The U.S. and global economy are in a fragile position right now. Many economists believe we’re on our way to a recession, and the JPMorgan CEO says we’re headed toward something worse. Now Graham Stephan, a real estate investor and personal finance expert, has warned that the worst economic collapse could be coming.
In a recent video on his YouTube channel, Stephan discussed signs that two of the world’s major banks are in trouble. Although there are mixed opinions about how bad the situation is, it’s important to be aware of what’s going on and to get ready 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 among a small group of globally systemic banks, meaning banks that are vital to the global economy.
Investor confidence in Credit Suisse has plummeted. The bank’s stock has fallen over 90% from its all-time high, and over 50% in the last year alone. It has gotten to the point where the CEO has been sending out memos to reassure staff, while also explaining the bank is facing a “critical moment.”
But what’s going on with Credit Suisse? Over the last decade-plus, the bank has been plagued by legal issues and failed investments. Here are some of the most problematic examples:
Credit Suisse paid a $5.28 billion fine in 2017 for sales of 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.
It forfeited $536 million in 2009 for violating the International Emergency Economic Powers Act.
It pleaded guilty to assisting U.S. taxpayers in filing false returns and paid a fine of $2.6 billion in 2014.
It lost $5.5 billion in 2021 from its dealings with the Archegos Capital Management hedge fund. A report found the loss was due to fundamental failures on the bank’s part.
Credit Suisse is currently going through a restructure to return to profitability. Some experts, including Stephan, see parallels between the situations of Credit Suisse and Lehman Brothers, which made a last-ditch effort to raise capital before declaring bankruptcy in 2008.
If Credit Suisse goes under, it would have a massive impact on the world economy. And it’s also not the only globally systemic bank in a rocky position.
Deutsche Bank is facing similar difficulties, although not quite to the same extent. Its stock price has fallen by more than 40% over the last year. The bank has also had a variety of legal issues, including misleading investors, tax fraud, rate rigging, and money laundering.
Are two big banks on the brink of collapse?
Credit Suisse and Deutsche Bank aren’t doing great right now. The big question is whether they’re actually at risk of going under.
Analysts are split on this issue. Despite the grim headlines, some experts have said the situation isn’t as bad as it seems. Even in a worst-case scenario, there’s the possibility of these banks getting bailouts if necessary, given their global importance.
Based on the recent news, Stephan says, “There is a risk that the world’s largest banks could be in trouble.” However, he also says “they’ve grown to the point where they could also be supported by government funding in the event that their downfall would lead to a global catastrophe.” Basically, they could be too big to fail.
At the moment, there’s no way to be completely sure what’s going to happen with Credit Suisse and Deutsche Bank. The most likely scenario is that they recover, either on their own or with government funding. But as Stephan pointed out, there is a real risk 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 go into a recession in 2023, but it’s still always wise to prepare for the worst.
The best way to prepare yourself is to have enough money in your emergency fund. Having cash available is an important safety net in case 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 a 12-month emergency fund. Suze Orman has started recommending you have enough to cover eight to 12 months of expenses.
Where you have this money is also extremely important. Your emergency fund needs to be easy to access. High-yield savings accounts are great for this, because they pay reasonable interest rates and you can withdraw from them at any time. On the other hand, you wouldn’t want to have your emergency fund invested in the stock market. If the market drops and you need money, you could be forced to sell your investments at a loss.
As stressful as it can be, economies go through periods of turbulence. By making sure you’re in a solid financial position with plenty of cash in your bank accounts, you can at least know you’ll be safe no matter what happens.
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