Design Failure

100 years ago, the Titanic sank after striking an iceberg off the coast of Newfoundland. Have we learned anything?

On the hundred-year anniversary of the disaster there has been lots of commentary about who and what were to blame for the tragedy. One entity that hasn’t been mentioned all that much was the British Board of Trade. Because of the nature of ships lost at that time, they expected that lifeboats mainly be used to ferry passengers to other ships.

Had the Titanic sunk more slowly, it would have been surrounded by ships ready to assist. The North Atlantic was a busy stretch of sea, and the number of lifeboats would have been adequate. But it sank too quickly and over 1500 people died. The issue wasn’t cost or how cluttered the deck might seem. The Board of Trade took responsibility for the safety and soundness of evacuation planning, When reality didn’t conform to the government’s projections, disaster was the result.

Fast-forward 90 years: in the run-up to the housing collapse government regulators took responsibility for bank capital and accounting standards. Repo 105 and Basel II didn’t anticipate a precipitous 30% decline in residential housing prices. As a result, many large financial institutions either failed or needed massive government support. Had prices declined more modestly or slowly, the existing regulations would have been adequate. Instead, financial disaster was the result.

It’s all too easy, when government gets involved, for risk management to morph into regulatory compliance. I’m not saying we don’t need rules. But as we plan for the future, let’s not forget the lessons of the past. Safety is no accident—it needs to be planned!

Douglas R. Tengdin, CFA
Chief Investment Officer
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