Morning Coffee: What's wrong with Credit Suisse now? Barclays will be clawing back some bonuses
What happened? On Friday, Credit Suisse seemed its same old self: a poorly performing bank with a share price down over 50% year-to-date, some issues retaining staff and a promise of major restructuring following the revelation of a new strategy at the end of this month. On Sunday, it was being spoken about as the next Lehman Brothers. This morning, its shares are down another 10%.
As we noted (on Sunday), the catalyst for Credit Suisse’s new self seems to have been CEO Ulrich Koerner’s memo to staff on Friday that all is fine at Credit Suisse in terms of liquidity and capital. This, as has been amply observed on Twitter and Reddit, sounded distinctly similar to the sort of thing said by Lehman Brothers in 2008. Then, there’s the fact that the risk of Credit Suisse defaulting (as measured by the cost of insuring against it defaulting), has gone through the roof and is back to the level of 2009. This risk is deemed considerably higher than at other European banks and has risen another 100bps on Monday. Shriek.
OOPS! Credit Suisse CEO seeks to calm as default swaps near 2009 level. Koerner touts ‘strong capital’ after shares touch new low. The cost of insuring bank’s bonds against default climbed about 15% last week. Markets price default probability at 20%. https://t.co/AMzLjRTYiJ pic.twitter.com/TG3s6gacl5
— Holger Zschaepitz (@Schuldensuehner) October 2, 2022
Should you be worried? There have been worries about Credit Suisse's leveraged finance portfolio, which totaled $5.9bn on June 30th, and the bank's $75bn exposure to mortgage bonds and asset backed finance, but these may be overdone...
Probably a hostage to fortune but CS seems possibly the least exposed investment bank to the current turmoil.... it's basically a pile of high carry low duration levfin and securitisation, tiny in rates, small in mortgages
— Owen Sanderson (@OwenPSanderson) October 1, 2022
Nonetheless, as economist Nouriel Roubini points out today concerns about capital and liquidity can become self-perpetuating. And yet, as we noted on Sunday, it's worth noting that many of those who we’d expect to be panicking, are not (Boaz Weinstein, ex-senior Credit Suisse traders). And many of those who like panicking (Redditors, Twitter pundits), are. Koerner, in the meantime, has issued another missive asking investors for less than 100 days to deliver a turnaround strategy as the bank works on asset and business sales to raise capital. A fixed income investor presentation last week stressed that Credit Suisse’s 13.5% CET1 capital ratio at the end of June was already beyond the 9.6% required by Swiss regulators. Phoenix analogies have been deployed by senior management and the weekend was spent working the phones to top investors and counterparties, some of whom reportedly even called in with messages of support.
While Credit Suisse is unlikely to be Lehman (in the sense that it’s unlikely to go spectacularly and suddenly bankrupt), it is, however, likely to come out of this period in a very different shape to when it went in. The increase in spreads on Credit Suisse’s five year credit default swaps, from 57bps at the start of the year to closer 250 bps on Friday, implies a CHF300m a year increase in the cost of refinancing existing debt according to FT Alphaville (although some have put it even higher at closer to CHF500m). Those are not the sorts of capital costs that sit well with a large credit trading business. – If Credit Suisse was inclined to make its credit traders redundant before this, it will be even more so now.
At the same time, Credit Suisse isn’t exactly in a great position to be negotiating the sale of some of its businesses. The banks/hedge funds it's negotiating with aren't known for their charity and won't be inclined to cut a generous deal to a counterparty clearly in desperate need of a sale. It doesn't help that the securitization business which is supposed to form the cornerstone of the capital raising is unlikely to be having a great year...
In the midst of all this, Credit Suisse's new CFO Dixit Joshi, posted today that he's reporting for duty. There's an preset option on LinkedIn for wishing him the "Best of luck." He may need it.
Separately, and as we predicted in March, Barclays will be clawing back some of the bonuses it paid last year. Following its accidental sale of $15.2bn of ETN securities and resultant loss of at least £450m as it bought them all back again, the bank has reportedly said that some of its people may face: "adjustments to remuneration, including to past variable remuneration, the potential for disciplinary action and performance management as appropriate...”
Meanwhile...
Nikhil Goel, an M&A banker who left Credit Suisse last year, has rejoined after a short spate at AI-powered drugs company Absci Corp, where he was a director. (Bloomberg)
Credit Suisse says there hasn't been a formal approach to any shareholders about issuing new shares.(WSJ)
UK Chancellor Kwasi Kwarteng had a budget-day cocktail party with financiers at the home of Andrew Law, a conservative party donor and hedge fund manager. Multiple other hedge fund managers also attended. (The Times)
Andrew Law was probably shorting the pound. (Times)
Morgan Stanley CEO James Gorman has been sucking up to Elon Musk. When Twitter accepted Musk's bid, Gorman sent him a message saying: “Spectacular!! You are a rocket ship...Very excited for you!” (The Information)
There's huge demand for engineering staff at hedge funds in Florida. (Business Insider)
It's a great year for macro hedge funds like Brevan Howard, Bridgewater and Key Square Asset Management. (WSJ)
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