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OCTOBER
**4, 2022**
Dayen on TAP
Why Credit Suisse Is Imperiled
A crisis of confidence at Switzerland's second-largest bank shows the
dangers of Federal Reserve-driven chaos.
If you got a call from your bank over the weekend, you would be
concerned. Banks aren't supposed to be all that operative on weekends,
after all. If you got a call from your bank over the weekend to say, "I
don't know what you've heard about us, but just to be clear, your
money is fine," you would be exponentially more concerned. It's not
like you were even wondering if your money was fine; you assumed so
because it was in a bank.
This was the actual triggering event
for global concern about Credit Suisse. Switzerland's second-largest
bank did hit a speed bump about a year ago when it lost $5.5 billion
in the blowup of Archegos Capital, and it has consistently lost money
this year while promising a restructuring to minimize risk. It was also
one of the main banks left holding the bag in the Citrix mess the
**Prospect**wrote about last week
.
But more recently, it has experienced falling stock prices because the
spread on its credit default swaps, which serve as protection against
Credit Suisse defaulting on its debt, increased massively, to its
highest levels of the year. So the scenario, approximately, was this:
Someone or other got worried that Credit Suisse was going to default.
That led to a key indicator of investors protecting against a Credit
Suisse default to go haywire. That led to Credit Suisse telling clients
that everything's cool. That led to investors becoming even
**more** pessimistic about Credit Suisse.
If this all sounds like a potentially consequential corporate collapse
based on nothing more than a game of Whisper Down the Lane, welcome to
the global financial system. It runs in much the same way as the old
Monty Python sketch about a conjurer who spun up a block of flats with
his mind. As long as all the tenants believed in the flats, they
remained upright. As soon as they stopped believing in them, they began
to collapse. This faith-based system mirrors financial markets to a
certain degree, and people are losing faith in Credit Suisse.
This looming collapse has been followed by several
market
analysts
huffing
that nobody should lose faith in Credit Suisse, although if they did, it
would be bad, and central banks would have to step in. The whole thing
is rather unnerving. And it's not limited to Credit Suisse. (In fact,
one of the analysts minimized the potential of a Lehman Brothers-type
event from Credit Suisse by noting that it was only the eighth-most
vulnerable European bank
according to short-sellers. This is not reassuring!)
It's certainly possible, if not probable given that Credit Suisse is
well capitalized, that this drama is self-created. There's kind of a
perpetual hunt for the next 2008 financial crisis that is misguided, as
not only have capital standards changed, but the experience of 2008 and
its various blunders militate against a replay. But faith is a tricky
thing, and it can be sapped quickly. And that's especially true in the
environment the Federal Reserve is creating for the world.
As Lee Harris writes today
,
the Fed's accelerated rate hikes have surged the dollar and exported
pain to emerging markets. That's true in financial markets as well, as
higher interest rates heighten risk and create traps for those that get
caught unable to refinance. This damage is being done to serve an
inflation that has been relatively unmoved by monetary policy, because
it's being driven by at least some factors outside the control of
central banks. Destroying demand to try to chip away at inflation has
serious residual effects that pop up in unanticipated corners, even the
sober confines of a venerable Swiss bank.
~ DAVID DAYEN
Follow David Dayen on Twitter
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Reclaiming the Deep State
How the Office of Information and Regulatory Affairs (OIRA), the
longtime graveyard of regulation in the public interest, became its
unlikely champion. BY ROBERT KUTTNER
U.S. Declines to Blunt Pain as It Exports Inflation to Poor Countries
The Treasury is resisting calls to provide emergency liquidity for
emerging markets facing a strong dollar. BY LEE HARRIS
International Finance Capital Rebels Against British ... Tax Cuts for
the Rich?
Bankers shoot down the Conservative Party budget plan. BY RYAN COOPER
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