[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage Podcast.

[00:00:15] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. Happy Friday, everybody. If you’re new here on these Friday shows, we try to take something that’s in the news and go a few steps deeper. This can also be summed up as a show all about Dylan reads things, so that you don’t have to. And I gotta tell you I kind of know that it’s not funny, but I’m actually like super into all of like the financial chaos that’s going on because after all, my day job is a corporate auditor. And while I’m also a financial coach who coaches in the things that I’ve done and the things that I’m very good at, I’m also just kind of just completely fascinated by what I’m seeing out in the world. And, you know, when you look out at the banking sector specifically right now, I’m reminded of the opening line of Leo Tolstoy’s and Anna Karenina, which goes “All happy families are alike. Each unhappy family is unhappy in its own way.”

[00:01:13] And ladies and gentlemen, this is so true when it comes to banking, mostly because a good bank is boring. And I’ve said this before. I’ll say this again. When it comes right down to it, there’s lots of ways to build wealth. There’s lots of ways to generate income. But for the vast majority of people, it’s not the interesting, super exciting things. It’s typically very boring day-to-day things. And a good bank is a piece of financial infrastructure. It should be boring. Like I might get worked up over infrastructure because I’m me, but most people like their eyes will glaze over the second you say the I word. But banks that fail and find themselves up a creek without a paddle tend to have found some beautiful, unique way in which they found themselves in this situation. And typically, it’s because they found some sort of nook or cranny in the regulatory structure that is meant to keep them in, and then they did things like lobby for less regulations, and no, no, no — you can totally trust us this time. We won’t possibly trigger a massive financial collapse like we’ve done every other time you’ve let us do this. It’ll be fine. Don’t worry about that.

[00:02:22] And so today I’m gonna talk about banking’s special blessing, which of course is Credit Suisse. Now, Credit Suisse, if you are unfamiliar with who these people are, Credit Suisse is a bank in Switzerland. And it’s not something — like you can’t just go and open an account at Credit Suisse here in the United States, but you can if you are in other locations around the globe. It’s a global financial services company. It’s headquartered in Switzerland. It’s one of the largest banks in Switzerland, and it has been around for over 150 years. So we have this juggernaut of a financial dynasty that has been has survived so many different things. In the current context, you kind of think about it like, oh my God, this bank must be eternal. So fun fact when it comes to investing, older companies are actually more risky than newer companies for a variety of different reasons. But suffice it to say that the odds that a company’s not going to be successful is the same every single year. Like this is why when you talk to financial advisors, they’re always quick to say that historical results are not indicative of future success. This is a great example of that. Now, Credit Suisse as a bank provides basically three different things. They provide investment banking, which is they are using these funds to then help try to generate more funds, they have private banking where you can open an account with them and you can do operations, and they also have asset management, which they’re going to take your assets under their management and care and then try to grow that for you. As of the end of 2021, they had about $1.5 trillion in assets on their balance sheet, and that number from $1.5 trillion has steadily decreased as a function of time for reasons that we’re going to get into in just a second.

[00:04:09] The other thing to know about Credit Suisse — and this was a knock-on effect of the 2008 financial collapse. So just to recap the 2008 financial collapse: banks had gotten into these ridiculously risky investments that were tied to what was considered to be the safest of safe, which is mortgage-backed securities. And when those things blew up in the bank’s face, a lot of regulators globally had to ask themselves the question of whether or not they could actually afford to let these banks go under. This is of course the infamous “too big to fail.” And so one of the things that we should understand about this is that not all banks are created equal, and I’ve talked about at length that Silicon Valley Bank when it collapsed was considered to be a small regional bank, which means that it had a lower threshold of regulations and capitalization requirements, which is one of the major things that directly led to its collapse. But other larger banks that are considered like globally systemic banks, they are subject to a completely different set of regulations. JPMorgan Chase tops the list of globally, systemically important banks — and yes, there is a list — and that’s a US Bank. And Credit Suisse is on that list at number nine, or at least it was ’cause, you know, if you’ve been paying attention to the news, Credit Suisse doesn’t exist anymore. It was in fact bought by a competitor.

[00:05:30] But when you’re looking at the banking sector as a total whole, if you had sat down at the end of 2022 and said, Hey, we’re all gonna take bets on what bank do you think is gonna collapse in this upcoming year. People would’ve put big money on Credit Suisse. Like if you’re gonna bet that a bank’s gonna fail — and this has been true for like a decade — you would’ve bet your money on Credit Suisse because at the end of the day, we know that Silvergate Financial collapsed because there was a run on the crypto exchanges that banked at that bank. We know that Silicon Valley Bank collapsed because of a run due to VC panic. We know that Signature Bank collapsed because of its systemic exposure to this type of things in contagion. These are different reasons. Just like we mentioned Washington Mutual back in 2008, which was the largest bank to ever collapse in the United States. It did so because at the time, it had to purchase one out of every four mortgages created in the United States to stop from shrinking. These are all different reasons, so what’s the reason why Credit Suisse was unhappy in its own special way? Because ladies and gentlemen, it was a clown show. By the time Credit Suisse collapsed, everybody knew that every ranch hand from the fuckup farm was at the helm of that bank, and that’s because they just could not seem to get their act together to generate a profit no matter what they did. And it started in 2008 because Credit Suisse was overexposed just like a lot of other banks were to the, you know, financial fuckery that was going on in the United States. And when Credit Suisse lost its reputation in 2008, they also lost a lot of talent. Banking operations — specifically the investment sides of choosing how to, you know, grow money with your depositor’s money because that’s how banking works and more importantly, how to hedge risk and vet investments for the quality of the investment itself, the risk profile of that investment, and the likelihood of a return — requires talent. Like these investment bankers are very well paid because they produce results for a lot of this. And so one of the things I pointed out with Silicon Valley Bank is that they went nine months without having a credit manager to deal with their interest rate exposure, which of course at the end of the day is what put them under and may have them report the loss that triggered the run in the bank. And I pointed out at the time this is insane. This is like saying I’m driving my car with the windshield blocked out, but it was only nine blocks, so it’s fine, right? Well, Credit Suisse, they could hire for these positions, but they couldn’t hire good talent, so they weren’t really good at it, which of course has created a lot of what Credit Suisse’s problem has been over the last 10 years.

[00:08:17] So let me just ask you a question, ladies and gentlemen: when does crime not pay? Well, when Credit Suisse does it. That’s right, ladies and gentlemen. Credit Suisse is one of the only banks that I’ve ever seen that can commit scandal after scandal after scandal and somehow not make any money. Like we all know that this is something that banks in the United States do. They go through and they do things like open bogus accounts for their customers. They get embroiled in government corruption scandals and interest rate rigging things, and then at the end of the day, the regulators come in and they find them basically 1% of the profits of the illegal activities, and the banks go, eh, and then move on. Why? Because it’s at that point just part of the cost of doing business. When the fines are so low that your profit margin on crime is so high, well, you just keep doing it. This is one of the reasons banks are really notoriously hard to control because how much do you actually fine them on these institutions that are critical financial infrastructure that are also at the same time too big to fail, so that it’s painful? Because let’s face it. So many banks know that they are critical infrastructure, and so their argument always is, well, if you do that, I will punish you and all of your other people, all the citizens, all the small businesses, just to show you that I can as a threat to avoid regulations. And if you’re looking at the banking system right now, you kind of realize that they won that argument every time they’ve made it.

[00:09:50] But Credit Suisse — oh, no. Credit Suisse figured out how to commit crime and not make a profit, which honestly is just impressive. So I’m just gonna go through a list of some of the things that they have gotten caught with and then fined. There was a tax evasion scandal, which they were allowing themselves to be used as a money laundering facility for tax evasion purposes for US companies and individuals. Then, there of course was the LIBOR rate rigging scandal. So LIBOR was the London Interbank Offered Rate. It was essentially the rate that banks charged to lend money to each other and everyone got caught rigging the rate, so that it was in their benefit, which is hilarious because when you look at like all of the other banks who were in on this, they just made oodles and oodles of cash — but not Credit Suisse. They figured out a way to rig the game in their favor and still lose. Then, there was the Mozambique corruption scandal. So essentially, what happened here was Credit Suisse gave a $2 billion loan to the Mozambique government for the purposes of military enhancement. But unfortunately for Credit Suisse, $2 billion vaporized into the foggy no man’s land of government corruption, and they never saw the money again. Basically, Mozambique kind of went, $2 billion? What $2 billion? We’ve never seen $2 billion. And Credit Suisse went, well, we didn’t actually ask for collateral. Then, there was the dark pool scandal where Credit Suisse was running an anonymous trading floor for equities. I can’t even describe to you just how unbelievably insane this idea had to have been. Like I kind of imagine some bankers like sitting in a back room somewhere just smoking some illicit substances and going, Hey, guys, I got this great idea. And they lay it out. We’re gonna have this trading pool and it’s gonna be anonymous. You can just swap securities. There’s not gonna be any records ’cause it’s all anonymous, but like then we can be the stock exchange. It’d be great. And at that same time, like the banker who has been looking up to the Wolf of Wall Street for his entire life just does a line of blow and goes, alright, let’s do it. Because that’s about how crazy this idea is. And then of course, how do you run a market and still not make any money on it? Well, when your Credit Suisse. Alright. Let’s continue. Then, they had a former employee who committed a massive level of fraud and another $2 billion seemed to have vaporized off their books. Oh, and then on top of it, I think in part because of all of the things I’ve mentioned, Credit Suisse got caught spying on their employees. Not like the like weird thing they do where they just like monitor your internet traffic. No. Like we’re talking like full-on like voyeuristic spying level type of stuff, and so that obviously didn’t go over very well. And then more recently, they’ve had some really good wins in the loss department where they had Archegos Capital Management, which is a family office. So in brief, a family office is when you have a wealthy group of people, typically a family, who are investing for their own benefit. So they’re like, you know, they’re an investment firm but only for this select group of people and it’s not open to the public. Yeah. Credit Suisse was underwriting them, and so when it turns out that the people running this family office didn’t know what they were doing, Credit Suisse watched $5.5 billion vaporize in that collapse as well. And then of course, there’s Evergrande, which is a Chinese real estate firm. It was in the headlines a couple of years ago, all about how the Chinese government was losing its shirt in all of these deals, and it turns out the Chinese government was not only losing their shirt in all of these real estate deals, but they were taking Credit Suisse’s shirt at the same time, apparently it was produced in China, and Credit Suisse had to write off a $9.7 billion loss. So for those of you who are following along at home, over a 10-year period of time, Credit Suisse was able to commit a whole slew of crimes and scandals that totaled — at least on a back of a napkin, very lowball estimate — almost $20 billion in losses for the bank. In addition, they were also fined $11.4 billion for illegal activity. I mean, when I said that this was a whole bunch of people who just had no idea what they were doing, I feel like this is the point where I drop the mic and rest my case and go sit down and smugly look at the judge because I’ve got them dead to rights.

[00:14:19] Now, all of this has been going on for years, and it’s not like anybody didn’t know that Credit Suisse was just a horrible institution. This is why they can’t actually recruit talent because who wants to have the largest financial slow-moving train wreck in the world on your resume? Because that’s like being like, oh, yeah, I was risk management for Lehman Brothers. Like that guy didn’t get another job. So people don’t want to go to Credit Suisse. And even with all of this, even with all this, they probably would’ve been fine — except when interest rates are rising, fraud will be revealed. That is to say that when money isn’t just cheap when you can’t just basically borrow it for free, you start to run into problems, and Credit Suisse was no different, which goes back to what I had said at the top of the show that if you were gonna bet on a bank to collapse this year, everybody who is smart would’ve bet on Credit Suisse.

[00:15:14] So then what you end up having is Silvergate Financial ends up collapsing because of the run on the crypto markets. Silicon Valley Bank ends up collapsing because of their losses, the VC-triggered run, and that would be considered contagion. And then, Signature Bank, well, you know, they were closed because of systemic risk, and right now there’s a discussion as to whether or not it was regulators doing a crypto hit job because of Signature’s relationship with the crypto firms, but given Silvergate, that may or may not actually have been a good idea. But let’s just take a side note. Have you ever heard of the Dodd-Frank Act? It was this act that was passed in the wake of 2008 that was supposed to make everything a lot safer and better. Yeah, the Frank in that — Barney Frank — he’s actually on the board of Signature Bank and he has been telling anybody who will listen that this is a regulatory hit job. This ladies and gentlemen, to me, is where irony has truly started to rot because it is dead as a doornail and collecting flies at this point. Okay. End of side note. When all three of these banks hit together, all eyes swivel to Credit Suisse on a global level because whatever the US is doing, the US is trying to backstop it and stop contagion. This is where I’d said First Republic Bank was in trouble because of their exposure to crypto markets, but it turns out a whole bunch of other banks, including US Bank, JPMorgan, and these other ones got together and bailed out First Republic Bank, which if you’re following along at home, the banks are bailing out each other and they can do that. Maybe we as taxpayers should stop doing that. But I digress.

[00:16:45] When these three banks in the US collapsed, everybody started looking at Credit Suisse, and then the preliminary financial statements for 2022 came out. Now, this is just the time of year where we’re starting to report earnings. We’re having our investment calls. This is a totally normal thing for the financial reports to be coming out at this time for the previous year. But it was revealed that Credit Suisse was going to report a $7.9 billion loss after they had already reported a $1.6 billion loss in 2021. So two consecutive years of escalating losses. That one announcement sparked a 50% drop in their stock price. Then, it was revealed shortly thereafter that the annual report was gonna be delayed because of material weaknesses identified in their internal control structure. So what does that mean? Let me just make you smart. This is one thing that me as an auditor I really care about these things. I have to. It’s my job. PWC was the auditor for Credit Suisse. That’s PricewaterhouseCoopers. They’re one of the largest accounting firms in the world, and they specialize a lot into different financial institutions. What PWC issued was called an adverse pinion. And so in the accounting world, there are basically three types of opinions: an unqualified opinion — that’s good; a qualified opinion — yeah, you kind of fucked up, but it wasn’t that bad; and an adverse opinion — you fucked up so royally that we are fairly certain that this entire thing is fraud. That’s what an adverse opinion means. Well, PWC didn’t issue an adverse opinion on their financial statements. They issued it on their internal controls. What are internal controls? They’re the things that a company does to make sure that as operations commence and continue, that they are happening correctly and without mistakes that would cascade and take down the entire company. If you’re interested with an example of a company that had really poor internal controls and it took down the company and then sparked a huge recession, you can go no further than our boy, Enron, because that’s what took them down — a complete lack of internal control. So what PWC is saying is that Credit Suisse’s internal operations — their internal controls, the things that are supposed to keep them safe as a bank — were so bad that they have to assume that these things were generating mistakes. But they also said at the same time, yeah, but the financial statements are fine. Is that possible? Maybe. Do I believe it? Probably not. I mean, I’ve been in these meetings before. I know how they go. I’m not exactly like thrilled. So what all this meant then is immediately there’s a run on the stock for Credit Suisse.

[00:19:25] To put this in perspective, at the end of 2022, the total market capitalization of Credit Suisse was $11 billion. Now, that sounds like a lot, but it’s not. And here’s why. Because $11 billion is 2% of the total assets that Credit Suisse held at the end of 2022. What this means is that investors have absolutely no faith that the management of Credit Suisse will be able to generate returns with the assets they hold. Let me say that again. At the end of 2022, Credit Suisse’s total market capitalization — that is, the value of its entire stock that’s on the market for sale — was 2% of its total assets, which means the investors in Credit Suisse do not have faith that the management of Credit Suisse, a bank, could turn a profit with their assets. That’s bad, like cosmically bad. But after the revelation of the $7.9 billion loss and the fact that their internal controls are absolutely atrocious, the market capitalization dropped to $3.1 billion on its last day of operations. It is really hard to overstate how shocking this entire scenario is. As somebody who has worked in capital markets as a CPA and as an auditor, I’m gobsmacked. Like the whole thing it’s like they don’t write TV this good, man. Like the hell with reality television. Finance is far more entertaining, and like how could you possibly have made this up? It’s unbelievable.

[00:21:16] And so when you’re in that bad of a position, investors are fleeing Credit Suisse, depositors are starting to say, yeah, no thanks. They’ve done every last thing they can to try to capitalize it, including selling nearly 10% of the company to the Saudi Arabians who when asked, Hey, do you want some more of this action? They’re — and I’m quoting here — their response was, quote, absolutely not. I mean, come on. This is not a good thing. And so Credit Suisse is, as of the time of this recording, which is on Tuesday the 21st, Credit Suisse is no more. May it rest an eternal slumber. It was purchased by UBS. Who’s UBS? It’s the other major bank in Switzerland. That’s right, ladies and gentlemen. The financial regulators of Switzerland got together and walked over to UBS and walked over to Credit Suisse and said, Congratulations. You two are gonna get a shotgun marriage because we’re done with Credit Suisse and all this craziness. We want our financial sector to be stable, and so UBS purchased Credit Suisse on Monday and Credit Suisse has ceased operations. This is very similar to what happened to Washington Mutual during the Great Recession. Essentially, the SEC and the Federal Reserve Bank of the United States walked up to Chase Bank and said, Congratulations, you’re buying Washington Mutual. And Chase Bank said, I’m doing what now? And those regulators said, you’re going to buy this bank or you’re not gonna get any more help, and of course, where’s Washington Mutual’s assets today? With Chase Bank. The same thing is happening here in Switzerland.

[00:22:49] Now, does this mean we’re on the verge of a widespread systemic collapse of the global financial system? Probably not. What I think I’m actually seeing here, particularly with Credit Suisse, is that there’s only so long that you can go being utterly incompetent before it finally catches up with you. And in a period of rising interest rates after for a decade you’ve been able to get away with this because interest rates have been so low, well, it’s just their time. Do I think that we’re gonna see more bank failures? Probably. Do I think that it’s gonna be going right off the cliff? I have no idea. I don’t have the crystal ball. But what I do know is that at this particular point in time, we’re going to be seeing some more of this stuff and we’re also going to see some people starting to clamor for more regulations. It’s not lost on people that what ended up happening particularly with Silvergate, with Silicon Valley Bank, and even with Signature to a certain extent — they were all lobbying for less regulations, and what ended up happening is exactly what happens every time we let the banks go run amok. In fact, there’s an entire story that goes along with regulatory environments of the financial systems. And I’ve said this before. In the crypto markets, cryptocurrency is stumbling one scandal at a time into understanding why certain financial regulations exist. So Credit Suisse’s story is over. Our story is still being written, but I don’t know what the future’s gonna hold, but I do know there’s gonna be more to talk about, and I’m gonna be right here step by step with you along for the ride.

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