Reddit Thinks Credit Suisse Is About to Collapse and Trigger a Financial Crisis Like 2008

Over the past few days, online traders have been on the edge, certain in their conviction that investment bank Credit Suisse is going to collapse any second now.

"Credit Suisse Investment Bank Might Collapse this weekend. LIMIT DOWN!" one popular post on the WallStreetBets subreddit declared, and a vast majority of commenters made comparisons to the 2008 financial crisis. "You guys remember Lehman and bear sterns? Maybe history about to repeat itself," one user mused.

At Wall Street Oasis, an investment banking forum, the hysteria is catching on as users speculate about the possibility of losing jobs in the event of a bank failure. It doesn’t take much effort to find fear mongering about the impending collapse of Credit Suisse, with "Debit Suisse" becoming a viral meme. The investment bank’s credit rating has been downgraded to credit sus, as one viral tweet put it, and there’s nothing to be done about it except make threads fueled by recent viewings of films like Margin Call or The Big Short. 

The panic appears to have had a real effect—there's been a selloff of Credit Suisse shares and bonds, and share prices have fallen as much as ten percent in swings across the few days alongside bonds which hit record lows on Monday. Credit default swaps (CDS), meanwhile—contracts that function like insurance on a firm defaulting on debt—have increased in price. Basically, you buy a CDS if you expect bankruptcy (Credit Suisse in this case) and want to profit from it, or hedge against it. As the odds of bankruptcy increase, so too does the price.

“With Credit Suisse's credit-default swap curve inverting this morning, I guess we now have an answer to the question: ‘can people on reddit and twitter move CDS prices?’” financial journalist Robert Smith tweeted ahead of sharing his Financial Times story on this debacle. There, he writes, investors claim "the exaggerated market moves reflected chaotic trading rather than fundamental fears over the bank's solvency.”

Despite some of the hysteria, Credit Suisse is not Lehman Brothers and we are not staring down a similar sort of crisis. Lehman collapsed in part because of its CDS, but specifically because it ran out of assets to put up for margin calls for its insurance contracts—a problem Credit Suisse likely doesn’t have as reiterated in a staff memo sent out by the bank’s chief executive.

"I know it's not easy to remain focused amid the many stories you read in the media – in particular, given the many factually inaccurate statements being made. That said, I trust that you are not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank," CEO Ulrich Koerner wrote in the memo.

So what’s driving the fear mongering? Part of it is that the business seems to be doing badly as the investment bank has had persistent losses and poor performance that led to credit and stock downgrades. It makes sense, then, that its share prices have been on a steady decline. And as mentioned earlier, a notable part of that downward pressure is likely connected to online traders with overblown fears and concerns about this being another 2008 crisis. 

“CS also has roughly twice as many liquid assets as it needs to in order to cover large outflows like those that brought down Lehman. There's also a concern that if CS gets into trouble, it could drag down other banks with it,” George Pearkes, Macro Strategist at Bespoke Investment Group, told Motherboard. “But again, so much has changed: financial firms are required to hedge much of their exposure to each other, clear more trades through central counterparties, and just generally are more insulated from one another than they were in 2008.”

All this is to say that things are bad for the bank, just not quite as bleak as some might suggest. Volatile markets, surging inflation and interest rate hikes, anxiety about another recession, a strong dollar, a general sense that things are worsening for people economically—all of this mingles together understandably to supercharge fears that we are on the brink of another financial crisis. The same hypervigilant dynamic could be seen with some traders anticipating a 2008-style housing market collapse. 

It’s unlikely any of this will subside anytime soon. Not only is Credit Suisse in the midst of raising capital for a massive overhaul, but as Pearkes points out, it's doing this amid broad market pressures that are pushing up CDS prices and likely to sustain them across the board. Softbank CDS prices shot past Credit Suisse’s last week, Deutsche Bank has seen its CDS prices jump, 

Bloomberg Opinion columnist Paul J. Davies observed the same thing, noting in a Monday piece that while share prices have collapsed and helped push up CDS prices, the bank has more than enough capital to keep running even if returns are poor. 

“To change that picture quickly, it needs money to pay for a restructuring—analysts estimate potentially $4 billion through asset sales or capital raising. Without that, the less it can change and the longer its troubles will last,” Davies wrote. “The weaker it appears, the costlier it’ll be to raise any money and the harder it will get squeezed by potential buyers of any of its assets. Markets feed on desperation, and you’ll find fewest friends when you’re most in need.”

So, it's unlikely that Credit Suisse will collapse or is even on the brink, but it is likely that it’ll suffer more pain as investors and traders overreact, cause some harm, smell blood in the water, and continue the feeding frenzy.