Too Big To Fail

Imagine this.

It’s a lazy Saturday afternoon, you’re at home on the couch and a thousand miles from care when the phone rings.

It’s your bank.

“Hi, can I speak to Mary please?” the caller asks.

“Yes, this is Mary”

“Mary, my name is Bob the banker. The purpose of my call is to assure you that your money is safe and you’re not about to lose it all despite the endless rumours our bank is about to collapse.”

“WHAT?! IS THIS A JOKE? WHO IS THIS?!”

Deep down you hope it’s another prank call.

But your head’s spinning like a slot machine so you start Googling.

You’re shocked! The rumours are rife. Your bank is about to collapse.

The rest of the weekend is a blur.

Incredibly, this was the case last weekend for Credit Suisse. Rumours were circulating like a hurricane that it was about to fall over.

Consequently, they started phoning clients to reassure them everything was ok.

The problem was it had the opposite effect. It frightened the hell out of them.

Seriously, how dumb is that?

I mean most bank branches don’t even open for eight hours on any given work day let alone a few hours on the weekend.

So why did Credit Suisse hit the panic button on Saturday instead of Monday if the rumours weren’t true?

It’s simple.

This once great Swiss investment bank has recently been run by a bunch of muppets.

And here’s a sneak peak of what this muppet show looks like….

Since the start of 2021, Credit Suisse has racked up $4.5 billion in losses from scandals and bad business deals.

They include…

Hiring private detectives to spy on employees, laundering money for a criminal organisation in Bulgaria, and facilitating corrupt loans in Mozambique, over which the bank agreed to pay $475m in fines.

And then there was the collapse of Archegos and Greensill who borrowed billions from Credit Suisse before they went tips up.

In short, the 176-year-old Zurich based bank is not in good shape.

And by last Sunday night, social media was in overdrive.

Put simply, the demise of Credit Suisse was being compared with the collapse of Lehman Brothers (another investment bank) in 2008, which catalyzed the global financial crisis.

If this occurred, the ripple effect would be catastrophic.

So, was it a fair comparison?

Short answer. No.

First of all, Credit Suisse has enough capital to cover it’s losses.

Secondly, the global financial environment has changed significantly since Lehman Brothers filed for bankruptcy 14 years ago.

Banks the world over (including Australia) are more tightly regulated than in 2008 which means they’re now required to hold more capital to manage their risk profile.

The problem for Credit Suisse is they created this mess on their own thanks to a very sick culture. They can’t even blame it on Covid.

The good news is, despite it’s poor management, there’s a chance they can turn things around. But it will take years.

In the meantime, you can put your feet up and relax.

Have a great weekend!

Adam

Back paddock: ‘when things go wrong, don’t go with it’ – Glenn Stearns, billionaire, cancer survivor and founder of Stearns lending.