The Ghost of Lehman Brothers is back?
Numerous investment banks were impacted by the subprime mortgage crisis, but normally, when a bank goes bust, it is either sold off to a larger one or given a government bailout. Prime Examples of this would be Bear Sterns and AIG that almost went under during the 2008 mortgage crisis.
This is exactly why everyone was taken by surprise when the “TOO BIG TO FAIL” Lehman Brothers filed for bankruptcy in September 2008.
This event marked the end of the subprime lending crisis.
This time, all eyes are on Credit Suisse. Their share price has fallen by 57% since January, and their market capitalization has been reduced drastically from 28.2 billion to 9.87 billion.
Credit default swap spreads for the Swiss bank have increased significantly to 2008 crisis levels.
CDS are derivatives that can be used to protect your investment from a bank default. This is merely a sentiment indicator, and it may occasionally be exaggerated.
This has been termed as a classic case of a reverse meme stock, i.e., the majority of the selling was a result of the online noise.
Due to significant scandals like the Archegos, Greensill Capital, Mozambique tuna bonds, etc., the bank has experienced enormous cash hemorrhaging in its investment banking division. They have had trouble refinancing their debt due to the excessive noise and pessimism caused by this.
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EXTREME PESSIMISM OR BANKRUPTCY?
The bank is currently working with Royal Bank of Canada and Morgan Stanley on a potential capital increase under the name “Project Ghana”.
In addition to the same, they are considering a sale of their US asset management business, $10 billion in bailouts from the Feds, a $ 400 million hotel and about 5000 job cuts to recoup their losses.
This is all just potential possibilities based on market chatter. The company is all set to announce its turnaround plan of action by the end of this month.
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