Anatomy of a Financial Crisis

On Madison Avenue today, you can walk into the Morgan Library and, in the dim lighting, take in the familiar scent of old books, rare Gutenberg Bibles, manuscripts and drawings that the legendary capitalist J. Pierpont Morgan collected starting in the late 1800s. But it’s one evening in 1907 that gave the space its gravity in the world of banking.

In the Panic of 1907, after two weeks of a financial meltdown, J.P. Morgan called the titans of finance into his library and locked the front doors. Determined to get a deal done that night, the banking executives pledged money to bail out the country’s banking system. It turns out, that created a template that would be followed a century later.

In 2023, Jamie Dimon, chief executive officer of JPMorgan Chase & Co., didn’t get a deal done within hours. But he did help it get done within days.

On Tuesday, Treasury Secretary Janet Yellen floated an idea to the modern-day banking tycoon in a call, Bloomberg reports: The country’s largest lenders would deposit billions into First Republic Bank, which looked to be in distress. Two days later, 11 banks contributed $30 billion of deposits to their struggling rival, promising to park the money for at least 120 days, uninsured.

In addition to its stark resemblance to the agreement that calmed the panic of 116 years ago, the deal has another parallel, as explained by my colleagues, led by Hannah Levitt, in a story they broke Thursday:

In some ways, the rescue resembles the 1998 plan devised to bail out Long Term Capital Management without using public money, after the hedge fund made disastrous wrong-way bets. Back then, the Fed convened a meeting of Wall Street executives. ... They agreed to pump $3.65 billion into the fund to keep it afloat and avert a collapse in financial markets.

As with LTCM, the banks saw saving First Republic as ultimately in their best interests, as it’s better than risking a widening panic that might engulf more of them, one of the people said.

Thus, in a matter of five days, we saw: an FDIC bailout of depositors for the second- and third-largest collapses of banks in US history; a Swiss central bank backstop to one of the largest systemically important banks in the world (Credit Suisse); and a private rescue of a darling lender catering to America’s wealthy. At first, that rescue looked to calm the market, especially for banks smaller than First Republic, the 17th largest US bank by assets. But within hours, bank stocks were whipsawing again.

The week’s turmoil has “some rhymes” with the 2008 global financial crisis, said Marty Chavez in an interview with Bloomberg Television. The vice chairman of investing firm Sixth Street, he was previously the top risk and finance overseer at Goldman Sachs. But it rhymes much more with the savings and loan crisis of the 1980s. “As we keep learning, in case we didn’t learn it the last time,” he said, “banks are all interconnected.”

The people who lived through 2008 on Wall Street will tell you that this crisis is happening faster. Whisper campaigns have become internet-fueled rumor mills, and the speed of mobile banking has turbocharged the mechanics of a bank run.

Chavez has implored regulators for decades : “Don’t draw magic numbers into the regulations.” He said in the interview, “These smaller banks were systemic,” and leaving them out of the stricter stress tests designed to check banks’ resilience to a crisis has been a mistake since 2018, when the rules were relaxed. (The US over the weekend made systemic risk exemptions for banks with about $200 billion in assets or less.)

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The Problems Compound

Major investors are really worried about the banks across the country. Apollo Global Management’s top economist, Torsten Slok, notes that smaller institutions account for almost a third of the total banking sector’s assets.

Meanwhile, the big keep getting bigger. Deposits have been moving from small banks to large ones for decades, particularly after 2008.

That doesn’t mean there aren’t real worries about the largest firms, as evidenced by Credit Suisse and the panic as investors weighed the reality that any new money would be hard to come by. Credit Suisse shares hit record lows this week, its credit default swaps widened to alarming levels, and its troubles led to a $54 billion lifeline in the form of a collateralized credit line opened with its country’s central bank.

Its endgame is unclear. Large US banks and big investing clients have been reducing their risk for months , and many this week raced to shield their finances in many forms. At least one bank informed clients that it will no longer accept requests to take over their derivatives contracts when Credit Suisse is the counterparty. People familiar with the matter have told us that Swiss banking giant UBS is opposed to a forced merger, reluctant to take on its rival’s risks .

A credit investor with hundreds of billions under management explained to me this week that they hated that this was happening. It just draws more concentration risks into a smaller number of big banks, which, by the way, have limits to how much leverage they can extend to any given customer.

Big investors are also starting to warn of long-term consequences, some very drastic. Citadel founder Ken Griffin told the Financial Times that American capitalism is “breaking down before our eyes.” He’s one of many, also including AQR founder Cliff Asness, warning of moral hazard. The famed quant criticized the system, on Twitter, as catering only to “tech start up bros and other elites .” Bill Ackman called the First Republic rescue another example of bad policy, with the risk of spreading financial contagion. “Half measures don’t work when there is a crisis of confidence ,” he tweeted.

These are extraordinary times. My producer Keiren Buchanan cited Hemingway on how one can go bankrupt: “Gradually, then suddenly.” Although the banking system took on more risk this week with the First Republic rescue—the reality is, when the “suddenly” hits, the ultimate lender is the US government.

“People are questioning the fire department. ... They’re questioning whether the crisis managers are up to the task,” Mohamed El-Erian, a Bloomberg Opinion contributor and finance veteran, told Bloomberg’s Jonathan Ferro this morning. “These little fires are getting to be messier.”

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