Monday, February 22, 2010

The financial system and the Hudson River Landing

It’s been a year since the amazing emergency landing of the Airbus A320 on the Hudson River after the aircraft had struck a flock of geese. This landing was a demonstration of risk management at its best.

This was the very first time that landing on water had been attempted successfully. Yet, simulators were built, procedures put in place, and pilots trained to handle such an unlikely risk. None of these were based on historical events, but rather on foresight. It was this foresight that made the difference and saved the lives of the 155 people aboard the plane.

This should be a lesson to the financial industry.

But this is not the only lesson. Learning from other mistakes and disasters in the airline industry can be just as valuable.

For instance, a couple of years ago a pilot of a Garuda Indonesia, who had crashed his aircraft, was charged with negligence and deliberately causing an accident. It was shown that the captain had knowingly ignored 15 warning signals from an onboard system and from his co-pilot, and force-landed his Boeing 737, which then skidded off the runway and burst into flames killing 21 people.

The investigation found that had the pilot listened to the warnings and followed the proper procedures, he’d be required to fly his plane round the airstrip a second time. This would have consumed more fuel and cost him his ‘saving fuel bonus.’ So he chose to land. This is the very same incentive that led to the crash of many financial institutions – the incentive to ignore risk signals in order to maximize personal remuneration.

We too often forget that the financial industry is not the only industry that practice risk management. Many industries and disciplines – from airline to drug manufacturing, from space exploration to building submarines – have developed ways to manage risk. None is based on historical analysis alone, as is the common practice in the financial industry. Yet, the financial industry has arrogantly chosen to ignore all these important development and insisted on practices that benefits a minority of individuals who run these institutions, and nobody else.

So why don’t we force our regulators and those who invest our money to learn how other disciplines manage their risk? After all, we have already been proven us that we cannot rely on the financial industry to self-regulate itself, nor make socially responsible decisions. So let us force them. Isn’t that what democracy and capitalism should be about?

1 comment:

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