The popular YouTuber believes a repeat of the last financial crisis may be imminent.
- Two of the world’s largest banks are in financial trouble.
- They could turn things around or be rescued, but there is a risk that one or both will go under.
- With widespread economic problems, make sure you have a strong emergency fund.
The US and the global economy are currently in a fragile position. Many economists believe we’re headed for a recession, and JPMorgan’s CEO says we’re headed for something worse. Now Graham Stephan, a real estate investor and personal finance expert, has warned that the worst of the economic meltdown could be near.
In a recent video on his YouTube channel, Stephan discussed signs that two of the world’s largest banks are in trouble. While opinions differ on how dire the situation is, it’s important to be aware of what’s going on and prepare financially.
Credit Suisse is in bad shape
Credit Suisse is one of the largest banks in the world with over $1.5 trillion in assets under management. That’s enough to place it in a small group of global systemically important banks, meaning banks that are critical to the global economy.
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Investor confidence in Credit Suisse has plummeted. The bank’s stock is down over 90% from its all-time high, and over 50% in the last year alone. It’s gotten to the point where the CEO is sending out memos to reassure employees while declaring that the bank is facing a “crisp moment”.
But what’s going on with Credit Suisse? For the past decade, the bank has been plagued by legal troubles and failed investments. Here are some of the most problematic examples:
- Credit Suisse paid a $5.28 billion fine in 2017 for selling mortgage-backed securities during the 2008 financial crisis. In the settlement, the bank admitted it knew it was selling loans that were likely to fail.
- In 2009, it forfeited $536 million for violating the International Emergency Economic Powers Act.
- She pleaded guilty to assisting US taxpayers in filing false declarations and paid a $2.6 billion fine in 2014.
- In 2021, the company lost $5.5 billion from its deals with hedge fund Archegos Capital Management. A report found that the loss was due to fundamental errors by the bank.
Credit Suisse is currently undergoing a restructuring to return to profitability. Some pundits, including Stephan, see parallels between the situation at Credit Suisse and Lehman Brothers, which made a last-ditch effort to raise capital before filing for bankruptcy in 2008.
A collapse of Credit Suisse would have a massive impact on the global economy. Nor is it the only globally systemically important bank in a difficult situation.
Deutsche Bank faces similar difficulties, although not to the same extent. The stock price has fallen more than 40% over the past year. The bank also had a variety of legal problems, including misleading investors, tax fraud, interest rate fixing and money laundering.
Are two big banks about to collapse?
Credit Suisse and Deutsche Bank are not doing well at the moment. The big question is whether they are actually in danger of going under.
Analysts are divided on this issue. Despite the bleak headlines, some experts have said the situation is not as dire as it seems. Even in the worst case scenario, given their global importance, there is a chance these banks could be bailed out.
Based on the recent news, Stephan says: “There is a risk that the world’s largest banks could face difficulties.” However, he also says: “They have grown to the point where they could also be supported by government funds if their demise would lead to a global catastrophe.” Fundamentally, they could be too big to fail.
At the moment it is not foreseeable what will happen to Credit Suisse and Deutsche Bank. The most likely scenario is that they will recover either on their own or with government support. But as Stephan pointed out, there is a real danger that one or both could collapse.
How to Prepare for Economic Uncertainty
The possibility of an economic collapse is alarming, to say the least. Hopefully we don’t fall into a recession in 2023, but it’s always wise to prepare for the worst.
The best thing to do is prepare to have enough money in your emergency fund. Cash availability is an important safety net in the event of a job loss. Although the traditional guideline is to have three to six months of living expenses in your emergency fund, some financial experts recommend even more.
For example, Ramit Sethi says you need an emergency fund for 12 months. Suze Orman started out recommending that you have enough to cover eight to 12 months of expenses.
Where you have that money is also very important. Your emergency fund needs to be easily accessible. High-interest savings accounts are ideal for this, as they pay low interest rates and can be withdrawn at any time. On the other hand, you don’t want to invest your emergency fund in the stock market. If the market falls and you need money, you may be forced to sell your investments at a loss.
Stressful as it is, economies go through turbulent times. By making sure you’re in a solid financial position with plenty of cash in your bank accounts, at least you can know you’re safe no matter what.
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