Money Rehab with Nicole Lapin - Credit Sus

Episode Date: March 22, 2023

Nicole breaks down the biggest headlines (so far) this week on Wall Street, including: the latest on the banking crisis, UBS' ginormous acquisition of Credit Suisse (aka Credit Sus) and all things interest rates.

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. It's time for some money rehab. Last week, we all became banking experts, right? Even if you hadn't heard of SVB before Monday, by the end of the week, you probably had a solid opinion about what had gone wrong with their balance sheets, which is good.

Banking can seem super complicated, and it is. But it is also one of the fundamental systems we all rely on. We trust that when we tap our debit card, our phone, or our watch on the payment portal at the store, our money is going to be there. But we aren't just manifesting that money with each tap. There is a structure in place that gets our money where we need it. Understanding that system is important. There are a lot of questions about how much we can trust those systems, and we've watched banks around the world struggle. So before we get into those struggles, let's talk about how the system works. Banks take in deposits, and then they loan out the money and invest it. But legally, they are required to have

a reasonable amount of cash on hand at all times to meet the needs of depositors. Our current economic situation is very different than it was even a year ago. As a result of inflation, depositors are spending more on basic purchases and generally doing different things with their money, meaning banks need to keep more cash on hand. Many banks rely on bonds as a way of generating more money, but as the interest rate goes up, the market price of those bonds fall. Let's double click on that idea. When you buy a bond directly from the government, it costs whatever it costs, let's say $100, and you earn whatever the current interest rate is. As long as you keep that bond to maturity, you will get all of your

money back plus what you made in interest no matter what happens to the interest rate. But if you need to sell your bond early, it becomes subject to market prices. And the more new bonds pay, the less old bonds are worth. This also means that the bank may have a balance sheet that looks bad because of unrealized losses, meaning that the bank would lose money if it sold those bonds right now. Changing market pressures have caused banks to need to have more money on hand, so they may need to sell their bonds before maturity. This system is all about balance and trust. One report found that there are 190 banks in America with weaknesses in their books, and if those banks are forced to sell their assets

prematurely as a result of a bank run, they would become insolvent. But before you freak out, and please don't, if there isn't a bank run, all of these banks in this study would be totally fine and remain solvent. So the entire system really hangs on everyone just being chill. And in the face of the situation over at Credit Suisse and First Republic, chill is in short supply these days. You know all of those jokes about secret Swiss bank accounts? Yeah, those jokes are about Credit Suisse. The bank is so bad that you can't spell Suisse without sus. Credit Suisse was Europe's second largest bank with billions under management, and it had a long history of scandals and mistakes. For years, it marketed itself based on its ability to offer secrecy and help out with

a little international tax evasion. And they've never been hesitant to get mixed up in a scandal. Credit, sus, has been the bank of choice for sketchy situations involving everything from cocaine to tuna fish. But in 2018, it was forced to finally start complying with a 2014 Swiss law that ended banking secrecy. This kicked off a very rough time for Credit Suisse. In 2020, it became public that the bank was spying on employees. And I don't mean peeking at their browsing history. They were literally having employees followed. Credit Suisse's problems aren't new. They have a long history of lousy judgment. They were the favorite bank of many literal World War II Nazis. So net net, this bank has been on everyone's radar for problematic behavior by a globally important

bank with a notoriously terrible balance sheet. So when it was announced last week that it had weaknesses with its financial reporting and the Saudi National Bank refused to lend it any more money, it was not totally unexpected. The Saudis had already invested $1.5 billion in Credit Suisse last November. They're currently down 80% on that investment. While the Credit Suisse situation November. They're currently down 80% on that investment. While the Credit Suisse situation is being aggressively managed, it has not been stabilized. And unlike SVB, who fell prey to an old-style bank run and some lousy risk assessment, Credit Suisse's problems are deep and well-established.

So early this week, UBS, Switzerland's largest national bank, bought Credit Suisse for over $2 billion and with the aid of the Swiss government in an attempt to keep people from freaking out. To help stabilize global markets, the Fed and other central banks are increasing the frequency with which they hold swap operations, basically bank-to-bank currency exchanges. The goal of this is to ensure that banks around the world can get access to American dollars. Usually, these swaps are held weekly. Right now, they're being held daily in an attempt to bring some chill to global markets. The rescue of Credit Suisse, of course, isn't the only one going down.

First Republic had a very similar profile to SVB in terms of having a real misalignment between the liquidity needs of its customers and the type of fixed income investments it made. Unlike SVB, it hasn't been subject to a bank run, and it's just hanging out being worrisome. So worrisome that Moody's, a credit score company for financial institutions, dropped First Republic's credit score. While its stock price is down, a group of other banks agreed to deposit $30 billion in First Republic in an attempt to calm everyone down. It didn't fully work, but the bank is still in operation despite about 40% of total deposits having been pulled from the bank.

All of this moving and shaking in the banking industry makes the Fed decision-making around rate hikes even more complicated. The Fed is meeting this week and will announce its latest rate decision on March 22nd, the day this podcast drops. So that's the news I'll be glued to today. For today's tip, you can take straight to the bank. Does all of this uncertainty with banks have you feeling nervous? Consider checking out local credit unions in your area. Part of the problem for some of these banks is that they are businesses with shareholders, which means they're trying to make a profit.

Credit unions are owned by depositors, so they're worried about operating costs, but not necessarily profit margins. This eliminates some of the need for that behavior we have seen go so wrong with banks in recent weeks. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Levoy. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehabatmoneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me.

And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.