2008 Crisis Survivors Remember Dominoes Fall Fast

Steve Chiavarone doesn’t want to scare anyone, but what he remembers most about the last banking crisis is how sure most people were that it wasn’t going to happen.

In your office at New York in early 2008, Wall Street’s best and brightest—“strategist after strategist after strategist after strategist”—recalls Chiavarone, now a senior portfolio manager at Federated Hermes—lined up to say that even if there was a recession, it would be light and short.

Of course it wasn’t like that. A few months later, “you’d go into the office every day and something would happen that you never thought would happen,” he recalls.

All kinds of crises were predicted by “financial Cassandras” in the wake of 2008. In reality, they are extremely rare in the US. markets. And yet, with three banks bankrupt Americans, a fourth financial institution in the hot seat, and the government-mediated takeover of a fifth—and much larger—in Europethe comparisons to that crisis have become a little harder to ignore.

Not that the current turmoil matches the magnitude of the last crisis. While the odds of a recession have increased, authorities are better equipped today to deal with the stress on the financial system, and the biggest banks are stronger than before.

reasons for caution

But for today’s class of professional investors who seem largely unfazed by recent events – numbed perhaps by years of false warnings – there are important messages to be gleaned from this crisis from the first-hand accounts of veterans like Chiavarone. His main message: things can evolve in ways that seemed inconceivable weeks before. “It’s one of the reasons I’ve been so cautious,” he said.

On Sunday, the UBS bought the Credit Suisse for $3.2 billion in a government-brokered deal aimed at ending a crisis of confidence.

The Swiss National Bank agreed to provide a franc 100 billion ($108 billion) liquidity line to UBS as part of the deal, while the government also provided a franc 9 billion guarantee for possible losses on assets taken over by UBS.

All of this is consistent with the belief that financial stress will be contained. Something worrying is not being totally inconsistent with the perspective that prevailed before the storm of 2008, which ended up dropping American stock markets by more than 50%. One of the hallmarks of bank stress is how quickly the dominoes fall when you lose faith, said Adam Crisafulli, founder of Vital Knowledge in New York.

based on trust

“You want banks to be as tedious and boring as possible,” said Crisafulli, who worked at Bear Stearns when it had to be bailed out by the JPMorgan Chase in 2008. “The entire business model is based on trust. So even if you are very, very comfortable with finances, if the market has lost confidence in a financial institution,” it is very difficult for this bank to refute that loss of confidence, he explains.

Kris Sidial is a professional short bet and runs tail risk strategies for hedge fund Ambrus Group, so it’s not surprising that he’s a bear. Sidial plans to keep options for the banking sector in a bearish position, whose gain has already multiplied by 40 in the last month.

“When the Credit Suisse theme came up, it was a sign that there was another ‘body,’” he said in a telephone interview on Saturday. “It’s very binary. There really is no in-between situation here where this drags on,” she stated. “(…) There will be government intervention and it will be fixed – or it will be a nightmare.”

Sidial said he’s already worried about finding prime brokers that won’t collapse in unison should the contagion spread. “Forget US stock markets, the whole world is connected to the banking system. If that happens, everything goes together. You can destroy technology, you can destroy everything else, but banking is the one thing where, if that happens, there will be massive repercussions.”