This is Why Credit Suisse Crashed

I want to tell you a story.

Meet Sid.

Sid is in high school. And Sid is a pretty good student and he's relatively popular. Everyone likes Sid, until Sid starts acting a little bit weird.

First, he gets caught spying on his ex-girlfriend, binoculars through a window. Very creepy, very weird. And immediately, Sid's reputation takes a bit of a hit.

But he keeps it pretty cool for the next 12 months, and slowly but surely his reputation starts to come back a little bit, until Sid gets into a drunk driving accident, just pure negligence.

And then, to make matters worse, within the same month, he then gets caught dealing drugs to drug addicts. A little bit shameful, Sid's reputation not doing great.

To save his reputation, he has to try to go to rehab. And once he does, things are quiet for a while again.

But then, Sid gets caught cheating on a geography test, which is shocking because Sid was a good student.

And then, to make matters even worse, all of the texts on Sid's phones get leaked to the whole school. And it turns out, he's talking to some real weirdos. This is humiliating for Sid.

And then, to make matters even worse, Sid gets caught doing more cocaine. He's relapsed. At this point, his friends have stopped hanging out with him. They don't want to be seen with him either, which only makes him seem more lame and makes his reputation even worse.

In a desperate last stand effort, Sid tries to get up in front of the school and tell everybody that he's still cool. But while he's talking, his pants fall down. Ugh, outrageous. Very sad for Sid.

You would think that things can't get any worse, right? Well, you'd be wrong. Sid's own father then tweets about the incident and says that he is disappointed in Sid as well. Not surprisingly, the entire school is now mocking Sid relentlessly.

And the question for you is, would you be surprised if Sid had to drop out due to all of this pressure?

What does any of this have to do with Credit Suisse?

Well, let me explain it to you right now. In this story, Sid is Credit Suisse.

Much like Sid, Credit Suisse was a very reputable bank. They'd been around for more than 160 years, older than many countries. At one point, they were the 8th biggest bank in the world, but around 2020, that started to change. That was when the bad times began.

Much like Sid got caught spying on an ex-girlfriend, Credit Suisse got caught spying on some ex-employees. Turns out they were hiring private investigators to follow their executives around to see what kind of new business dealings they were having. Pretty shocking. Pretty bad.

They had an additional apology and after that, they were pretty quiet for about 12 months. And as you can see, on this chart, the stock price started to recover. It was almost to where it was when the spying scandal was announced.

But then, much like Sid got into a drunk driving accident, Credit Suisse got into a negligent accident as well with a company called Greensill. Greensill is what's called a supply chain financing company. And basically, they take a bunch of invoices, package them up, and then sell them to people like Credit Suisse, as well as other banks.

In short, Greensill had some problems. Almost to the tune of $10 billion for Credit Suisse. Pretty major deal. That alone would be the biggest crisis that any bank had to face in a year, but not Credit Suisse.

Just like Sid had the drunk driving accident and then got caught dealing drugs, Credit Suisse had Greensill and then they got caught dealing leverage-to-leverage addicts, specifically Bill Hwang and Archegos, which was a hedge fund that had a massive blow up. And in the resulting chaos, Credit Suisse lost another $5.5 billion. This is all in the span of weeks that this happened.

To make matters even worse, they were the ones who got screwed. There were other banks who were also working with Archegos, but no one got hit as bad as Credit Suisse. At this point, their reputation is pretty low. They have to promise that they're going to be better going forward.

Much like Sid has to go to rehab, Credit Suisse just promises that they're going to have better risk controls put in place. However, much like Sid, this was not enough.

Remember how Sid got caught cheating on that geography test? Well Credit Suisse got caught taking bribes in Mozambique in what's called the Tuna Bond Scandal. You can see some details in it right here. They took a bunch of kickbacks from some corrupt officials in Mozambique around the tuna and fishing industries. And as a result, they had to pay a $500 million settlement.

Then to make matters even worse, just like Sid had all this text leaked from his phone, all of Credit Suisse's secret accounts got leaked. And let me tell you, there were some real dirty players there. People that they were helping to bank and helping get loans and move money around included human traffickers in the Philippines, Hong Kong exchange bosses who were in for bribery, Egyptian billionaires who murdered their pop star girlfriends, and a lot, lot more. Not great for Credit Suisse, right? Pretty embarrassing, pretty humiliating.

And then, you can't make this up. Just like Sid, after all this, had a relapse on cocaine, well Credit Suisse had a cocaine scandal as well. That's not a metaphor. They actually had a cocaine scandal. I swear, this is true. You can't make this up. They're found guilty in helping a Bulgarian crime ring launder their money in a cocaine scandal. Pretty bad stuff.

In the same way that at this point Sid's friends are kind of abandoning him, at this point Credit Suisse's talent is leaving them in droves. And it's becoming impossible to bring in new talent. The problem there is, if all your good talent leaves and no good talent comes in, you're left with only the not so great people. And the not so great people are not going to run a very effective business.

Well, just like Sid in the story tried one last ditch attempt to say like, hey, no, I'm still cool, everything is fine, and his pants fell down, Credit Suisse had a similar problem. Earlier this year in 2023, they released an earnings report, and the earnings report did not help their case. It was their worst earnings report since 2008, the great financial crisis, straw that broke the camel's back.

Just like Sid's dad said that he was disappointed in Sid, which sounds too crazy, sounds like I've made that up, has nothing to do with reality. Actually it does. Credit Suisse's biggest investor, which is the Saudi fund, was asked in an interview, would you invest more money into Credit Suisse? And they said, I swear, absolutely not. The answer is absolutely not.

See, I told you so. Now, in fairness, they were saying absolutely not because of regulatory reasons and everything else, but the market did not hear it that way. As soon as that came out, the stock price dropped by 28% in a single day.

At the same time, there's other bank failures happening with Silvergate, Silicon Valley Bank, and others facing unprecedented bank runs. It is no surprise that in this very high pressure environment, Credit Suisse, this bank that has had a few very difficult years with crisis after scandal after crisis after scandal is also going to be a victim of the overall macro environment.

So my question to you is, are you surprised that the market's lost faith in Credit Suisse?

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