Times in the global financial markets could hardly be more turbulent. Since 2022, we are experiencing the spreading of the Sudden Death Virus in the financial industry. First, the crypto segment was hit by the collapse of the Terra-Luna stablecoin scheme and the resulting bankruptcies from Three Arrows Capital to FTX. The virus jumped to the legacy banking system and we saw the collapse of Silicon Valley Bank and Signature Bank in the U.S. and now Credit Suisse in Switzerland.
The Rise Of The Sudden Death Virus
There are certainly numerous aspects to the Sudden Death Virus and the banking collapse pandemic it triggered. As with Covid-19, there are various theories about the cause. Many blame the easy money policies of central banks after the 2008 financial crisis and the C19 pandemic. This led to an inflationary spike in asset prices, including crypto, that peaked in 2021. The bubble then burst in 2022, releasing the super-aggressive and deagly Sudden Death Virus.
The collapsing asset prices have resulted in disastrous holes in financial institutions’ balance sheets and subsequent liquidity crises. In parallel, inflation has skyrocketed to heights not seen in decades. And this has forced central banks to raise key interest rates. Investors are getting hyper-nervous and starting to shift their funds and investments. For many smaller banks, collapse is the result. This triggered another bank run, which ensured that the Sudden Death Virus continues to spread.
There is no vaccination against this virus. Governments and regulators are trying to bail out banks to stop the domino effect. So far, with little success, as the example of Credit Suisse shows. Even a $50 billion lifeline from the Swiss National Bank (SNB) has not calmed investors. It is doubtful whether the hidden nationalization disguised as a takeover by UBS can stop the virus. We doubt it.
Big Losers Everywhere
Saudi National Bank, Credit Suisse’s largest shareholder with a 9.9% stake, confirmed to CNBC that it had been hit with a loss of around 80% on its investment. The Riyadh-based bank bought Credit Suisse stock at 3.82 Swiss francs per share. Under the terms of the bail-out deal, UBS is paying Credit Suisse shareholders 0.76 Swiss francs per share. They lost 1.1 billion francs less than 15 weeks from when it finished buying its stake.
The bail-out deal results in a total loss for Credit Swiss’ bondholder. The deal will trigger a complete write-down of Credit Suisse’s 16 billion Swiss francs ($17.3 billion) worth of Additional Tier 1 bonds. This would mark the biggest loss yet for Europe’s $275 billion AT1 funding market.
The Bet On Crypto
Despite existing problems, we would instead put our 10 cents on the crypto sector despite existing problems. Overcoming the issues could lead to a new financial system, whereas overcoming the problems in the legacy financial sector will ultimately lead to its end.
An example? While on Twitter, the critics of Binance and Tether keep justifiably questioning the questionable 100% backing of stablecoins by FIAT assets; one may point out that the fractional reserve system of the legacy banking industry leads to unfunded FIAT money.