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.

Prelude: Titanic
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.

Construction: Titanic
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.

Unsinkable: Titanic
"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 (NYSE: 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."

Disaster: Titanic
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.

Aftermath: Titanic
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 (NYSE: GS  ) and Morgan Stanley (NYSE: 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 (NYSE: 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."

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

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Read/Post Comments (10) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 18, 2012, at 5:20 PM, DJDynamicNC wrote:

    Depressing but excellent article.

    The fight continues to put money at the service of people, rather than the other way around.

  • Report this Comment On April 19, 2012, at 4:49 AM, kickbishopbrenna wrote:

    Unsinkable vs unthinkable, both occurred slowly, with enough time for a response, if the tools were in place..only one of them, I hope had access to tools. Thankfully we have (just) enough lifeboats. I spoke to a customer yesterday, her uncle was sold a ticket (22 yrs old) when another man was too sick to travel..he was killed, and the other man moved to USA a year later and worked out his life there...fate plays a cruel card sometimes! Let us all remember them, and remind ourselves that we, as the shareholders should consider the workers who keep us all afloat.

  • Report this Comment On April 19, 2012, at 1:43 PM, whereaminow wrote:

    Ok, let's go through this.

    Deregulation is the REMOVAL of state intervention in the market. There was NO deregulation of the financial markets under Greenspan.

    Just as there was already existing regulation in place during the housing and credit boom, so was there regulation in place during the age of the Titanic. In fact, the 1178 lifeboats aboard the Titanic EXCEEDED the existing government regulation of 962 required.

    The Federal Reserve, the very institution that told us all that there was little to no risk of a bubble/bust, had regulatory oversight over EVERY CREDIT INSTRUMENT created during this period.

    So your analogies are right on, only they don't represent the fairy tale of evil capilatists and noble bureaucrats! Instead we find the incompetent State intervening in the market, then pretending that they never were there in the first place.

    And of course, an ignorant journalist pretending that he has it all figured out because his liberal arts professor told him capitalism is unethical (or unsustainable or fill in the blank), but doing no research is perfectly fine since we're all winners in our own special way.

    David in Liberty

  • Report this Comment On April 19, 2012, at 1:50 PM, whereaminow wrote:

    The above comment should read 1178 lifeboat accommodations. The government regulation was for 962 lifeboat accommodations.

    I'm willing to bet a paycheck that our author had no idea that the Titanic's safety requirements actually EXCEEDED the government mandate.

    Well, some people get their history from books, and some get their history from James Cameron movies. The latter end up working at Fool writing populist/socialist tripe, while the rest of us keep the world moving.

    David in Liberty

  • Report this Comment On April 19, 2012, at 1:50 PM, whereaminow wrote:

    The above comment should read 1178 lifeboat accommodations. The government regulation was for 962 lifeboat accommodations.

    I'm willing to bet a paycheck that our author had no idea that the Titanic's safety requirements actually EXCEEDED the government mandate.

    Well, some people get their history from books, and some get their history from James Cameron movies. The latter end up working at Fool writing populist/socialist tripe, while the rest of us keep the world moving.

    David in Liberty

  • Report this Comment On April 19, 2012, at 1:56 PM, TMFBiggles wrote:

    David,

    I am aware of what the existing lifeboat regulations were at the time.

    Would you like to send that paycheck by money order, or will a wire transfer be fine?

    - Alex

  • Report this Comment On April 19, 2012, at 4:34 PM, whereaminow wrote:

    Good. So you admit that you intentionally misled your readers by implying that evil super scary deregulators are responsible for the sinking of the Titanic and our current financial crisis.

    In other words, you care more about your ideology/religious faith in the wonders of regulation rather than being truthful and fair.

    What college spit you out?

    David in Liberty

  • Report this Comment On April 19, 2012, at 5:15 PM, TMFBiggles wrote:

    I'd be happy to have this debate with you, so long as your arguments develop some substance beyond "you believe something I don't, so you must be a complete imbecile."

    Till then.

  • Report this Comment On April 20, 2012, at 8:38 AM, whereaminow wrote:

    Sure, here is some substance for you. During this super scary evil Republican era of DE-REGULATION that occured after the wonderful Progressives gave us all kittens and ribbons, here were the Regulatory responsibilities of the Federal Reserve (ya know, that organization that usurped even more power after the crisis):

    "The Federal Reserve has supervisory and regulatory authority over a wide range of financial institutions and activities." That's the understatement of the century. Among the Fed's functions are the regulation of

    Bank holding companies

    State-chartered banks

    Foreign branches of member banks

    Edge and agreement corporations

    US state-licensed branches, agencies, and representative offices of foreign banks

    Nonbanking activities of foreign banks

    National banks (with the Comptroller of the Currency)

    Savings banks (with the Office of Thrift Supervision)

    Nonbank subsidiaries of bank holding companies

    Thrift holding companies

    Financial reporting

    Accounting policies of banks

    Business "continuity" in case of an economic emergency

    Consumer-protection laws

    Securities dealings of banks

    Information technology used by banks

    Foreign investments of banks

    Foreign lending by banks

    Branch banking

    Bank mergers and acquisitions

    Who may own a bank

    Capital "adequacy standards"

    Extensions of credit for the purchase of securities

    Equal-opportunity lending

    Mortgage disclosure information

    Reserve requirements

    Electronic-funds transfers

    Interbank liabilities

    Community Reinvestment Act subprime lending requirements

    All international banking operations

    Consumer leasing

    Privacy of consumer financial information

    Payments on demand deposits

    "Fair credit" reporting

    Transactions between member banks and their affiliates

    Truth in lending

    Truth in savings

    And it is just one of numerous financial regulatory agencies (the SEC, Comptroller of the Currency, Office of Thrift Supervision, FDIC, and numerous state regulators also existed.

    And did I mention that the 2007 SEC Rules and Regulations book was around 100,000 pages long?

    There's your substance. No go back to dream land where evil capitalists were running amok and helpless, powerless, noble bureaucrats just couldn't regulate anything because of those darn Republicans (who, btw, are no more "free market" than any Democrat. They're all freaking whores.)

    David in Liberty

  • Report this Comment On April 20, 2012, at 9:05 AM, DJDynamicNC wrote:

    Deregulation - the act of removing or reducing regulatory barriers to a particular action.

    Gramm-Leach-Bliley - an act which removed or reduced regulatory barriers to a particular action.

    How is that not considered de-regulation?

    I realize that the etymology is a little wonky, but the term "deregulation" is not used to mean "the complete removal and subsequent absence of regulation," it is a term used to mean the opposite of increased regulation. If you are using a different definition, it would be good to clear that up now.

    I'd also like to point out the logical fallacy you've used regarding the lifeboat. You said that the lifeboat capacity exceeded that required by existing regulations. You're right, of course - but it didn't come close to being enough lifeboats for everyone on the ship. Your implication is that regulations didn't help, but of course, after the disaster, the regulations were improved.

    That's the fundamental difference in philosophy. You reject the utility of regulation and so you see a situation like that and say "see! Regulations were flawed!" But that's a strawman; nobody ever denied that regulation is a flawed, inefficient way of addressing problems. It just so happens that it's also a method that tends toward greater equitability and effectiveness at generating non-market selected results that are nonetheless socially desirable. People, you see, are more than markets - and price signals are not the only means by which value can be determined.

    Any society that attempts to give every human being an equal voice, on the scales in which we've built our society, will find itself burdened with bureaucracy and inefficiency. It is evident that we, as a people, have decided that that is a fair price to pay in exchange for the increased stability and safety. You can argue that unrestricted capitalism would deliver even more stability and safety all you like, and I can argue the opposite all I like, but the fact of the matter is that our society has made its choice, and we've embraced a very socialist society - and we're moving further in that direction every day. You hate it, I think we could move faster on it, but it's where we're going, undeniably.

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