(PresidentialHill.com)- An economic expert who spoke with The Epoch Times believes that the financial troubles faced by Credit Suisse could get worse in the weeks to come, which could lead to regulators applying the same kind of bailout measures adopted during the 2008 financial crisis.
With its share prices tumbling, Credit Suisse CEO Ulrich Kömer is under pressure to present a reorganization plan. The bank is looking for someone to purchase its investment banking arm. However, with Credit Suisse looking increasingly toxic, prospective buyers aren’t likely to bite.
Last week, it was reported that a proposed joint venture between KB Securities and IGIS to purchase Credit Suisse’s Zurich headquarters fell through.
And some economists suspect that Credit Suisse’s situation is likely far worse than it appears on paper.
Theo Vermaelen from the University of Chicago’s Booth School of Finance told The Epoch Times that it is important to take into account the market forces affecting the bank’s operations rather than the capital ratios derived from “book value.” Failing to account for the market forces of Lehman Brothers was a contributing factor in the 2008 financial crisis, Vermaelen said.
He noted that the warning signs were clear in 2007 and the market was anticipating trouble. But those warning signs were ignored “until the day of the Lehman default.” Vermaelen said he was hoping someone learned a lesson from Lehman Brothers, namely, that rather than focus on accounting measures to determine financial health, market information must also be incorporated.
Vermaelen told The Epoch Times that while the market may occasionally be inefficient, on average, it is still a better indicator than book value.
He noted that Credit Suisse is trading at 25% of book value. As a result, “its regulatory capital ratios” are underestimating just how much financial distress Credit Suisse is in.
At the same time, Vermaelen conceded that things today are not nearly as bad as in 2008 since the broad exposure other banks had to Lehman Brothers doesn’t apply in this instance.
