A Century of Disaster and a Century of Reform
The Titanic sank 100 years ago on April 15. Three days later -- a century ago today -- its bedraggled survivors returned to dry land. Almost immediately, key witnesses were subpoenaed for Senate hearings into the cause of the disaster. The hearings, along with a British Board of Trade inquiry that began on May 3, resulted in sweeping changes to maritime safety laws that have contributed to a century of relative safety at sea.
The sinking of the Titanic has been compared to our recent financial meltdown often enough that it seems appropriate to examine them side-by-side today. It remains to be seen whether or not the crash of our financial Titanic results in reforms similar to the ones that century-old disaster inspired. As you'll see, reform may not be as likely now as it once was.
The seeds of tragedy were sown in 1907 at the London home of William Pirrie. White Star Line executive J. Bruce Ismay and Pirrie, chairman of Harland and Wolff, a shipbuilding company, set out to create ships that would amaze the world. Their goal was to recapture the lead in a pitched battle with Cunard, whose twin transatlantic titans Lusitania and Mauretania then represented the gold standards of speed, size, and luxury. To topple Cunard, the new White Star ships would have to be larger and more opulent than anything built before.
Prelude: financial crisis
The U.S. was already nearing its second decade of banking deregulation by the time Alan Greenspan reached the chairmanship of the Federal Reserve. The 1978 Marquette National Bank v. First of Omaha Supreme Court case opened up the floodgates of credit, allowing banks with national charters to use the regulations of whichever state offered the least of them. This is why, to this day, your credit cards are likely to be issued by a financial corporation based in Delaware. This also significantly loosened the leash on the mortgage industry and initiated a widespread move toward riskier loans.
Three thousand men began work on the Titanic in 1909, laboring for three years to complete the largest moving object in the world. Its final cost, borne by White Star parent company International Mercantile Marine (owned by John Pierpont Morgan), would have been about $200 million today.
Construction was plagued with problems. Three million rivets were used to bolt the hull together, and these were in such short supply that Harland and Wolff reached beyond its usual suppliers for substandard rivets made by inexperienced forges. Watertight bulkheads, built to prevent flooding in case of breach, barely extended above the waterline. Pirrie, a very hands-on executive, overruled the naval architect's recommendation to install 64 lifeboats on the luxury liner. Ultimately, 20 lifeboats would be installed, with capacity for just over 1,000 people. This was done as much to preserve the ship's aesthetics for wealthy passengers as it was out of a belief in the ship's unsinkability.
Construction: financial crisis
The savings and loan industry had been largely deregulated in the early 1980s through two acts of Congress by the time of Greenspan's nomination, and its deposit insurance was rapidly approaching insolvency. By early 1989, 286 thrifts with assets of $125 billion had failed. This forced the newly elected Bush administration to create a bailout fund to handle further failures, which would eventually number 747 more thrifts with total assets worth $394 billion. Over 800 bank officials went to jail as a result of investigations launched during the crisis.
By the time the crisis was resolved in the mid-1990s, $124 billion of taxpayer money had been lost. Congress had already passed a new law deregulating interstate banking before the last thrift failed, and it set its sights on bigger legislative changes. By the end of the Clinton administration, Glass-Steagall -- the Depression-era law that had kept banks in check -- was gone, and the Commodity Futures Modernization Act had effectively deregulated derivatives of all stripes.
"I cannot imagine any condition which would cause a ship to founder," said Captain Smith before the maiden voyage. "I cannot conceive of any vital disaster happening to this vessel. Modern ship building has gone beyond that." White Star Line vice president Phillip Franklin concurred, saying, "There is no danger that Titanic will sink. The boat is unsinkable and nothing but inconvenience will be suffered by the passengers."
Unsinkable: financial crisis
Greenspan agitated publicly against Glass-Steagall for years before its eventual repeal. Shortly after Congress eased interstate banking restrictions, he asked, "Will we continue to rescind and modify outdated laws and regulations in order to permit banks to serve the needs of their customers?" In 1998, he came out in support of the Gramm-Leach-Bliley Act at a luncheon celebrating the merger that had recently created Bank of America (NYS: BAC) . After the dot-com bubble popped, Greenspan again touted deregulation, which he said "has enabled this country to absorb shocks in a way that it could not in previous periods."
Titanic struck an iceberg shortly before midnight on April 14, 1912. By midnight the mail room had flooded, and the bow was sinking. Naval architect Thomas Andrews, sailing with the ship he'd helped create, assessed the damage and knew right away that the ship was doomed. He would not survive the night, perishing with 1,500 others in the freezing water -- two-thirds of all those that had set sail from Europe.
Disaster: financial crisis
The 2008 bankruptcy of Lehman Brothers came a year after the market's peak. Employment had been in decline since that January, bottoming out two years later with nearly 9 million fewer people in the workforce. Employment levels and real median income have yet to recover to pre-crash levels. Since the start of 2007, more than 11 million homes have received foreclosure filings, and 433 banks have failed. The subsequent bailout -- which has distributed an estimated $4.76 trillion to the floundering financial system -- is now expected to lose $54 billion of taxpayer money. The national debt of the U.S. has increased by approximately $6 trillion since the start of the crisis.
Telegraphs from the Carpathia, which rescued Titanic's survivors, shocked the world. A crowd of 40,000 gathered at New York's docks to meet the arriving ship. Senator William Alden Smith, a key figure in the creation of many American railroad safety regulations, began issuing subpoenas as survivors walked off the boat and led an official inquiry that began the next day. Leading publications, from Hearst's yellow-journalism newspapers to the Scientific American, were vocal in calls for reform.
The American and British inquiries led to the adoption of international radio rules (to enable clear communication in disasters), codes of conduct for ice passages, strict lifeboat regulations, and more stringent shipbuilding codes. Sonar was also developed as an additional safety feature; its earliest patents were filed a month after the disaster.
Financial losses from the sinking would today amount to nearly $2.4 billion.
Aftermath: financial crisis
A Senate subcommittee chaired by Carl Levin of Michigan began investigating the causes of the crisis in November of 2008. The subcommittee's report, released a year ago, includes highly suspect testimony from executives at Goldman Sachs (NYS: GS) and Morgan Stanley (NYS: MS) . There have been virtually no prosecutions of financial executives to date. The largest banks in the country, dubbed "too big to fail" after the bailouts, are all much larger than they were before the crash.
The Dodd-Frank bill, which includes the well-known but poorly understood Volcker Rule, passed in 2010 in an effort to rein in the most egregious financial manipulation. The Volcker Rule has since been under continuous assault by bank lobbyists and may well be rendered meaningless as greater levels of complexity continue to be layered in. Dodd-Frank's efforts at enforcement rely on a government organization that has already proven unable (or unwilling) to keep up with its charges. Punishments for major ethical breaches remain little more than slaps on the wrist. JPMorgan (NYS: JPM) , which earned $17.6 billion in profit last year, was recently fined $20 million for mishandling customer funds.
The JOBS Act, which loosens both accounting standards and capital-raising requirements, was signed into law on April 5. Alan Greenspan continues to beat the deregulation drum. Speculators, he says, "are essential to the process of stability and recovery."
At the time this
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