Stocks plummeted again today as recession fears continued to mount. The Dow, S&P, and Nasdaq Composite all tumbled, led lower by Credit Suisse (NYSE: CS), which fell over 24% through noon. Shareholders were stunned when Saudi National Bank, Credit Suisse’s largest investor, said this morning that it would not provide any additional funding to the flailing bank.
Credit Suisse released a statement earlier this week saying that the bank had discovered “certain material weaknesses in our internal control over financial reporting” for 2021 and 2022.
In other words, the already dire situation at Credit Suisse over the last year is likely much worse than reported. The Saudis pulling their funding only amplified insolvency concerns surrounding the Swiss lender.
Sentiment then swung from bad to worse following a desperate attempt by Credit Suisse to save face as bank chairman Axel Lehmann said that a bailout “isn’t a topic” at the moment. However, the Financial Times reported this morning that the bank has already reached out to the Swiss National Bank.
Someone’s lying here. Is it the three anonymous sources that spoke to the Financial Times? Or is it Lehmann, who let his company commit accounting fraud for the last two years (if not longer)?
Rhetorical questions aside, a bailout is almost undoubtedly on its way for Credit Suisse as the situation deteriorates.
“It is looking inevitable that the Swiss National Bank will have to intervene and provide a lifeline,” said Opimas analyst Octavio Marenzi.
“The [Swiss National Bank] and the Swiss government are fully aware that the failure of Credit Suisse or even any losses by deposit holders would destroy Switzerland’s reputation as a financial centre.”
Many perma-bulls labeled the Silicon Valley Bank meltdown as an isolated incident last Friday. And while it’s true that most banks will survive the current crisis, what’s also at stake is the prospects for future growth.
Slumping tech revenues reduced deposits at Silicon Valley Bank dramatically, as roughly 90% of the bank’s customers were high-flying tech startups and venture capitalists. This put the bank in an already tough spot independent of its Treasury bond troubles, which racked up major unrealized losses for the bank. It was a “perfect storm” of plunging deposits and soaring Treasury losses, both resulting from Fed rate hikes.
Unlike SVB, other small and regional banks have nowhere near the same amount of bearish exposure to Treasury yields. Nor are they attached to arguably one of the worst-performing sectors (tech) over the last six months.
But SVB will serve as a cautionary tale for the rest of the banks, all of which will shift from holding higher-yielding Treasurys to parking their funds with the Fed for lower rates. The result will be a major, recession-inducing credit crunch as bank returns fall, Treasurys sell off, and long-term yields climb.
“You’re going to see a credit crunch happening in the United States and that’s starting to get priced into the market in a dramatic way,” said Mike Novogratz, CEO of Galaxy Digital. Novogratz was unabashedly one of crypto’s biggest cheerleaders over the last five years.
Seeing the banks fail – something Novogratz had been warning investors about – must be a cathartic experience.
We’ll see if he’s proven right. In the meantime, “buying the dip” is likely a bad idea as Credit Suisse threatens to take the regional US banking crisis to a global scale, which could make the SVB blowup look like small potatoes by comparison.