Wild speculation about the bank's debt only mirrors the Swiss bank's underlying problems. It may only have one way out.
Credit Suisse's share price touched new lows at the start of the week on widespread concerns about the bank's viability, prompting credit spreads to widen and its bond prices to fall sharply.
At times, shares were down by as much as 10 percent, although they recovered somewhat by the end of the day. Credit default swap (CDS) spreads spiked, which is usually an important indicator as to whether an institution will potentially default on its outstanding debt. But as Monday showed, fluctuations in the spread are acutely prone to investor speculation.
Many Signs
Other large financial institutions have seen similar spikes in the past although they often managed to recover. Deutsche Bank is a good example, with its subsequent transformation and restructuring now widely held up as a model.
But Credit Suisse's malaise seems to run far deeper than that, particularly since it does not seem to be able to recover from its self-inflicted tailspin. More concretely, investors simply doubt management's competence. The signs are all there.
1. Hapless Communication
The leadership team under Credit Suisse chairman Axel Lehmann and CEO Ulrich Koerner have failed to communicate consistently. Sometimes the bank didn't want to say anything, then it would deny certain rumors, and then it put out a statement about its capital and liquidity, which it delivered selectively to certain media. The whole back and forth clearly unsettled investors.
2. Capital Increase
All the excitement just boils down to whether it will ask for more capital or not, as taking such a step massively dilutes current shareholders given the sharp deterioration in the bank's market valuation.
It is also an open question as to who would take one up given that there has never been as little confidence in the bank managing any kind of massive turnaround as there is now.
3. Buyer's Market
Credit Suisse can't do much about the fact that investors don't trust it much. But the current environment also sharply limits its room to do anything. The Ukraine war, higher interest rates, inflation, and the threat of an impending recession are prevalent everywhere, as chair Lehmann repeatedly told small circles of observers at different junctures.
There is currently no market for the businesses it wants to get rid of as buyers will get better prices if they simply wait.
4. No Outlook
Many are beginning to suspect that Credit Suisse will get far less money from restructuring and selling businesses than originally expected. They also believe that a radical restructuring will entail high costs and that any improvement in revenues will take far longer to materialize in the current environment before making themselves felt, as the Deutsche Bank example also shows in hindsight. That is a bad omen.
5. Regulatory Alarm
Given everything that is happening, it is of little wonder that all the regulators are following Credit Suisse and staying in close contact with the bank. This includes the Swiss regulator (Finma), as well as UK and US supervisors.
Potential intervention by government authorities scares investors away and dims the possibility of a capital hike. In the situation it is in, it has to submit to regulatory directives. In other words, any commercial imperatives take a back seat.
6. Sink or Swim?
Given all the work that has gone on since the financial crisis, the domestic regulator will do its utmost best to avoid creating some future precedent given the country's experience in 2008 when UBS had to be saved with Swiss taxpayer money. Credit Suisse should no longer be «too big to fail» but it also can't be «too big to be saved» as a Twitter Tweet by US economist Nouriel Roubini sent Monday maintained.
7. No Succession
Many are beginning to doubt whether the most important people trying to rescue Credit Suisse – chairman Lehmann and CEO Koerner – are really up to the job. They are both exponents of a generation of bankers whose time has seemingly passed – and whose general approach has been symptomatic of the issues the industry still faces.
Probably some of that is because it has not been able to place younger executives internally from its ranks. There does not appear to have been any far-sighted succession planning.
8. Back to a True Swiss Bank
Every little bit of doubt in connection with Credit Suisse plays into someone's hands. Any parts of the business for sale get cheaper. The share price keeps falling, making a takeover less expensive, regardless of whether it is done at regulatory behest or not. It also increasingly provides a clear impetus for an effectively restructured, fully Swiss bank – something that had been thought of years ago. But also something that many domestic shareholders have been waiting in vain for.
Increasing numbers of investors are answering the questions as to whether they would get into the share if it fell any further. «If Credit Suisse became genuinely Swiss again, I would buy the shares up immediately». The cards are now on the table.
