Time to bring in the crash investigators
The NTSB is capable of providing a clear and authoritative narrative, explanations and conclusions about the crisis
After a financial train wreck, it’s time to begin to learn lessons from the disaster and prevent its recurrence.
This is not an easy problem: Andrew Lo, a professor of finance at MIT, recently compared the financial crisis to Kurosawa’s Rashomon, a film in which each character has a different story about an alleged rape and murder. We have no agreed narrative about what has happened in the crisis, which makes it hard to figure out how to prevent it happening next time. The details are picked over in the press, by think-tanks, by commissions and, of course, by ideologues of all stripes.
Professor Lo, along with Jian Helen Yang and Eric Fielding, has proposed an alternative approach to the whole affair in the Journal of Investment Management. Lo, Yang and Fielding argue that there is an organisation that specialises in establishing a clear narrative, ruling out alternative explanations, and drawing conclusions which have real authority and influence. It’s not the Securities and Exchange Commission, the Financial Services Authority, or the G20’s Financial Stability Board. It’s the National Transportation Safety Board, the NTSB.
For more than 70 years, the NTSB – or its predecessor, the Civil Aeronautics Board – has investigated plane crashes, bridge collapses and other transport-related accidents in the US. Why do Lo, Yang and Fielding (who is an NTSB official) believe it is worth emulating?
Two attractive attributes stand out. The first seems paradoxical: the NTSB is not a regulator and has no regulatory authority. “At first I thought this undermined its effectiveness,” Lo told me. “But now I see it makes it more effective. If you are a regulator, how can you criticise your own regulations, for instance?” Quite so: in a crisis where much of the debate centres on whether regulations were too lax or perverse, and whether regulatory authorities such as the Federal Reserve and the Bank of England were asleep at the wheel, a non-regulatory investigator has something going for it.
The second admirable feature of the NTSB is its approach to investigations. First, it holds open hearings to establish a set of objective facts. As each party tries to exonerate itself with evidence about what happened, the facts tend to mount up. This initial focus on facts, says Lo, is an important discipline. Then the NTSB goes into a huddle and tries to settle on a consistent, fact-based narrative; its accounts are rarely challenged.
This all sounds very impressive. Will we get a Capital Markets Safety Board? In the US, perhaps we will: the Dodd-Frank Act established an Office of Financial Research, which has a mandate to gather data and produce or enable better analysis of the financial system. It may develop into something like the NTSB.
The other question, of course, is would an NTSB for finance actually help? There are three obvious differences between transport accidents and financial ones. The first is that what constitutes a financial accident is vague: would an NTSB for finance have studied the collapse of Lehman Brothers? The fraud at Enron? Or vaguer topics such as the dotcom bubble or the sub-prime mortgage industry? (For Lo, the answer is clear: it would study collapses of major financial firms.)
The second difference is that a financial accident is more complex than a physical one: there are more actors involved and far more variables. “It would be way too complicated to reconstruct the cockpit Dick Fuld was in,” says Lo, referring to the last boss of Lehman Brothers. True – but still worth a try.
The final difference might cause the biggest headache. Nobody actually wants to cause a plane to crash or a bridge to collapse; different people have different priorities, but nobody profits from a transport accident. When it comes to finance, that simply isn’t true.
Also published at ft.com.