Credit Suisse faces the meme army

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In today’s newsletter:

The GameStop effect hits Credit Suisse CDS

When an unruly crew of day traders posting memes on Reddit managed to engineer a short-squeeze in GameStop shares last year, it demonstrated how a combustible mix of retail investors and social media can drive wild swings in the US stock market.

The chaotic price action surrounding Credit Suisse on Monday shows this phenomenon has now spilled over to the credit default swap market, which is entirely closed to everyday investors and is instead populated with the so-called big boys at hedge funds and bank trading desks.

To recap: the cost of buying insurance against Credit Suisse defaulting on its debt soared to a record high on Monday, with some traders quoting the bank’s five-year CDS as high as 350 basis points, more than 100bp above where it closed on Friday.

Fundamentally, Credit Suisse’s risk profile had not changed over the weekend. 

Instead, a social media maelstrom saw figures as eclectic as Boris Johnson’s former adviser Dominic Cummings posting screenshots of Credit Suisse’s CDS prices on Twitter, while even the odd respected financial commenter drew a comparison with Lehman Brothers.

The ensuing market moves were even more dramatic in the bank’s shorter-term CDS, with one trading desk quoting Credit Suisse’s one-year CDS 440bp higher than on Friday at 550bp. 

These moves meant that Credit Suisse’s CDS curve inverted on Monday, a phenomenon that happens when investors rush to buy protection against a default in the very near term.

DD would caution readers about reading too much into these CDS prices, however. One credit hedge fund manager compared investors buying one-year CDS to people rushing to “buy lottery tickets”, noting the bank’s incredibly strong levels of liquidity. 

(Credit Suisse has a liquidity coverage ratio of 191 per cent, which is significantly higher than most of its peers, as the FT’s Owen Walker and Rob Smith explain in this dissection of the bank’s balance sheet.)

Also, while Credit Suisse’s CDS prices are now at even more elevated levels than during the 2008 financial crisis, a change to the contracts means the derivatives now reference a riskier class of debt that is more exposed to losses if the bank collapses.

Bloomberg’s Paul Davies cites these intricacies surrounding CDS in a plain-speaking column titled “No, Credit Suisse isn’t on the brink”, taking aim at the “fevered typists of social media” stoking fear around the Swiss bank.

Notably, an ABC business journalist who had sent a widely circulated tweet on Saturday suggesting that a large international investment bank was “on the brink” has now deleted the post and his employer said it had reminded him of its social media guidelines.

DD does not think Credit Suisse should be given a free pass, however. 

The spark that ignited the social media firestorm appeared to be a Friday memo from Credit Suisse chief executive Ulrich Koerner, reassuring staff about the bank’s “strong capital base and liquidity position”. 

Our friends at FT Alphaville noted that this was a classic example of the Streisand effect, whereby attempts to suppress or downplay a story have the unintended consequence of stoking it further.

Credit Suisse already demonstrated its poor understanding of the Streisand effect earlier this year, when it demanded that hedge funds destroy documents relating to its richest clients’ yachts, following a leak to the FT that pulled back the curtain on a unit of the bank that has made loans to oligarchs who were later sanctioned.

It seems that a change in chief executive has not improved the bank’s amateurish communication strategy.

Keeping up with the Krypto-fluencers

In a much-discussed interview with Variety earlier this year, Kim Kardashian dispensed some sage advice: “Get your fucking ass up and work. It seems like nobody wants to work these days.”

US securities regulators have answered the call. On Monday, the reality television star/billionaire entrepreneur agreed to pay $1.26mn to settle charges with the Securities and Exchange Commission for promoting a cryptocurrency without revealing that she was paid $250,000 to do so.

The saga began with an innocuous Instagram post: “Are you guys into crypto????” Kardashian asked her hundreds of millions of followers last summer, directing their attention to a new coin called EthereumMax.

“This is not financial advice,” she cautioned, including an #ad hashtag to show the post was not unprompted. The power of her celebrity was enough to move markets nonetheless.

Kardashian’s posts sent the price of EthereumMax surging, before losing 70 per cent of its value the following week. The losses were at the centre of a lawsuit alleging Kardashian and other celebrities including boxer Floyd Mayweather and former NBA player Paul Pierce helped inflate the token’s price as part of a scheme that enriched its backers at the expense of other investors.

Converting social capital into the real thing has been a tried and true strategy by Kardashian, who has leveraged her reality television and social media fame into a $1.8bn empire.

She sold a 20 per cent stake in her beauty brand KKW to cosmetics maker Coty in 2020, underscoring her ability to create big wins from her celebrity status.

But the crypto backlash could hinder efforts at a rebranding, especially as the star launches her private equity firm, SKKY Partners, with former Carlyle partner Jay Sammons.

Kardashian — who neither admitted nor denied the SEC’s findings — isn’t the only celebrity that has capitalised on crypto.

Supermodel/Sam Bankman-Fried fan Gisele Bündchen and her American football quarterback husband Tom Brady both have skin in the game. Actor Matt Damon has declared that “fortune favours the brave” — the brave being crypto investors, and former first lady Melania Trump has taken up non-fungible tokens after leaving the White House.

SEC chair Gary Gensler launched a social media campaign of his own advising caution on celebrity crypto endorsements, signalling that the regulator is paying close attention.

Today @SECGov, we charged Kim Kardashian for unlawfully touting a crypto security.

This case is a reminder that, when celebrities / influencers endorse investment opps, including crypto asset securities, it doesn’t mean those investment products are right for all investors.

— Gary Gensler (@GaryGensler) October 3, 2022

For Kardashian, collecting “2 and 20” private equity fees may be a more shrewd monetisation of her fame than shilling worthless coins for a $250,000 fee.

Byju’s bad education 

Online learning companies were among the companies that thrived during Covid-19 lockdowns.

With millions of children forced out of school, teaching apps suddenly became incredibly important, and valuations soared. The pandemic helped propel interest in India’s best-known online learning app, Byju’s, which became the world’s most valuable edtech company last year at $22bn. 

Engineer-turned test prep tutor-turned start-up founder Byju Raveendran was expanding worldwide with a number of acquisitions. He had Silicon Valley backing from the likes of the Chan Zuckerberg Initiative and Owl Ventures. Plans were made to float Byju’s in the US via a special purpose acquisition company.

But good times rarely last forever, as illustrated in this Big Read from the FT’s Chloe Cornish, Jyotsna Singh and Mercedes Ruehl.

An 18-month accounting wrangle with its auditor, Deloitte, left pundits to speculate about what Byju’s had to show for its pandemic fortunes. As investors waited for its filings, Byju’s felt the heat from unhappy parents and media investigations into allegedly aggressive sales practices.

Its accounts for the financial year ending in March 2021, which finally emerged last month, showed ballooning losses and flat revenues.

Now in damage control mode, charismatic Raveendran insists the company has made mis-selling practically impossible and that revenues are rising strongly. DD will be eager to see if the numbers add up.

Job moves

• Morgan Stanley has named Massimiliano Ruggieri as head of investment banking for Europe, the Middle East and Africa, succeeding Simon Smith who has been promoted to co-head global investment banking in July. Emea mergers and acquisitions head Colm Donlon will become investment banking chair for the region, while his deputy Jan Weber will take over his current role.

• Disney has added media veteran Carolyn Everson to its board of directors as part of an agreement with Daniel Loeb’s Third Point just weeks after the activist investor abandoned his push for a spin-off of ESPN.

• McDonald’s has appointed Disney veteran Kareem Daniel as an independent director to its board.

• Private equity firm Clayton, Dubilier & Rice has hired Gordon Smith, former co-president and chief operating officer of JPMorgan Chase, as an operating adviser.

• BlackRock has named Martin Small as chief financial officer, replacing Gary Shedlin.

• Aston Martin has appointed former Slaughter and May partner Nigel Boardman as an independent non-executive director. 

• Société Générale has selected investment banking head Slawomir Krupa as its next chief executive, turning to a markets specialist to reboot the French lender.

Smart reads

‘Buying our way in…!’ In a secret plan to crack the UK health system, controversial US data-analytics group Palantir aimed to scoop up smaller rivals with existing relationships to the NHS while avoiding political scrutiny, Bloomberg reports.

New acronym, same problem Last week’s UK pensions crisis was caused by a blow-up of liability-driven investment strategies, a widely misunderstood corner of financial markets. The FT’s Patrick Jenkins explains how the ignorance surrounding these instruments harks back to the financial crisis.

Everyone starts somewhere Swiss billionaire Guillaume Pousaz’s rise to riches has been well-publicised. Lesser-known are his humble beginnings working with clients in the porn and gambling industries, as Bloomberg details.

News round-up

Unilever urged to seek outsider chief after Alan Jope tenure (FT)

Qatar funds RWE’s $6.8bn green energy deal in US (FT + Lex)

Prosus scraps $4.7bn deal for Indian payments group BillDesk (FT) 

Former Credit Suisse boss launches new fund to invest in Human Longevity (FT) 

Bertelsmann ditches auction of French broadcaster M6 (FT)

Vodafone and Three in talks to create UK’s biggest mobile operator (FT) 

Celsius Network founder withdrew $10mn ahead of bankruptcy (FT)

Apollo bets on Diameter’s private-credit push with new stake (Bloomberg) 

Odey steps up bet on fracking after UK government lifts ban (FT)

US dealmakers hope strong dollar will alleviate M&A drop (FT)