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The Markets Are Missing The Point: Credit Suisse Is NOT "Lehman Brothers 2.0", But Bear Stearns
European Banks Are Not At All Healthy
There are a few key points to remember about the Lehman Brothers collapse in the fall of 2008, particularly as we look to understand the parlous state of the Swiss banking giant Credit Suisse, and its presumed potential to become “Lehman Brothers 2.0”.
Lehman Brothers collapse was not a “moment”, but a somewhat drawn out decline that began in 2007 and steadily progressed towards a brutal denouement in September 2008.
Lehman Brothers woes were centered over a hugely overplayed mortgage securitization strategy, which boomeranged badly when the subprime mortgage markets collapsed in 2005-2007.
Six months before Lehman Brothers filed for bankruptcy, Bear Stearns failed in pretty much the same fashion over the same mortgage securitization strategy—with the difference being that regulators orchestrated a bailout/takeover of Bear Stearns but declined to do so for Lehman Brothers.
Not only are these reasons why Lehman Brothers was not the “moment” that catalyzed the Great Financial Crisis and ensuing recession, but these same points illustrate why the Lehman Brothers example is the wrong model for Credit Suisse today.
Credit Suisse Has Been Languishing Since 2008
The major reason the Lehman Brothers comparison simply does not wash is that Credit Suisse has been languishing and underperforming since the Great Financial Crisis. Their stock began declining in 2009 and has been constantly under both the 50-day and 200-day moving averages ever since.
Lehman Brothers had its ups and downs in 2007 and 2008, but it was not until the summer of 2008 that the bank was clearly in trouble. Anyone believing Credit Suisse has only just fallen on hard times has not been paying attention to the financial markets.
However, that narrative is exactly what the corporate media is peddling—and it’s wrong. As was reported in Markets Insider on Monday, Wall Street just now noticed that Credit Suisse stock had fallen 60% year-to-date (and much more than that since 2009).
Credit Suisse shares have fallen 60% year-to-date as investors fret about the bank collapsing in a similar manner to Lehman Brothers, the investment bank whose 2008 bankruptcy filing heralded the start of the financial crisis.
This, of course, ignores the 82% collapse in Credit Suisse share price from 2009 to January 2022. That’s a rather big detail to overlook.
Moreover, the causes of Credit Suisse’ underperformance have not been a single overplayed strategy as in the case of Lehman Brothers, but a number of major mis-steps, all of which have cost the bank dearly.
It is unclear how keen investors are and interest may be dampened by the fact that the bank, which has struggled with a string of scandals, has gathered almost 12 billion francs ($12.22 billion) in capital since 2015 - almost equivalent to its current market value.
When a bank flubs its risk management time and again, it is going to be punished severely by investors, and that is what is happening to Credit Suisse.
Credit Suisse Is Not Alone
Credit Suisse is hardly the only struggling underperforming bank in Europe. Comparisons of stock performance since 2008 with UBS, BNP Paribas, and Barclay’s all show Europe’s major banks joining Credit Suisse in the cellar, while US banking giant JP Morgan Chase has soared over the same time period.
Yet not only is Credit Suisse not the only European bank languishing in underwater performance relative to US banks, it’s not even the bank with the biggest bets against it at this time. That dubious distinction belongs to the largest European bank, French-based BNP Paribas.
Meanwhile, French lender BNP Paribas BNP, -2.99% ranked first with the largest consolidated short interest of 4% or $1.68 billion, followed by U.K.-headquartered bank HSBC HSBA, -1.98% HSBC, -2.63% and Finnish lender Nordea NDA.FI, -2.15% both with $1.1 billion in short interest.
What has attracted attention has been the recent spike in interest rates on Credit Suisse credit default swaps—the infamous hedging derivatives that along with the equally infamous collateralized debt obligation turned a subprime mortgage crisis into a global banking/liquidity crisis.
Unsurprisingly, BNP Paribas swaps have also risen rapidly of late.
Ironically the other European bank that is trading at highly distressed levels, Deutsche Bank, has yet to see a similar upswing in swap rates.
However, even Deutsche swaps have risen, just not as sharply.
Not Just Banks
The financial situation in Europe is actually far more unstable and far more widespread than just rising swap rates at major banks. Swap rates on sovereign debt both here in the United States and in Europe have been rising of late.
Wall Street and financial markets around the world have been placing rising bets against the sovereign debt of most major economies. Investors are anticipating a major debt crisis from somewhere, but not necessarily a bank. A sovereign debt crisis or currency crisis would do just as well from an investor point of view (at least the ones shorting the banks and buying more swaps all around).
This is the larger context within which Credit Suisse’ current problems are taking place. Yes, the bank is in trouble—even if it survives the year the odds of it surviving 2023 are not at all good. Nor is Credit Suisse the only bank having financial difficulties, and is not the only bank that may fail either this year or next. Even if Europe’s distressed banks do not fail, investors are pricing in a series of soveriegn debt crises in Europe. Something is about to break in Europe, but that “something” need not be a bank per se. Sovereign debt can cause just as much market chaos.
Yet unlike Lehman, which confirmed that the Bear Stearns collapse was not just a fluke, but the leading edge of a collapsing derivatives mess fueled by a collapsing subprime mortgage market, Credit Suisse is merely the first bank running afoul of investors no longer willing to tolerate an underperforming financial institution, at a time when investors are increasingly suspicious of all manner of debt financing.
Bear Stearns Was First In 2008, Credit Suisse Is In Line To Be First In 2022
If there is any historical parallel to be drawn between Credit Suisse’ difficulties today and the bank failures which precipitated the Great Financial Crisis in 2008, the comparison is not with Lehman Brothers, but with Bear Stearns. Bear Stearns was the first bank to buckle under the weight of a badly played securitization strategy in 2008; Credit Suisse is likely the first bank to buckle under the weight of what are ultimately years of less than successful management—Deutsche Bank and BNP Paribas being the likely candidates for that follow-on role that went to Lehman Brothers in 2008.
Yet even that comparison has its flaws, because while the 2008 crisis was driven by a single force—derivatives—what is creating financial tremors this time around is the accumulated weight of European monetary policies, including the ECB’s horrendous negative interest rate policies, coupled with the larger deglobalization process that has roiled supply chains and unleashed inflation pretty much everywhere, and certainly across the Euro-centric G7/G20 group of nations. 2008 was catalyzed by the failure of central banks to appreciate the impact of rising interest rates on the entire securitization and financialization process, but 2022 is marked by a decoupling of central bank policies from one another, with the Federal Reserve, the Bank of England, the ECB, and the Bank of Japan all choosing their own independent responses to what has been set in motion post-pandemic.
The dollar’s steady rise against other currencies of late makes on thing fairly clear: if central banks do not coordinate on interest rate policies—either informally or formally in the context of a new Plaza Accord from the 1980s—rising yields and fluctuating currency valuations will siphon capital away from the weaker economies of the world towards the healthier ones. With recession and economic contraction becoming a global concern, the world’s central banks are locked in a “race to the bottom”, and the strongest currency (and thus the strongest central bank) will be the one whose economy collapses last.
Thus the best albeit crude analogy between 2022 and 2008 is that Credit Suisse is not Lehman Brothers, but Bear Stearns. Credit Suisse is lined up to be the first European bank to buckle, but it will not be the last. Credit Suisse is the first bank to demonstrate the degree of stress European financial institutions are enduring, but it is not the only bank exhibiting that degree of stress.
The challenge for Europe now is how does the ECB respond? If Credit Suisse is somehow rescued, do the other distressed banks also get rescued? Will the ECB let Credit Suisse and then the rest of the distressed banks fail without a rescue and bailout?
The world wonders….
Lioudis, N. The Collapse of Lehman Brothers: A Case Study. 30 Jan. 2021, https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp.
Skeel, D. History Credits Lehman Brothers’ Collapse for the 2008 Financial Crisis. Here’s Why That Narrative Is Wrong. 20 Sept. 2018, https://www.brookings.edu/research/history-credits-lehman-brothers-collapse-for-the-2008-financial-crisis-heres-why-that-narrative-is-wrong/.