Fourteen years after the demise of Lehman Brothers, another investment bank is in the news for all the wrong reasons.
Credit Suisse (CS) fell sharply at Monday's open, partly due to a Financial Times report. According to FT, the bank's executives are engaging in talks with major investors to assuage any fears about the company's health.
Regular readers of this column were not entirely surprised by this development. On June 2, I wrote about Credit Suisse and the signs of trouble that were already appearing on its chart. That day, Credit Suisse closed at $7.02.
On Monday, the stock closed at $4.01. In the four months since that article appeared, the bank's stock lost 43% of its value. The chart is a long, downward spiral of lower highs and lower lows.
Source of charts: TradeStation
Credit Suisse's long-term chart is even more disturbing. In April 2007, the stock traded above $79 (point A). After the 2008 crash, Credit Suisse fell as low as $18 (point B). Today, the stock is worth just a fraction of its post-crash price (point C).
The issue here isn't just Credit Suisse, but other banks as well. As we saw with Lehman Brothers in 2008, financial institutions can be intertwined in various ways.
Despite this overhanging news, stocks rose sharply on Monday. Why did the market react so bullishly in the face of a possible 2008-style blowup?
The Fed, the European Central Bank and other major central banks can't continue raising interest rates at their current pace if the threat of a Lehman-like event hangs over the market. On Monday, investors were betting that central banks will be forced to curtail their tightening programs. They're probably right.
While Credit Suisse spent the weekend reassuring investors about the stability of the company, it's important to understand that if the Swiss banking giant does have a problem, it would never admit it. Doing so would cause the company's stock and bonds to plummet, making a rescue all but impossible.
In April 2008, Lehman Brothers' Chief Financial Officer Erin Callan tried to explain away the investment bank's troubles as an issue of perception. At the time, Lehman had just raised $4 billion in capital by issuing additional shares of its soon-to-be worthless stock.
If Lehman had revealed the true depth of its difficulties, would anyone have purchased those shares?
I feel as though I've heard all this before. Where there is smoke, there is probably fire. Ironically, Credit Suisse's troubles could cause the Fed and other central banks to pivot away from tightening.