Livin' Like Lehman
Forecasting the next to fall
We've got a fire drill on our hands.
We're really happy for Credit Suisse, we're going to let them finish, but Eight Ball is one of the best newsletters of all time. And it's officially tri-weekly (Tuesday, Wednesday, Sunday). To consummate the union, we just made it Twitter official.
Now, back to your regularly scheduled programming: Lehman Brothers.
Bottom Line Up Front
Contribute something new to the news you’ll coffee chat over
Goldman Sachs has begun laying off workers across the US amid a downturn in dealmaking. Don't worry, though, because there are still enough cash reserves for David Solomon to fly the firm's private jet to DJ at Lollapalooza.
Kim Kardashian will pay the SEC $1.26 million for allegations she touted a crypto token without disclosing she was paid for the promotion. And Tom Brady may be next.
Brazilian assets are soaring as its Presidential Race goes to a runoff. Leftist challenger took 48% of the vote to President Bolsonaro’s 44% on Sunday.
Deep Dive: Livin' Like Lehman
Lehman Brothers was stripped from the street over a decade ago. One of its apprentices is here to replace the master.
It took Lehman $600B AUM to crash and take the entire economy down with it. Credit Suisse and Deutsche Bank control $2800B AUM. Let's forecast who will be the next to fall.
It’s been more than a decade since Lehman Brothers, the fourth largest investment bank in the US, collapsed and filed for bankruptcy in 2008. The term “Lehman 2.0” brings back memories of the bond crash, which culminated in the global financial crisis and sent ripples through the capital markets.
Lehman's collapse led to a heated debate about whether and under what circumstances companies should be bailed out. Clients of Lehman Brothers came away empty-handed, but the executives of the charred remains of Lehman and its interim management were able to cash in…big time.
Today, the irony is that the Bank of England rushed to the aid of the markets on the anniversary of the Lehman proceedings were finally wound up. Just like 14 years ago, the fears of a new Lehman moment are back and inescapable.
Both national and private banks are in crisis. But back to the private sphere.
Close to 14 years later, Credit Suisse and Deutsche Bank, two of the world’s largest banks, are suffering from distressed valuations and the banks’ credit default insurance levels are approaching degrees not seen since 2008.
Both Credit Suisse and Deutsche Bank’s valuations have dive-bombed. Hard. And faster than in 2008. Similar to Lehman, investors have been put on red notice to the systemic risk to the global economy.
It’s only the first week into the fourth quarter, and the outlook for the world economy is as bleak as ever:
Energy and gas prices have reached record highs.
Inflation in many countries is the highest in 40 years.
Supply chains are fractured.
Equity markets have shed significant value.
Tensions between the West and Russia have elevated.
Some banks have fared less favorably in the current economy, with two of the largest investment banks taking center stage with distressed valuations. Values not seen since the 2008 financial crisis.
This August, Deutsche Bank analyzed their issues tethered to Credit Suisse. It wasn’t until then that they noticed there was a $4.1 billion gap that needed to be filled in order to combat the financial institution’s financial well-being.
The problem? Credit Suisse’s credit default insurance (CDS) levels resemble the same CDS levels Lehman Brothers had just before the bank’s bankruptcy. In short, history could repeat itself, and one bank may just take many other parties down with it.
Both Credit Suisse and Deutsche Bank are trading at distressed valuations. Credit Suisse is seemingly the more imminent of the two. At the very least, it looks more like Credit Suisse will suffer a painful restructure.
Credit Suisse is trading at 0.23x tangible book value, and Deutsche Bank is trading at 0.3x tangible book value. But Deutsche Bank is shielding some of the storm via benefits from interest rates.
Don’t fear, Credit Suisse’s CEO is here. Ulrich Koerner recently explained that his company has a “strong capital base and liquidity position.”
Yet some analysts are skeptical that a major market anomaly will reveal itself.
Since 2008, Credit Suisse and Deutsche Bank each enjoy the annual conspiracy theories they will go bankrupt. And each year, they build back the “too big to fail” mindset that was one of the many things Lehman brought down with it.
To some, a black swan event never announces itself. So as the markets continue to slip and layoffs loom, who will be the next to fall? Place your bet on the Lehman Brorometer:
They're still keeping me around, so bullish on this month's jobs report this Friday. That's why we're taking <300,000 jobs to be added for $0.28. That's all for today, see you Thursday!
Forecasts powered by Kalshi
As always, these market forecasts are powered by Kalshi, the first regulated prediction market in the US. Trust data, not pundits, and get your forecasts from people with real skin in the game.