The collapse of Silver Yay, Silicon Valley Bank and Signature Bank within the last few weeks has caused fears of another 2008 level financial crisis. After Lehman Brothers collapse in 2008, it caused Global Credit markets to freeze, ultimately leading to the worst economic downturn since the Great Depression. It's important to note that Svb is very different from Lehman Brothers Svb focused primarily on the technology in Venture Capital Industries, so the economic damage of this collapse will likely be ring fenced to this sector of the economy Silvergate, and Signature Bank focused on the crypto industry, which represents a tiny fraction of the economy. Thus, while the three recent vein collapses could certainly have impacts within their respective Industries, it is unlikely that they alone could cause a wider recession.

However, Credit Suisse is a whole different story. With well over half a trillion dollars of assets, the Swiss Bank is a systemically important financial institution on a global scale, with operations in over 50 countries. If Credit Suisse were to collapse, The Fallout would be orders of magnet to greater than Svb. Credit Suisse's share price has been declining precipitously in recent years, losing almost 90 percent of its value since 2018, with the declines accelerating Recently, in a media appearance on March 15, 2023, Krita Swiss's chairman Alex Lehman said the bank's financial position was strong and seeking government assistance was not a topic whatsoever for them.

However, just one day later, the bank announced that they would be borrowing 50 billion Swiss Francs from the Swiss Central Bank to shore up their liquidity. As of the time of recording this video, One Franc is worth 1.08 US dollars. So this borrowing from the central bank is equivalent to 54 billion dollars in this video, We'll take a deep dive into how Credit Suisse got into the situation and whether we could be at the beginning of a broader financial crisis foreign to understand what's going on at credit. Suites We first had to establish what the bank does.

They have four business segments: wealth management, the Swiss Bank, the investment bank, and asset management. So what do these segments do? Wealth management is their most important segment, accounting for 37 percent of Revenue. This involves helping High net worth individuals manage their finances including filing taxes, estate planning, financing of large purchases, etc. For example, if you're a multi-millionaire wanting to buy a new yacht, Credit Suisse could help you finance the purchase coming in at 32 of Revenue.

The Swiss bank is their second most important segment. This is a regular Bank in Switzerland that has branches, takes deposits, gives out mortgages. Etc Fifteen percent of Revenue comes from their Investment Banking division which underwrites IPOs advices on corporate mergers and provides brokerage services to hedge funds and other institutional investors. Their smallest segment is asset management, which only represents nine percent of Revenue.

This segment offers mutual funds and other actively managed investment funds to both individual and institutional investors. Up until recently, Credit Suisse was doing pretty well. This chart shows the reported pre-tax income in red in blue is there pre-tax income adjusted for litigation and restructuring expenses. From 2018 through 2022, they reported more than 4 billion Swiss Francs of adjusted pre-tax profit each year.

In almost every single year, their reported profit is below their adjusted profit because they almost always have major litigation expenses. For example, in 2014, they had to pay almost 4 billion dollars in settlements, including 1.8 billion dollars with the U.S Department of Justice in relation to the bank helping their High net worth clients evade taxes. 2017 was their biggest settlement year, having to pay more than 5 billion dollars mostly related to their fraudulent sales of mortgage-backed Securities In the lead-up to the global Financial Crisis in 2021, they had to pay 500 million dollars to resolve litigation related to a two billion dollar loan that they hope to range to a state-owned Enterprise in Mozambique The loan proceeds were supposed to be used to develop the fishing industry in the African nation, however the money was instead diverted to the purchase of military equipment. This ultimately led to the suspension of foreign aid which devastated the country's economy.

In 2022, they had to pay multiple fines related to their failure to maintain adequate records from its Traders as required by U.S Securities regulations. the maintenance of communication records is required to prevent Traders at Big Banks from conducting Market manipulation or illegal actions. For the past decade, Credit Suisse has constantly found itself in trouble with Regulators as they played fast and loose with the law, but the bank was so profitable that they could afford to pay the fines with the settlement payments almost becoming like a cost of doing business for them despite their repeated scandals. High Net worth individuals and corporations continue to View Credit Suisse as a highly sophisticated and competent Investment Bank so long as their customers still had confidence in them.

Credit Suisse could still make billions of dollars of fees every year, thank you. But this would all change in 2021 when they had two high-profile disasters. Green Seal Capital was a British financial institution that used the power of artificial intelligence to revolutionize the supply chain Finance industry. They used their AI technology to determine the credit worthiness of borrowers and provide them with working Capital Loans which supposedly had almost zero risk of default.

As it turns out, their AI technology was mostly just hype and their supply chain loans were concentrated in a handful of risky industrial borrowers. If you want to learn about the Green Soul scandal in more detail, you can check out this video we made about it: Link in the description below. Credit Suisse was a major backer of Green Seal. Capital They sold Green Cells bonds to their High Net worth Wealth Management clients saying that they were almost risk-free In 2021, Green still collapsed and Credit Suisse's clients lost billions.

Credit Suisse was also a brokerage provider to Bill Huang's hedge fund Artego's Capital. The Swiss bank extended billions of dollars worth of margin loans to Arcados and suffered a 4.7 billion dollar loss when it collapsed, driven mostly by the Arcagos losses. Credit Suisse reported a pre-tax loss for the full year of 2021.. following these disastrous results, the bank announced a major restructuring, firing the head of their Investment Bank reducing their leverage and raising 1.9 billion dollars of new capital from existing shareholders to shore up their balance sheet.

Despite repeated attempts at restructuring, 2022 ended up being even worse for the Swiss bank. in every single quarter, the reported net income was negative. Even after adjusting for litigation and restructuring charges, their pre-tax profit was still negative in the second third and fourth quarters. Not all this was Credit Suisse's fault.

After Blockbuster years in 2020 and 2021, Rising interest rates and declining stock market prices caused the number of IPOs to decrease by more than 80 percent in 2022. This negatively impacted all investment Banks as IPOs are one of the biggest fee generators for Wall Street. But Credit Suisse was especially hard hit because they also reduced margin lending in their brokerage business following the Archangos disaster. Total revenue from Credit Suissen Investment Banking division decreased by 53 versus 2021, but this wasn't even the worst news.

The crown jewel of Credit Suisse isn't their Investment Bank. It's instead their wealth management franchise which helps high net worth individuals manage their money. Many of Credit Suisse's clients who lost money in the Green cell Bonds were Furious and the archaicos debacle further signaled a lack of competence. Throughout 2022, wealthy clients started pulling their money out of Credit Suisse with their wealth management assets under management decreasing 27 percent from 740 billion Francs in the fourth quarter of 2021 to just 540 billion in 2022.

And the outflows accelerated in the fourth quarter with the bank losing almost 100 billion Francs in that quarter alone. So why were the outflows so bad in the fourth quarter? According to the CEO, the outflows were the result of malicious and false rumors about the bank's Financial Health spreading around on social media. But why were they taking money out then if if your clients are happy because and that's that's what I also said if you are in a situation like we bear in October, you know where you had malicious information out in the Market at the beginning of October we were not able to speak legally, not able to speak and that's why I said like two-thirds of the outflow stemming from October line alone, 85 from October and November At the moment we could reach out, we started that huge program talk to our clients, more than ten thousand clients and wealth management. Since then, more than 50 000 individual meetings in Switzerland and that has created momentum.

So what was he talking about? Because of the deteriorating financial performance, we talked about earlier Credit Suisse's share price started declining precipitously throughout 2022. but there is no indication that the bank was at any risk of insolvency. On October 1st, an Australian journalist named David Taylor tweeted that a credible source told him a major air National Investment Bank is on the brink. He never revealed which Investment Bank he was talking about and eventually he deleted the Tweet.

However, given the share price performance of credit, Suites Many people in the internet assumed that Taylor was talking about the Swiss bank. Almost immediately, the social media Rumor Mill got to work with people making Twitter posts and YouTube videos comparing credit Suites to Lehman Brothers The CEO called these social media speculations militias whether this was truly malicious or just an example of clickbait and Sensational headlines getting out of control is Up For Debate Either way, it does appear that the rumors had an adverse effect on Chris with his wealth management outflows. If you're a wealthy individual with millions of dollars being managed by Credit Suisse If you think there's even a one percent chance of the bank failing, you might as well pull it out and move it to a competitor. Instead, these wealth management outflows help contribute to the 3.2 billion Franc loss they reported in 2022.

The situation was getting desperate and Credit Suisse needed a way to reassure their increasingly beleaguered shareholders. On October 27, 2022, Credit Suisse unveiled what they called a radical restructuring plan to finally get the bank on the right track. They said the restructuring plan would take three years to implement and consisted of four key pillars: a divestiture of their Investment Banking business, a massive head count reduction, selling off part of their Securitized Products group, and raising additional capital all the way back. in 1988, Credit Suites acquired a New York-based Investment Bank called First Boston which they renamed Credit Suisse's first boss in and eventually just Pretty sweets.

While First Boston was a major growth driver for Credit Suisse in the lucrative U.S market, it has been plagued with scandals and risk management deficiencies. Instead of trying to fix First Boston, they now intend to spin it off as an independent company. This way, even if First Boston continues to have issues, it won't be Credit Suisse's problem. Second, they'll be laying off 9 000 workers, which represents almost 20 percent of their total headcount.

While layoffs are never popular, this is a necessary move in light of their wealth management outflows and scale down of their Investment Banking business. Thirdly, they'll sell the majority of their structured product script to the private. Equity Firm Apollo This group packages mortgages and other loans into mortgage-backed Securities While this can be a very profitable business, it got Chris we sent to a lot of trouble in 2008 and it's a risk they no longer want to hold on their balance sheet. And finally, they raised roughly 4 billion dollars of new capital from a group of investors led by Saudi National Bank the largest bank in Saudi Arabia.

With this investment, Saudi National Bank became Credit Suisse's biggest shareholder with a 9.9 ownership stake. Overall, this restructuring plan looked pretty good. Historically, most of the problems that Credit Suisse found itself in were the result of its Investment Bank which would be spun off. Also, with the bank's balance sheet bolstered by the 4 billion share sale, Wolf Management clients should feel comfortable bringing their money back to Credit Suisse foreign.

Despite the fact that Credit Suites is located on the other side of the Atlantic, the Swiss bank share price was not spared from the negative Market sentiment stemming from the collapse of Silicon Valley Bank and Signature Bank in the U.S By March 13th, the Monday After the Svb collapse, Credit Suisse's U.S listed chairs had declined to 2.54 cents. This represented almost 20 percent decline since the beginning of the year, and a more than 80 percent decline from its recent peak in 2021. However, things were about to get even worse on March 14th, Credit Suisse released his 2022 annual report. In the report, Credit Suisse's auditor PWC gave an unqualified opinion that the bank's Consolidated financial statements represent fairly in all material aspects the financial position of the group.

Basically, this means that the financial statements are accurate in Pwc's opinion. However, PWC also said that Credit Suites did not maintain effective internal controls over financial reporting. So what does this mean for a large and complicated organization like Credit Suisse Preparing Act your financial statements can be a Monumental task. What PWC is saying is that critic Suites has not been allocating sufficient resources to this task.

Because of this. Credit Suisse has a higher than average chance of making material mistakes on his financial statements. However, PWC does not believe that these internal control issues affected the reported financial statements over the last three years. Curtis Greece's senior management team has acknowledged the internal control issue and say they are actively working to fix it.

Given that the issue did not affect Pwc's opinion about the accuracy of existing financial statements, this normally wouldn't have been a big deal, but we are currently not in normal market conditions. Given the extremely negative sentiment around Bank stocks. The PWC report caused Credit Suisse's share price to Fall by almost 30 percent, although it subsequently made back some of those losses. Given this, Confluence of negative nears: credit default swaps on credits we skyrocketed in value.

Credit default swaps are essentially insurance contracts which pay out when an issuer defaults on its bonds. As of March 16 2023 credit default swaps on credit squeezes bonds skyrocketed to 3 500 basis points or 35 percent. That means that CDs speculators believe that there's a 35 chance that credit suits will default within the next year. After Credit Suisse's annual report was released, the bank's bonds started tanking with some of them trading as low as 65 cents on the dollar and sporting yields well in excess of 20 bonds with 20 yields are generally considered to be in distress.

On March 16th, Credit Suisse announced they will be borrowing up to 50 billion francs from the Swiss Central Bank under a pre-existing credit facility. They'll use these proceeds in part to buy back their own distressed bonds, which will decrease their interest expense. On the surface, this looks like a pretty smart move. Credit Suisse is accessing a low interest rate credit facility from the central bank to buy back its own bonds which are trading at much higher yields, but the question is, is it Justified for Credit Suisse's bonds to be trading at such distressed levels in the first place? As of December 31st, 2022, Credit Suisse had 528 billion Francs worth of tangible assets and 486 billion of liabilities.

This gives them a tangible Book value of 42 billion francs, meaning that the bank is solvent. but just because a bank is solvent doesn't necessarily mean that they are safe. About half of Credit Suisse's assets are loans made either from their Commercial Bank in Switzerland or to their wealth management clients worldwide. Most of these loans are due years from now, so they are not immediately available.

After subtracting these loans, as well as some other illiquid assets, the bank only has 190 billion francs of immediate liquidity. That's compared to 226 billion of customer deposits and other liabilities that can be withdrawn on demand. Thus, even though the bank is solvent, their on-demand liabilities exceed their on-demand assets by 36 billion francs. This means if all their depositors and other counterparties withdraw their funds at once, they would collapse.

Those numbers were, as of December 31st 2021. Since then, they've borrowed 50 billion francs from the Swiss Central Bank. After accounting for this new source of liquidity, their on-demand liquidity position increases to positive 14 billion francs. Thus, even if all their depositors want to withdraw their funds tomorrow, they would be able to satisfy them.

With that being said, we don't know for sure how long the 50 billion Franc Central Bank credit line will last. Also, given how interest rates have risen over the past year, it's unclear how much Credit Suisse's 260 billion Franc loan portfolio would be worth if it had to be liquidated today. The Swiss Central Bank doesn't want to be left in a position where it has to keep bailing out Credit Suisse every time he gets into a liquidity. Crunch And given the poor performance of the paying stock price, it's clear that their own shareholders aren't terribly optimistic either.

While Credit Suisse has already announced plans to spin off its Investment Banking division, recent events have pressured the bank to move faster in a strategic transformation. According to Media reports, the Swiss government is scrambling to arrange a sale of at least some of Credit Suisse's assets to rival Swiss bank. UBS UBS is larger than Credit Suisse and operates in the same businesses of wealth management and investment banking with offices all over the world. Given that UBS is in a better financial position than Credit Suisse Wealth Management clients would be more willing to bring back their business if they know that their deposits are backed by Ubs's balance sheet.

and given how cheap Credit Suisse's share prices. UBS May View this as a once in a lifetime opportunity to buy one of their biggest competitors for a Bargain Basement price. One potentially interesting solution would be for Chris who used to sell all of its assets except for its domestic. Swiss Commercial Bank The domestic Swiss bank is the only unit within Credit Suisse that has been consistently profitable.

In 2022, it made the equivalent of 1.7 billion dollars of pre-tax profit. If you put just a five times multiple on that, you get 8.5 billion dollars of value. Credit Suisse's entire market cap currently sits at just 7 billion dollars. The domestic Swiss bank is almost certainly worth more than Credit Suisse's entire market cap, which is being dragged down by their embattled Investment Banking and wealth management arms.

If Credit Suisse could sell everything except for the domestic Swiss bank to UBS For a symbolic price of one dollar, this would almost certainly be accretive to Credit Suite's shareholders. With that being said, it wouldn't be as simple as Ubs just handing over one dollar bill and magically solving all the problems UBS would have to take on all the liabilities associated with Credit Suisse's wealth management and Investment Banking divisions. But given the fact that Credit Suisse has positive Book value, it should be possible to make a deal work, especially with the Swiss Central Bank providing short-term liquidity. While Credit Suisse is certainly facing some serious problems, it's important to realize that there are major differences compared to Silicon Valley Bank.

After accounting for its unrealized losses, Svb was insolvent. Because it was not a systemically important financial institution, it did not have adequate regulatory scrutiny. By the time the run on the bank began, it was already too late. Credit Suisse is in a very different situation.

They've just been played by a host of scandals and risk management failures, which have caused many of their wealth management clients to lose confidence in them. With that being said, there is still solvent and the Swiss Central Bank is actively supporting them with liquidity and exploring strategic options. If I were a betting man, I would say an organized resolution such as a merger with UBS is far more likely than a disorderly collapse. but in these uncertain times, nobody can predict the future.

So make sure you subscribe to Wall Street Millennial where we'll keep you updated on any future developments. All right guys, that wraps it up for this video. What do you think about Credit Suisse Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.