Summary of the current potential "Lehman Brothers" crisis, let's hope it doesn't happen

Purchase of Credit Default Swap (CDS) to insure against a default by CS and DB is increasing. For CS the current price of the CDS shows that the market is pricing in 3% chance of CS defaulting by next year, and a 20% implied probability that it defaults in the next 5 years.

CS had been losing money for 3 straight quarters when their competitors had been making money. They had lost $2b in 21Q4, $277m in 22Q1 and $1.59b in the last quarter, totalling $3.87b.

As a result, CS stock is down 60% YTD (similar to Lehman Brothers before the collapse) which means that it will cost more for CS to raise capital in the debt or equity market, especially when interest rate is increasing as well. CS is undergoing restructuring of the bank to be sustainable and to create more value, but DB reported that CS needs to raise at least $4.1 billion to cover their capital gap to fund their restructuring effort and to support growth initiatives. So, raising this money will be very expensive and difficult for CS now.

CS had been caught being involved in many scandals and fraud, who knows what else is there:
1. Archegos (Bill Hwang) collapse losing them $5.5b
2. Greensill fraud collapse losing them $1.72b
3. Mozambique fraud collapse losing them $0.7b
4. Money laundering for Bulgarian drugs ring
5. Helping Russian hide their money from the current sanctions
6. Helping businessman evade sanctions
7. forex manipulation
8. U.S. tax fraud
9. forgingclients' signatures
and many more

As the banks are involved in many countries, the collapse of the global economy may cause problem to them if they are overleveraged. Even UK pension fund was overleveraging in the bond market, and they almost collapsed but got a bailout from the Bank of England and survived.

The continuous increase in the interest rate is not helping either, as it may cause companies to get margin called.
Most companies invest their spare money in the bond market and then they take out loans using these bonds as collateral. But increasing interest rate causes those collateral (bond) to fall in value which could increases margin risk on the loan, requiring companies to put up more collateral.
If they need to raise cash, the drop in bond prices make it hard for the companies to convert the bond back to cash. If they must sell the bond to raise cash, they will incur losses. The only way for them not to incur losses is for the bond to hit maturity and they get their capital back. If they decide to borrow money instead, then they will be faced with a high interest rate. So getting margin called will bad for them.

It has also been shown that as the US dollar keeps getting stronger, it causes economic recession, assets bubble to burst, or a crisis to happen. Even the United Nation is calling on the Fed and central banks to stop the interest rate hikes to prevent a global economic recession followed by prolonged stagnation.
Investors are afraid that something might break this time round in the market causing the tide to go out and we'll see who has been swimming naked (probably a lot of people especially during 2020 and 2021).

CS manages $1.5 trillion worth of assets, DB manages $1.3 trillion worth, totalling $2.8 trillion. DB also holds derivatives worth $47 trillion dollar. If they were to go down, there will be a huge contagion effect, and the dominoes will start to fall, but probably there will be a bailout. Let's hope that they are able to avert this potential crisis and keep a lookout on the matter, along with all the crazy black swan events that keeps piling up .

In the meantime, invest safe and it might be good to avoid leverage. If you are thinking of leaving your job, and rely only on your investment, maybe you should think twice.