Would Credit Suisse collapse mean a repeat of 2008?

The boss of Credit Suisse has attempted to reassure staff and investors that the Swiss bank has a strong balance sheet after credit markets rated its risk of default as the highest in a decade.

Spreads of the bank’s credit default swaps (CDS), which provide investors with protection against financial risks such as default, rose sharply last week.

This has prompted speculation of a repeat of 2008, when Lehman Brothers, one of the titans of Wall Street, filed for bankruptcy, kicking off the worst financial crisis since the Great Depression.

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Were Credit Suisse, a globally significant lender that has suffered a spate of recent scandals and data leaks, to go under, it could have grave implications for the entire international financial system.

‘It’s a bit scary’

The interest rate charged on Credit Suisse five-year CDS – insurance against the bank defaulting on its borrowings – spiked 6 basis points to 2.47% on Friday, the highest level in ten years, as traders continued to lose confidence in the lender. The bank’s stock is also down about 60% so far this year.

The Swiss lender is among 30 “globally significant banks” listed by the central banks’ bank, the Bank for International Settlements, that are obliged to set aside extra capital to absorb potential losses because of their importance to the international financial system.

Therefore, recent developments prompted a memo from CEO Ulrich Koerner, which said that “many factually inaccurate statements” had been made in the media. “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,” he wrote.

The memo did little to settle nerves. Spencer Jakab, editor of The Wall Street Journal’s Heard on the Street column, posted a tweet juxtaposing Koerner’s statement with one from Lehman Brothers’ CFO in 2008 one week before the company filed for bankruptcy, which had declared: “Our capital position at the moment is strong.”

Indeed, a thread on the Wall Street Oasis website features panicked statements about rescinded job offers and the danger of finding yourself “screwed in the event of a crisis”. One staffer wrote: “It’s honestly a bit scary.”

‘Concerted scaremongering’

“Contrary to reports this weekend, the bank is unlikely to be going under,” said eFinancial Careers. “It’s BS,” said a former staffer, because Credit Suisse “has been de-risking and now has one of the safest balance sheets in the market”. It added that “claims that it’s the next Lehman are complete nonsense from people with no understanding of financial analysis”.

“Oh my, this feels like a concerted effort at scaremongering,” tweeted Boaz Weinstein, the financial crisis CDS expert and founder of Saba Capital Management, referring to recent speculation. He added that, “in 2011-2012 Morgan Stanley CDS was twice as wide” as Credit Suisse. “Take a deep breath guys,” he added.

The Financial Times said that “exaggeration was easiest to see” in the iTraxx Europe Crossover, a junk bond CDS tracker, which was “predicting a wave of defaults over the next five years” but “year-to-date, there hasn’t been a single default in the index”.

Credit Suisse team leaders “are said to have been working the phones all weekend” to “reassure customers, counterparties and investors on capital and liquidity, as well as to reiterate that restructuring plans are on course”, it added.