In this case, Credit Suisse is one of the biggest buyers of U.S. home loans. Their customers are beginning to withdraw their money at the fastest pace in decades. As of today, the cost of their credit default swaps skyrocketed to its highest level ever in history, implying that investors are beginning to bet on the entire company's demise.

So, in terms of what this means for you, your money, and the market, here's what you need to know. Although before we go into that, here's what I found surprising: a survey reported that fewer people have invested throughout these last twelve months due to a combination of inflation and the fear of losing money. However, Warren Buffett argues that most investors should simply stay the course for the long term, which is why our sponsor Wealthfront wants to help. For those not aware, Wealthfront is an automated investment platform that utilizes software to create an optimized diversified portfolio of index funds and ETFs to grow your money long term.

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Alright, now in terms of what's happening today, all of this stems from the Silicon Valley Bank collapse, which resulted in heavy scrutiny throughout the entire banking industry with Credit Suisse thrown right back into the spotlight. After all, just last year their co-headed banking suddenly left after only nine months of being promoted in over 27 years of working within the company. On top of that, they've continued to be on the losing end of bad trades, with their most recent deal resulting in a six and a half billion dollar debt that they'll be stuck with indefinitely. As a result, they've been scaling back on their entire operations by cutting 9,000 employees. But with an 800 million pending lawsuit and other potential issues, they're at the point of needing to make a pivotal move.

Right now, it's really not looking good, or I guess more simply put, people were taking their money out of a bank that was already losing a lot of money to begin with, and that exasperated, and may continue to exasperate, liquidity risks— which is another fancy way of saying they might be running out of money. In addition to that, their largest investors, the Saudi National Bank, said that they would not be giving them any more capital or increasing their position within the bank, with their exact words being, "the answer is absolutely not." For many reasons, I'll cite the simplest reason which is regulatory and statutory. We now own 9.8 percent of the bank; if we go above 10, all kinds of new rules kick in, whether it be by our own regulator or the European regulator or the Swiss regulator.

So, what are the chances then that this would be the next big bank to fail? Well, in the event that we do see a bank failure, there would be a rather devastating effect throughout pretty much everything, as we've kind of already seen. For example, in 2008, when Lehman Brothers collapsed from over-leveraged mortgages, their bankruptcy resulted in 26,000 job losses, a complete credit freeze, loans dried up, and losses across the entire market as investors worried about how their own investments would be affected. On top of that, more than 75 other bankruptcy proceedings were recorded following the bankruptcy of Lehman Brothers, so the fallout wasn't just limited to one company.

Not to mention, if people lose faith in the banking system, there's the concern that more people would pull their money out, resulting in even worse bank runs, liquidity issues, and a further consolidation into the banks that people believe are too big to fail. But in this case, Credit Suisse is listed as a systemically important financial institution, meaning they're deemed to pose a serious risk to our economy if they were to fail. This was a designation created back in 2010 as a way to enforce stricter oversight within banks that have a significantly large effect on our economy, and it's the government's way of ensuring that these companies operate as responsibly as possible, which I know is laughable in hindsight given everything that they've done.

Anyway, to answer your question as to whether or not you should be concerned, the answer is it's certainly possible. But given how large they are, I think it's rather unlikely they'll completely go under. In fact, within 24 hours of Credit Suisse facing potential financial difficulty, the Swiss National Bank said that they would provide liquidity if needed, even though they believe the bank to still be well capitalized. Essentially, they're promising to backstop any losses until hopefully the bank could eventually regain profitability.

All of this was really done as a way to calm down the markets, knowing that if consumers lose faith in the system, they're not all going to rush for the exits at the exact same time, and that's not going to spread throughout the entire economy. This leads me to believe that despite the headlines, there can't be a serious danger in the markets, and customers should absolutely diversify their holdings just in case.

But a company like Credit Suisse has grown to the point where they could be subsidized by the government in the event that their downfall would negatively affect the rest of the world. Of course, BlackRock's Larry Fink somewhat disagrees with this and says this is simply the dominoes beginning to fall after years of easy money. And hey, you know what? He could be right. The savings and loan crisis of the 1980s, for example, took almost a decade to unfold, with thousands of lenders being completely wiped out. Although in this case, I think a more realistic approach is simply that Credit Suisse gets bailed out; they get a slap on the wrist after receiving over 11 billion dollars in fines paid out over the last 20 years, and life goes on until the next headline comes up.

That's not to say that there's no risk whatsoever, but based on previous bailouts, it seems as though they'll be backstopped at least for the foreseeable future. That's why I would highly recommend that you diversify your bank accounts, make sure you're always under the FDIC limit, and understand that panic may create some good buying opportunities if you're a long-term investor. Personally, I'm using this as an opportunity to dollar-cost average into the markets on a lower basis. But I guess you could also ask ChatGBT because it correctly predicted that the market was going to crash on March 15th— coincidence? Let me know in the comments what you think.

So, with that said, you guys, thank you again for watching! Also, thanks again to Wealthfront for sponsoring a portion of this video. As always, feel free to add me on Instagram, and don't forget that you could get a free stock with all the way up to a thousand dollars with our sponsor Public.com down below in the description when you make a deposit. With the good grand enjoy! Thank you so much, and until next time.