Credit Suisse: How Switzerland’s oldest bank became a meme stock

Maureen Farrell, Emily Flitter and Joe Rennison

“Credit Suisse is probably going bankrupt.”

It was Saturday, October 1, and Jim Lewis, who frequently posts on Twitter under the moniker Wall Street Silver, made that assertion to his more than 300,000 followers. “Markets are saying it’s insolvent and probably bust. 2008 moment soon?”

Lewis was among hundreds of people — many of them amateur investors — who had been speculating about the fate of Credit Suisse, the Swiss bank. It was in the middle of a restructuring and had become an easy target after decades of scandals, failed attempts at reform and management upheavals.

There seemed to be no immediate provocation for Lewis’ weekend tweet other than a memo that Ulrich Körner, the CEO of Credit Suisse, had sent employees the day before, reassuring them that the bank was in good financial health.

But the tweet, which has been liked more than 11,000 times and retweeted more than 3,000 times, was one of many that helped ignite a firestorm on social media forums like Twitter and Reddit. The rumour that Credit Suisse was in trouble ricocheted around the world, stumping bank executives and forcing them to call shareholders, trading partners and analysts to reassure them that everything was fine before markets reopened Monday.

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Reached via private message on Twitter, Lewis said all he had looked at before sending out his tweet was Credit Suisse’s “low stock price and memes on Reddit.”

A storied institution had become a meme stock.

The same day Lewis tweeted that the bank might go bankrupt, Hunter Kikut tweeted: “High likelihood of Credit Suisse going bust. Will be shorting on Monday.”

Kikut, a 22-year-old living in Charlotte, North Carolina, doesn’t recall if he saw Lewis’ tweet, but a post by Unusual Whales — which bills itself as a trading service that “empowers the retail investor” — caught his eye. “Twitter was the reason I found out about it,” Kikut said in an interview. “It was one weekend, it just like blew up. I started looking into it.”

After U.S. markets opened Monday, October 3, Kikut began shorting the stock of Credit Suisse — or betting that the share price would fall. That morning, the bank’s shares plunged nearly 6%, shaving about $ 600 million off its market capitalization and temporarily dragging down a stock whose value had already fallen by more than half since the beginning of the year. As fear spread among professional investors that something might be going on, the cost of insuring Credit Suisse’s debt against default skyrocketed.

It wasn’t the first time individual investors, banding together on social media, had moved a company’s stock price so significantly. Last year, they acted in concert to prop up the shares of GameStop, the video game retailer, determined to outsmart hedge funds that had bet the company’s shares would fall.

But what started as a spontaneous effort to take down Wall Street has since become an established presence in the market. Millions of amateur investors have embraced trading, including more sophisticated strategies such as shorting. As the Credit Suisse incident shows, their actions highlight a new source of peril for troubled companies.

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Founded in Switzerland in 1856 to help finance the expansion of railroads in the tiny European nation, Credit Suisse has two main units — a private wealth management business and an investment bank. However, the bank has often struggled to maintain a pristine reputation.

It has been the repository of funds from businesspeople who are under sanctions, human rights abusers and intelligence officials. The U.S. government has fined it billions of dollars for its role in helping Americans file false tax returns, marketing mortgage-backed securities tied to the 2008 financial crisis and helping customers in Iran, Sudan and elsewhere breach U.S. sanctions.

In the United States, Credit Suisse built its investment banking business through acquisitions, starting with the 1990 purchase of First Boston. But without a core focus, the bank — whose top bosses sit in Switzerland — has often allowed mavericks to pursue new revenue streams and take outsize risks without adequate supervision.

Its most recent troubles started in the spring of 2021 when Archegos Capital Management collapsed. Credit Suisse was one of many Wall Street banks that traded with Archegos, the private investment firm of Bill Hwang, a former star money manager. Yet it lost $ 5.5 billion, far more than its rivals. The bank later admitted that a “fundamental failure of management and controls” had led to the debacle.

Frequent turnover at the bank’s highest levels hasn’t helped. In 2015, the bank hired Tidjane Thiam as its CEO. Thiam, a former McKinsey consultant, shored up the bank’s stock price and profitability largely through cost cutting, according to five people familiar with his decision making. He let go of senior risk managers and underinvested in new trading systems, the people said.

Thiam left in early 2020 after a scandal involving surveillance of Credit Suisse executives under his watch. He left the bank in a stable and profitable condition and invested appropriately across its various divisions, his spokesperson, Andy Smith, said.

Credit Suisse replaced Thiam with Thomas Gottstein, a long-time bank executive. When Archegos collapsed, the bank kept Gottstein on the job, but he started working with a new chair, António Horta-Osório, who had been appointed a few months earlier to restructure the bank.

In January this year, Horta-Osório abruptly resigned after an inquiry into whether he had broken quarantine rules during the pandemic. But he made swift changes in his short tenure. To reduce risk taking, Horta-Osório said, the bank would close most of its prime brokerage businesses, which involve lending to big trading firms like Archegos. Credit Suisse also lost a big source of revenue as the market for special purpose acquisition companies, or SPACs, cooled.

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By July, Credit Suisse had announced its third consecutive quarterly loss. Gottstein was replaced by Körner, a veteran of rival Swiss bank UBS.

Körner and the chair, Axel Lehmann, who replaced Horta-Osório, are expected to unveil a new restructuring plan October 27 in an effort to convince investors of the bank’s long-term viability and profitability. The stock of Credit Suisse has dipped so much in the past year that its market value — which stood around $ 12 billion — is comparable to that of a regional U.S. bank, smaller than Fifth Third or Citizens Financial Group.

Under the plan being discussed, Credit Suisse will sell or spin off some units, three people familiar with the company’s plans said.

The private wealth division would stand on its own. The investment bank would be spun off, and senior bankers would get a stake in the new entity, which would take on the First Boston name, the people said.

The bank has pitched investors — including Saudi Arabia’s Public Investment Fund — about investing several billion dollars to support the spun-off bank, two people familiar with the discussions said. Credit Suisse is also seeking buyers for its securitized products business, the division that creates products to finance residential mortgages, commercial real estate and other asset purchases, three people familiar with those discussions said.

Kevin Foster, a spokesperson for the Saudi Arabian fund, declined to comment.

“In the current market, selling any business is tricky, and everyone knows Credit Suisse are forced sellers,” said Johann Scholtz, an analyst who covers the bank for Morningstar.

“Many of the topics referenced in this story are legacy matters,” Candice Sun, a Credit Suisse spokesperson, said in a statement.

Even as Credit Suisse was struggling to fix itself, a new phenomenon had rocked the financial markets. Retail investors, many of them stuck at home during pandemic lockdowns and flush with extra cash from stimulus payments and savings, began talking to one another on social media.

Their greatest triumph: buying up shares of GameStop to squeeze a hedge fund that had bet the shares of the company would fall. Exhilarated by their success, some amateur investors looked for other targets, developing their own governing myths and codes along the way. A favourite online hangout was Reddit, and forums like WallStreetBets, where people shared ideas and banter about investing.

Some of them eventually turned their attention to Credit Suisse.

On Sept. 30, a Twitter post from Alasdair Macleod highlighted a decline in the bank’s share price compared with February 2021. Macleod’s verified Twitter profile lists him as a research analyst for Goldmoney, a technology platform connected to a network of vaults that offers retail investors a way to buy and store precious metals.

A day later, a screenshot of Macleod’s tweet appeared on Reddit.

Macleod said he had decided that Credit Suisse was in bad shape after looking at what he deemed the best measure of a bank’s value — the price of its stock relative to its “book value,” or assets minus liabilities. Most Wall Street analysts factor in a broader set of measures.

But “bearing in mind that most followers on Twitter and Reddit are not financial professionals,” he said, “it would have been a wake-up call for them.”

The timing puzzled the bank’s analysts, major investors and risk managers. Credit Suisse had long-standing problems, but no sudden crisis or looming bankruptcy.

Some investors said the Sept. 30 memo sent by Körner, the bank’s CEO, reassuring staff that Credit Suisse stood on a “strong capital base and liquidity position” despite recent market gyrations had the opposite effect on stock watchers.

Credit Suisse took the matter seriously. Over the weekend of October 1, bank executives called clients to reassure them that the bank had more than the amount of capital required by regulators. The bigger worry was that talk of a liquidity crisis would become a self-fulfilling prophecy, prompting lenders to pull credit lines and depositors to pull cash, which could drain money from the bank quickly — an extreme and even unlikely scenario given the bank’s strong financial position.

“Banks rely on sentiment,” said Scholtz, the Morningstar analyst. “If all depositors want their money back tomorrow, the money isn’t there. It’s the reality of banking. These things can snowball.”

What had snowballed was the volume of trading in Credit Suisse’s stock by small investors, which had roughly doubled from Friday to Monday, according to a gauge of retail activity from Nasdaq Data Link.

Amateur traders who gather on social media can’t trade sophisticated products like credit default swaps — products that protect against companies’ reneging on their debts. But their speculation drove the price of these swaps past levels reached during the 2008 financial crisis.

Some asset managers said they had discussed the fate of the bank at internal meetings after the meme stock mania that was unleashed in early October. While they saw no immediate risk to Credit Suisse’s solvency, some decided to cut trading with the bank anyway until risks subsided.

In another private message on Twitter, Lewis declined to speak further about why he had predicted that Credit Suisse would collapse.

“The math and evidence is fairly obvious at this point,” he wrote. “If you disagree, the burden is really on you to support that position.”

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