Credit Suisse and the Crisis Of Confidence

Date: 03/13/2023
Author: Mr. X

There is no safe harbor anymore.

Swiss banks were once the very Platonic ideal of a place where you could keep your money and have it remain safe from financial panics or grasping regulators. Now, however, perhaps the most iconic bank is in full scale collapse.

Credit Suisse declined by about 30% yesterday after the Saudi National Bank said it couldn’t provide any more money to the company. Instead, Credit Suisse is being forced to turn to the Swiss National Bank. The Swiss National Bank said it would provide funds “if necessary.” It is reportedly going to be necessary, to the tune of about $54 billion in Swiss francs.

Credit Suisse has already secured a different source of funding. The rationale for why the Saudis pulled out was also extremely technical. Saudi National Bank said it couldn’t invest more or it would have more than 10% of Credit Suisse’s shares, which would be a regulatory problem. It remains to be seen if European markets will recover from yesterday’s plunge and if America will follow suit.

Yet as of this morning, Asian markets are falling because there is little chance of this bank failure being contained. “People will be asking about the stability of their own banks, questioning the system of regulations,” said Ryan Patel of the Drucker School of Management. “Rightfully so, because if you think about here in the U.S., the second-longest run between no bank failures – guess what? – since 1933 was the Silicon Valley Bank.”

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Economist Nouriel Roubini, a notorious bear, said that Credit Suisse might be “too big to fail but also too big to be saved.” “It’s not clear that, unlike the US, the federal system has enough resources to engineer a bailout,” he said, “and what they need certainly is more capital. The question is whether they will get that capital or not. Otherwise, bad things can happen.”

Nontheless, the fall this morning is not universal. Chinese banks are reportedly gaining this morning, even as Indian and Japanese banks suffer.

This isn’t the first problem Credit Suisse has faced recently. In October, credit default swamps rose dramatically. A few months before that, the company was convicted for failing to prevent money laundering from, of all things, a Bulgarian cocaine trafficking group. In 2018, former Georgian Prime Minister Bidzina Invanishvli won a judgment against the company because they allegedly suffered from fraud by a former Credit Suisse analyst – who went so far as to forge signatures. Finally, Credit Suisse was among the companies implicated in the Panama Papers scandal, which showed various clients accused of human rights violations and under economic sanctions. The company has fought back against these and other cases, but together they created the image of a company that has facilitated some of the worst behavior by the wealthy and privileged.

Still, this entire episode may be an overreaction. “Credit Suisse is very likely to survive this though it will be badly mauled for many years to come,” said an analyst at ACY Securities quoted in Bloomberg. Saudi National Bank is also defending its investment. “If you look at how the entire banking sector has dropped, unfortunately, a lot of people were just looking for excuses,” said Saudi National Bank chairman Ammar Al Khudairy. “It’s panic, a little bit of panic. I believe completely unwarranted, whether it be for Credit Suisse or for the entire market.”

I agree – but panic has a way of being totally disconnected from specific circumstances. Silicon Valley Bank may have gone down because of a newsletter. Byrne Hobart, who publishes a newsletter on venture-capital called The Diff, told his list of influential subscribers that SVB had an unfavorable debt-to-asset ratio. That may have started the panic, though precisely diagnosing such things is almost impossible.

Separately, media critics have targeted Peter Thiel, whose Founders Fund had pulled its funding from SVB and instructed portfolio companies to do the same. Some have accused him of yelling “fire in a credit theater,” a remarkable charge when one thinks about it. Should people not be allowed express skepticism of a specific bank? Rep. Thomas Massie (R-KY) alleged that Senator Mark Kelly even called for free speech restrictions on the bailout of Silicon Valley Bank so as not to cause a panic.

It’s that intangible factor of confidence that is most important now. Of course, all currencies, economies, and governments are ultimately founded on confidence. Confidence, like other social attitudes, can sometimes be dictated through control of information. Yet if markets have shown anything, it’s that they are a more efficient way of distributing information than any top-down system. Blackrock CEO Larry Fink has warned that “markets remain on edge” and that SVB may not be the last bank to go down.

Right now, Credit Suisse looks like the weak link – but many others are possible candidates. If the Fed continues on its course of rising interest rates, which I believe it will, some of today’s strongest banks could be teetering on the brink tomorrow if even a small number of investors begin to think that their money is safer under their own control rather than that of a banker. The FDIC can’t protect everyone.



Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for to bring you news on what those with power are debating, planning, and doing.

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