Discover more from Margins by Ranjan Roy and Can Duruk
COVID-19 and Managing Risk
Why this is an acutely dangerous crisis
The night before Lehman went under felt like living in a movie. On Sunday, Sept 14, 2008, my boss said I'd have to go into that evening but wasn’t clear on why. I can't remember if it was public that Lehman was going under, but the banks had apparently been notified to start preparing for the fallout. I spent that entire night working with the risk team to get our positions in order. We had to recalculate all our positions with the assumption that all the futures/derivatives contracts with Lehman would be nullified. That completely changed your exposure to the market, so you needed to buy or sell to get yourself back to where you were.
As an example, I covered the Thai Baht. If my position appeared flat (I was neither long nor short) but had an outstanding contract with Lehman to buy 40 million Thai Baht in 1 month, I’d now be short 40 million Thai Baht for that time period. I would have to go out into the market and find someone else to sell me those 40 million Thai Baht.
That’s a very rough example of the hundreds of books and positions we were trying to understand and manage.
After hours of calculations and going into the market to square the positions, something happened. It turned out we had missed one counterparty that had the word Shearson in the name. It turned out Shearson was the name of some company that at some point was bought by Lehman (and somewhere American Express played a role), and that counterparty would be defaulting as well. Not having incorporated those contracts completely changed all the risk mitigation we were trying to do. We freaked out, recalculated everything and then went back into the market, crossing spreads every which way.
It was utter chaos. I can safely say, everyone around us was completely lost. I’ve been out of the market long enough that I feel comfortable writing that.
That experience scarred me. I was scared the banking system would collapse. I took out a bunch of cash. I tried telling my friends that things were far, far worse than they could ever imagine. The global financial system was in peril. I will never forget that fear. We were standing on a cliff.
Yet for most people, the prospect of complete financial meltdown was never quite as visceral. The pain of the recession was certainly real for everyone, but that utter apocalyptic terror was never drilled in.
Which brings us to today.
I’ve thought a lot about those moments as we enter this endless spiral of unknowns. That financial crisis was completely man-made. The feeling that civilization might end was only discussed amongst a few. As an American, we have a blind assumption of relative stability. Shit's been feeling a bit crazy, but that fear of not knowing what tomorrow could look like has not been there, at least in my lifetime.
It's now everywhere, and the COVID-19 pandemic scares me a whole lot more than the financial crisis did. It feels like a challenge that has been perfectly crafted to feed on our every societal and informational weakness. From an American perspective, health insurance, inequality, federalism, leadership, Trump, individualism, social media, broadcast media; all the shortcomings of every one of those elements feel built to exacerbate this crisis.
The enemy has no side.
First and foremost, the chaos and turmoil of the past decade have always involved a comprehensible, reprehensible 'other'. Wall Street. Trump. Social Justice Warriors. China. Marine Le Pen. Bernie. Warren. The Patriots. Kanye. Whatever it's been, there was always a very clear character that brought you grief. That’s how our reality show works. It’s maddening, but we’ve all learned to process everything like this.
COVID-19 is clearly none of the above. There is no us versus them. The two most analogous villains I can think of are climate change and the aliens in the movie Independence Day. Or maybe the White Walkers invading a warring Westeros.
This is our chance to bond together as humanity to fight off a faceless, evil force. But we’ve been trained to force-feed all danger through our typical lenses, political, cultural or whatever way we choose to understand the world. This can't be viewed through those identity lenses that give us comfort and understanding.
We want constant updates.
Next, we need a constant flow of new information. It’s how everything has wired us over the past few decades. We're exploring the charts and reading the posts. The data visualizations are beautiful and the push notifications are endless. We can find something new every minute of every one of these days, yet, none of it really makes a difference.
We just need to stay at home, stay sane and be patient. Until Elon Musk flies to Mars and finds us a vaccine using an alien serum, nothing will change this. But, we're sitting at home and need those dopamine fixes, even more, to get us through the day. We are not patient. We need an answer and an update, now.
There are no quick fixes to this. No amount of shady scientific papers or tweet threads will change any of this. If feels like we are all the Reddit sleuths trying to find the Boston Marathon bombers, and our leadership oddly enough, seems to be following us, and not, whatever their own information apparatus tells them.
Leave the intraday trading to the intraday traders and leave the epidemiology to the epidemiologists. Buy an index fund and hold it.
Built for Misinformation
As we sit there, fiending for info, the disinformation gods smile widely. You could not dream of a better scenario to make things break. We’ve all seen an uptick in forwarded WhatsApp messages about how it’s a Chinese thing, or FB posts about it all being a plot to take Trump down. That stuff all feels garden variety. But that Medium post that we all saw - it was sent to me by a friend who is a doctor, and it was forwarded to him from the Chair of his very reputable medical department (as a PDF attachment oddly enough). He passed it on to me as "from a researcher in the field". That terrified me.
(This Buzzfeed News piece nailed the ‘rise of the Coronavirus Influencers’)
Journalism is fighting the good fight but the amount of and speed of shit is intensifying. At first, I really frustrated that I couldn’t get a good hold on what things "actually" look like in Lombardy. I've seen those Italian-doctor-translated-by-someone-else Twitter threads that we all saw. But what does it really feel like to have COVID-19? Where are the images and the stories of the people living it?
This is the exact scenario where the fast-paced democratization of unverified information is the thing that helps us the least. We are not going to crowdsource a vaccine or have content marketers become our virologists (I say that as a content marketer). This is where we have no choice other than to trust the people whose job is to help with this stuff. The only thing we can do is stay inside, stay sane and be patient.
It’s becoming increasingly clear that the best thing we could’ve done is shut everything down a few months ago. But could you imagine the panic and rage that would’ve incited?
One of the most dangerous parts of this is if we had imposed draconian measures early on, and nothing happened, then everyone who doubted those measures would feel proven right. Yes, we have the data on South Korea versus Italy, but that is not how our politics or society work any longer. That is not how our leaders operate today.
Containing, or suppressing an outbreak, has no surrender ceremony. The victory is in the silence, in the lack of something happening. Think about the decision calculus for a leader: if I shut everything down and am right, then nothing happens and everyone blames me for shutting everything down. If I don’t shut things down, and that was the wrong decision, the cases will begin to explode, and then we will all collectively demand a shutdown. That is an almost impossible calculus for an elected official. Essentially, it calls for self-sacrifice, because just imagine the backlash on the first scenario. Even as of yesterday, the cashier at the grocery store complained to me how this was “all overblown media hype”.
There has to be some logic term for this decision calculus, right? Where the danger requires drastic action to achieve an optimal outcome of stasis.
As medical testing is on all of our minds, my co-host Can pointed me in the direction of the idea of a True Negative, and this kind of feels right, but not quite there.
In late January, everyone I spoke with was skeptical. Day by day, that skepticism dwindled. But of course, every one of those days mattered. In an already divided society, with no generalized sense of truth, and no central source of leadership, spurring a mass mobilization around an invisible enemy and asking for incredible sacrifice to simply maintain the status quo is, well, tough. That's what makes this a uniquely dangerous thing; the more we start to understand it, the more impossible it gets to contain it. For all the threads and the charts and the Twitter epidemiologists, in the end, this requires a leap of faith in our leadership.
In 2008, there were moments I genuinely thought society could collapse. Maybe I wasn't thinking of Mad Max, but certainly fascism and bread lines. We're currently facing a whole lot of unknowns and we're ill-equipped to deal with this. There are little things that give me glimmers of hope (like Zoom Happy Hours...seriously), but all I can ask everyone is to stay in, stay sane, and be patient.