Economist Nouriel Roubini, who predicted the financial crisis of 2007 and 2008, wanted to live up to his reputation as a crash prophet, who has already earned the nickname “Dr. Doom” because of his constant doom-mongering and said yesterday that Credit Suisse, whose share price plunge the previous day sent the markets into a panic, could be too big to be saved.
“The problem is that Credit Suisse may be too big to fail by certain standards, but also too big to be saved at all” (too big to fail, but also too big to be saved), Roubini said in an interview with Bloomberg TV.
“It’s not even known what their unrealized losses on securities and other assets are,” added the economist, who believes that “it’s not certain that the bank’s regulators have the resources to organize a rescue.”
As a reminder, three U.S. regional banks have failed in the U.S. in recent weeks, Silvergate Capital, Silicon Valley Bank and Signature Bank. Also under pressure is First Republic Bank, which is now considering a sale, according to Bloomberg. Since last week Monday, the SPDR® S&P Regional Banking ETF, which invests specifically in small regional banks in the U.S., is down more than 26%.
Meanwhile, rating agency Moody’s downgraded its outlook for the U.S. banking sector to “negative” from “stable”. It justified this with the “rapid deterioration of the operating environment”.
U.S. regulators assured SVB customers of compensation to reassure markets even if their deposits exceeded the $250,000 guaranteed by the Federal Deposit Insurance Corp (FDIC).
According to Roubini, Credit Suisse, whose major investor, Saudi National Bank, has ruled out any additional increase in its stake in the bank, is also at risk of bankruptcy.
“The question is whether or not they can raise the capital,” Roubini said. “If not, bad things can happen,” he added.
Because of the Credit Suisse crisis, the noted economist warns of a possible “Lehman moment” that could unleash a crash in European and global markets.
In the meantime, however, the Swiss National Bank has granted the ailing Credit Suisse a credit line of 50 billion Swiss francs. Whether that will be enough to avert the “calamity” Roubini fears remains to be seen.
According to Roubini, safety-oriented investors should resort to short-dated bonds, TIPS, gold and other precious metals.