Credit Suisse Was Bear Stearns. Who Will Be Lehman?

Global Banking Crisis Is Just Getting Started

When Credit Suisse’ woes became the topic of much media fulmination last fall, much rhetoric was expended on the notion that the troubled Swiss bank would become “the next Lehman Brothers”. The thesis then was that a Credit Suisse failure would trigger a global financial meltdown in much the same way Lehman Brother’s epic collapse in 2008 brought on the Great Financial Crisis.

The thesis was ultimately pure nonsense then, not only because Credit Suisse did not at that time trigger anything like a global financial crisis, but also because Lehman Brothers also did not trigger a global financial crisis.

The Markets Are Missing The Point: Credit Suisse Is NOT "Lehman Brothers 2.0", But Bear Stearns

Today we are seeing that much of my assessment last fall about Credit Suisse and its ongoing collapse as a banking institution was correct, and Credit Suisse is now more comparable to Bear Stearns in 2008—a failed bank “rescued” by means of a shotgun wedding/merger that did little more than postpone the inevitable reckoning over the financial sector’s serial financial lunacies in the run-up to the Great Financial Crisis.

The Swiss National Bank yesterday proudly proclaimed the Credit Suisse merger with UBS was “the end of the crisis”.

In a statement, the Swiss National Bank said it is providing large amounts of support for the deal to merge Switzerland's biggest banks and that the late Sunday announcement by the federal government, financial regulators and the central bank “put a halt to the crisis.”

“An insolvency of Credit Suisse would have had severe consequences for national and international financial stability and for the Swiss economy,” said Thomas Jordan, chairman of the Swiss central bank’s governing board. “Taking this risk would have been irresponsible.”

Today we are seeing that not only was that merger not the end of the crisis, it was not even the beginning of the end of the crisis nor even the end of the beginning of that crisis.

The lunacy of the SNB’s premature victory lap was quite apparent yesterday, with Swiss bank regulator FinMa having to justify the decision to write off 100% of the value of Credit Suisse Additional Tier 1 bonds—commonly called AT1 bonds—as part of the merger process with UBS.

FinMa’s logic was legalistic and technical—claiming that the bond covenants allowed for the write down.

The AT1 instruments issued by Credit Suisse contractually provide that they will be completely written down in a “Viability Event”, in particular if extraordinary government support is granted. As Credit Suisse was granted extraordinary liquidity assistance loans secured by a federal default guarantee on 19 March 2023, these contractual conditions were met for the AT1 instruments issued by the bank.

AT1 bondholders, meanwhile, are not only crying “foul”, but are preparing numerous lawsuits challenging the legality of the write-down (which means the UBS-Credit Suisse merger itself could be substantially redone before it fully closes).

US distressed debt investors and corporate litigators are preparing to fight the Swiss government over its decision to write down $17bn of Credit Suisse bonds as part of the bank’s shotgun marriage with UBS.

Switzerland provoked the ire of bond investors when the government used an emergency ordinance to write down the bonds to zero, even as it orchestrated a deal where UBS will pay $3.25bn to shareholders.

With a perversity unique to financial circles, some speculators are actually buying up tranches of the notionally worthless Credit Suisse AT1 bonds simply to have standing to sue Switzerland over the write down—if the case prevails such vulture investing could be quite profitable.

As one of the law firms representing the aggrieved bondholders is arguing, the UBS merger was in reality a resolution of a failed bank rather than a merger between two banks.

Quinn Emanuel Urquhart & Sullivan and Pallas Partners are among the law firms representing bondholders, with Quinn hosting a call on Wednesday joined by more than 750 participants.

Quinn partner Richard East told the Financial Times the deal was “a resolution dressed up as a merger” and pointed to statements by the European Central Bank and the Bank of England, which distanced themselves from the Swiss approach.

“You know something has gone wrong when other regulators come and politely point out that in a resolution [they] would have respected ordinary priorities,” he added.

That litigation will come back around at some point to further complicate the financial crisis in Europe.

Yet the Credit Suisse AT1 bondholder disputes are only part of the emerging issues from the shotgun merger with UBS.

Because FinMa opted to write down 100% of the value of outstanding AT1 bonds, while not eliminating 100% of Credit Suisse equity—stockholders received tranches of UBS stock, while AT1 bondholders received nothing—the perceived risk of other AT1 bonds (a $275 billion bond market in Europe) has been greatly elevated, which now is contributing to the next European bank to feel the pain of crisis, Deutsche Bank, whose stock has been declining precipitously even as Credit Suisse was capturing the headlines.

Deutsche shares, which have lost a fifth of their value so far this month, were last down 5.5% at 8.843 euros ($9.57), not far off Monday's five-month low.

They closed 3.2% lower on Thursday, while the bank's credit default swaps (CDS)<DB5YEUAM=MG> - a form of insurance for bondholders - shot up to 173 basis points (bps) from 142 bps the day before, according to data from S&P Market Intelligence on Thursday.

A signature factor in this most recent evolution of Deutsche Bank’s problems has been the uncertainty now attached to its issuances of AT1 bonds, whose yields are now at an eyewatering 22%.

Some of Deutsche Bank's bonds meanwhile sold off too. Its 7.5% Additional Tier-1 dollar bonds fell by 1 cent to 74.716 cents on the dollar, pushing the yield up to 22.87%. . That yield is double what it was just two weeks ago, according to Tradeweb data.

AT1s issued by banks have come under pressure since Credit Suisse was forced to write down $17 billion of its AT1s as part of a forced takeover by UBS at the weekend.

The consequences to Deutsche’s stock price are exactly what one would expect—freefall.

Not only did the Credit Suisse merger not “end” the banking crisis, the actions taken by Swiss regulators in making the merger with UBS happen are themselves producing contagion effects that are rippling throughout European banking, with several bank shares as well as the broader indices suffering major declines today.

Meanwhile, fallout from Credit Suisse is only exacerbating the market instability among banks here in the United States, as multiple second-tier “regional” banks are under significant duress, with major declines for the week in share price across the board.

Shares of U.S. regional lenders, including First Republic Bank FRC and rival PacWest Bancorp PACW , were also down. Financials were the second-worst performing sector on the S&P 500, with only energy stocks faring worse on Friday.

Neither the First Republic bailout nor the Credit Suisse shotgun wedding with UBS have provided even a semblance of resolution to the chaos that has emerged among banks. Worries persist, fears persist, and so stock selloffs persist. None of which is good for banks as a whole.

Certainly there are reasons for worry, given that emergency loans to banks by the Federal Reserve continue..

Nor can the Treasury or Federal Reserve take a victory lap over the creation of the Bank Term Funding Program. Thus far most of the emergency support being given to banks is occurring outside of that new facility.

The core issues, of course, have not changed—banks are still grappling with their underwater security portfolios while attempting to avoid acknowledging the extent to which their portfolios are, in fact, underwater.

Swiss regulators hoped the Credit Suisse merger would end the crisis. They were wrong.

UBS Bought Credit Suisse. Will That End The Crisis?

US officials hoped the First National deposit bailout by Dimon’s Eleven would calm banking fears here in the US. They were wrong.

The Big Bank Bailout Of First Republic

It was always ludicrous to look at Credit Suisse as “the next Lehman”. It was always ludicrous to look at First Republic, or even Silicon Valley Bank as “the next Lehman”. One or the other arguably is comparable to Bear Stearns, but all are merely progressively louder canaries in the banking coal mine that a crisis of confidence in banking is brewing.

We are not at the end of the global crisis in banking. We are not at the beginning of the end of the global crisis in banking. We are not even at the end of the beginning of the global crisis in banking.

We’re just getting started in the global crisis in banking. Buckle up—the ride gets bumpy from here.