Credit Suisse (NYSE: CS) shares are down more than 55% so far in 2022. Now, there's increasing chatter about a potential bankruptcy for the stock which could have massive ramifications for financial markets as it could lead to forced asset sales.
It's not entirely surprising that Credit Suisse is struggling given its exposure to Europe and the difficulties faced by the economies there due to the combination of a recession and soaring energy prices which is forcing countries to choose between keeping homes powered and shutting off industrial activity. There is also the matter of the strong dollar and weak Euro which is also a headwind for Credit Suisse's assets.
In fact, there's growing chatter on Reddit's r/WallStreetBets message board about this possibility with many traders buying out of the money put options to profit from this happening. Just like what we saw during the meme stock mania, this type of call buying can force market makers to buy shares to hedge their positions and exposures which causes shares to melt up, leading to even more call buying. This is called a 'gamma squeeze'.
Well, the inverse can also happen. In essence, massive, coordinated put buying can force market makers and dealers to short shares to balance their books and ensure that they are well hedged. This short-selling can cause shares to move lower, leading to even more put buying - a negative 'gamma squeeze'.
In fact, many are calling Credit Suisse, the 'Lehman of 2022'. Similar to Lehman, we are seeing a spike in credit default swaps which now imply a 23% chance of the company going bankrupt in the next 5 years.
However, there is a key difference in that policymakers are unlikely to repeat 2008 when they let Lehman go bust as a way to create market discipline. Unfortunately, this also exacerbated the financial crisis and led to credit freezing up even more in the economy.
The takeaway from this experience is that this was a mistake because it led to forced sales and liquidations and undermined confidence in the financial system. It's much more likely that the central bank takes a systemically important institution into receivership, and it slowly unwinds the assets rather than dumping them into a fragile market.