Author Archives: Jared Wade

About Jared Wade

Jared Wade is a freelance writer and former editor of the Risk Management Monitor and senior editor of Risk Management magazine. You can find more of his writing at JaredWade.com.
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The “Wall Street Mind” and “Too Big to Fail”

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Simon Johnson is the former IMF chief economist and current professor at MIT’s Sloan School of Management. And to say he is skeptical about the friendly relationship between government and Wall Street — particularly Goldman Sachs — would be putting it way too lightly.

He seems to be looking around at the industry “overhaul” that has occurred since the banks tanked the economy and wondering why everything is exactly the same as it was before. Very little has changed, he asserts, and he still thinks that at least one major firm remains entirely too big too fail regardless of how much Congress members want to walk around patting themselves on the back for passing Dodd-Frank last summer.

At the Institute for New Economic Thinking conference in Bretton Woods, he asked the following. (His transcribed comments here come from the video below.)

“Who in the room thinks that if Goldman Sachs were to hit a rock, a hypothetical rock — I’m not saying they have, I’m not saying they will. If they were to hit a rock today, Saturday, who here thinks they’ll be allowed to fail like Lehman Brothers did unimpeded by any kind of government bailout starting Monday morning? Can Goldman Sachs fail?”

After this, he pauses and looks around the room from his podium. You can’t see the crowd on the video but it becomes apparent that no one spoke up or raised their hand.

“I’ve asked this question around the country [and] only one person has ever raised his hand. It was in New York. He had a big short position in Goldman stock. That’s New York. But seriously, it can’t happen. Goldman Sachs is a $900 billion bank, total balance sheet. You might want to say it’s too big to fail. You might want to use the language of [Bank of England governor] Mervyn King and say it’s ‘too important to fail.’ You wouldn’t allow it to fail. I wouldn’t allow it to fail if it was my decision. You wouldn’t either. It’s too scary today given the nature of the global economy. And from that scariness comes power — comes an enormous amount of power.”

He then asks the audience what happened to the plans to reform this? Why is “too big too fail” still allowed to persist? Why is, as he claims, “it going the other way … too big to fail firms have gotten bigger”?

In his explanation is a lot of truth and straight talk about what he believes has been a failure to reform. Watch the video below in its entirety to hear all his insight. It’s 10 minutes long but you can make the time. (via The Economist)

In somewhat related news, New York magazine has put together a multi-part feature on “The Mind of Wall Street.” At it’s core, the piece asks if, when it comes to post-financial crisis reform, Wall Street won then why is it so worried.

Combined, both go a long way to explaining the current climate in the financial sector.

The Risk of Being Sucked Out of a Plane

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Last Friday, while en route from Phoenix to Sacramento, a five-foot hole that appeared in the fuselage a Southwest Airlines-operated Boeing 737 jet forced the pilot to make an emergency landing. Since then, the Federal Aviation Administration ordered mandatory inspections of nearly two hundred 737s worldwide.

The plane whose fuselage ripped open was 15 years old and had taken nearly 40,000 flights. And the concern that other old models may have similar vulnerabilities proved warranted when Southwest found five other jets with fuselage cracks. Scary stuff really.

But much like the ongoing confusion and misinformation surrounding nuclear radiation risks, few people understand the actual risk of a mid-flight tear in a plane’s cabin. And when I say few people actually understand either of these things, I certainly include myself in that classification.

Fortunately, someone much smarter than I is here to explain.

Brain Palmer of Slate explains why no passengers were sucked off of Southwest Flight 812.

How risky might the latest incident have been for passengers? The pressure differential between the cabin and the outside was approximately 7.5 pounds per square inch, and the hole measured 720 square inches. That means the maximum force applied would have been around 5,400 pounds—more than enough to blow an unrestrained person out of the plane. But a passenger would only feel that much force if he were literally plugging the hole with his body.

Keep in mind that the hole was not right next to any passengers or beneath their legs. It was in the ceiling of the cabin, which would have been at least two to three feet away from the heads of anyone sitting inside. At that distance, the force of an explosive decompression would be greatly dissipated. Air-flow patterns are complicated, and it’s impossible to quantify this effect for any given passenger. But as a simple way to visualize the effect of distance, we might imagine the force spreading itself out across the surface of an expanding hemisphere centered on the hole. Using the formula for spherical surface area, we see that at a distance of three feet, the 5,400 pounds of force would be spread across an area of 8,143 square inches. Four feet from the hole, it would cover 14,476 square inches, and so on. As the force gets more and more stretched out, the proportion of it that would be working to push a body out of the plane diminishes. On top of that, the air would be free to flow around the passengers in their seats, which would make its impact still weaker. Since the hole was in the ceiling of the plane, any decompressive force would have had to act against the full body weight of any passengers, lifting them up and out of their seats before it could eject them in a gust of air.

Here’s an experiment that illustrates the principle: Plug your sink drain with a rubber stopper, fill the sink with water, and then slowly remove the stopper. You’ll notice that the stopper is much harder to budge when it’s close to the hole and perfectly aligned with it. But tilt the plug slightly, or pull it out a little bit, and the force becomes barely noticeable. That’s more or less analogous to what happens when a hole opens in a Boeing 737 at cruising altitude.

So I guess it turns out that you can’t believe everything you see in action movies. I really can’t believe Steven Seagal would be disingenuous with his art.

2010 Disasters Cost the World $218 Billion and the Insurance Industry $43 Billion

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Swiss Re’s latest sigma study (full report; abstract) reveals that the final economic losses resulting from disasters (both natural and man-made) across the globe in 2010 was $218 billion — a number that dwarfs the $68 billion in damages caused by catastrophes in 2009.

With unprecedented flooding, Asia was the region worst hit, with $75 billion of the total occurring there. In relative terms, however, the fallout may be worse for the Latin America/Caribbean region. The $53 billion caused by the earthquakes in Haiti and Chile represents a staggering 1.1% of the region’s GDP. (By comparison, Asia’s billion in losses was only 0.

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28% of its GDP.)

Here is Swiss Re’s regional breakdown of the number of disasters, death toll and financial fallout.

Insured losses in 2010 totaled $43 billion as a whopping 10 different events caused insured losses of at least $1 billion. This was a huge jump from the $27 billion in insured losses for the global industry in 2009.

In all, 2010 had 304 catastrophic events.

The globe has seen a troubling trend of more natural catastrophes nearly every year in recent decades, and 2010 was no different with 167 natural disasters. On the flip side, the declining trend of man-made disasters the world has experienced since 2005 also held true, with just 137 man-made events. This is perhaps the only positive nugget of information in the entire report. (Although even this silver lining is bittersweet as you will see below when we look at the resulting death toll.)

Worst of all, of course, were the 304,000 people killed by disasters last year, making 2010 the third deadliest year since 1970 (the year Swiss Re first began collecting such data).

In 2010, severe catastrophes claimed significantly more lives than the previous year: around 304,000 were killed, compared to 15,000 in 2009. The deadliest event in 2010 was the Haiti earthquake in January, which claimed more than 222,000 lives. Nearly 56,000 people died during the summer heatwave in Russia. The summer floods in China and Pakistan also resulted in over 6,200 deaths.

Man-made disasters accounted for a small percentage of deaths last year, in relative terms, but the 6,446 killed was still a significantly higher number than the 5,970 who died in this manner in 2009. This fact puts a large blemish on the positive news that there were fewer man-made events. There may have been fewer incidents, but the ones that did occur were deadlier and that lower-occurrence/worse-outcome ratio should be going the other way in 2011 as safety, security and other risk management means strive to lessen the impact of catastrophes.

The man-made disasters that claimed the most victims in 2010 were a lead poisoning outbreak at an illegal gold mine in Nigeria in March (400 victims, mainly children), a stampede on a bridge at a festival in Cambodia in November (375 victims) and the collapse of a gold mine in Sierra Leone in March that killed approximately 200 people. Meanwhile, aviation and maritime disasters accounted for more than 800 and 1,100 victims respectively.

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Moving beyond the past, the globe has already been badly battered so far in 2011.

The Japanese earthquake and tsunami killed an estimated 18,500 people and caused upwards of $30 billion in insured losses alone, according to some experts. The Christchurch quake in New Zealand also ravaged the insurance industry, Australia floods cost billions and winter storms in the United States did plenty of damage of their own.

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Who knows what the final fallout will be from social revolutions in the Middle East, but it’s safe to say that there will be some claims.

All this and it’s not even hurricane season yet.

Hopefully, there is no way that more people will be killed by disasters in 2011 than we saw in 2010. But when it comes to economic losses, specifically insured losses, it is already shaping up to be a historic, market-altering year.

The Rising Cost of Disasters

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A new report from Allianz analyzes the fact that the insurance claims from natural disaster are becoming more expensive. The key reason is not so much that there are more disasters, just more buildings, more development and more insurance. And as parts of the developing world, specifically China and India, continue to become more affluent, we can likely expect this to continue.

One way this is illustrated is by looking at the most powerful and more deadly earthquakes in each of the past ten years. In some years (2003, 2008 and 2011 so far), the strongest quake is also the most deadly.

But in other years, notably last year with the 8.

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8 magnitude earthquake in Chile killing 507 people and the 7.

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0 earthquake in Haiti killing more than 200,000, that has not been the case. The two main reasons for this is that the stronger quake either hits a very remote location where people don’t live or it hits a location with modern building codes and shake-resistant buildings.

Markus Treml, seismology expert at Allianz SE Reinsurance, explains.

The Energy factor shows the ratio between the seismic energy released by the two earthquakes. For example, the quake in Chile released 500 times more energy than the quake in Haiti. This table shows that those regions where tectonic plates clash are at highest risk. Six tremendous earthquakes happened in Indonesia in the last decade. All other earthquakes in this table – except Haiti – are also in high-risk zones. The amount of energy released does not necessarily mean more damage or casualties. Instead, weak buildings or secondary effects of earthquakes such as tsunamis or fires are the most common reason for high fatality rates.

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This was the case in Haiti in 2010, in Northern Sumatra in 2004 and will probably be the case for Japan.

As he mentions, the “energy factor” in the chart below represents how much more powerful the strongest earthquake was each year than the most deadly.