Credit Suisse Flashes A Worrying Signal, And It’s A 2008-09 Throwback

Credit Suisse Flashes A Worrying Signal, And It’s A 2008-09 Throwback
Jonathan Hobbs

over 1 year ago1 min

The old saying “safer than a Swiss bank account” is being tested, at least at Swiss banking giant Credit Suisse. Its stock price ended last week at $4.14 – almost 80% lower than at the depths of the 2008-09 global financial crisis. The bank has seen a series of scandals and high-profile failures in risk management that have led to big losses for some of its major hedge fund clients.

Meanwhile, the bank's creditors (investors who lend it money by buying its bonds) are rightfully getting nervous. That’s suggested from the chart, which shows the premium paid on its five-year credit default swap (CDS) is now above its peak during the 2008-09 financial crisis. When investors buy bonds from a bank, they expect to get back the initial value of the loan, plus interest. But they can also take out insurance on those payments in case the bank can’t afford to pay them back that initial loan value. The higher that premium is, the more worried investors are about a potential default on the loan. But it’s not just lenders who can buy CDS insurance and bid up the premium. The swaps are derivative products, which means investors can buy or sell them without being actual lenders themselves. In other words, speculators can buy CDSs to turn a profit simply because they think those premiums will go higher still.

All in all, it’s not a good look for Switzerland’s second-biggest bank, which has reported three straight quarters of losses and has apparently been hitting up investors to raise even more money. Its next quarterly results are out on October 27th – don’t expect them to shoot the lights out.

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