Friday, April 29, 2005

Intergenerational Amnesia

I've been reading the book 102 minutes, an account of the last 102 minutes in the World Trade Center towers.

Its a totally riveting account of people's struggles for life in the burning towers.

Anyway, one thing that has really struck me is that people always forget lessons learned by one generation and have to RELEARN. Its as though we don't take warnings seriously unless we experience the pain ourselves.

I can think of several examples:
  1. Construction of the WTC and the changes in the building fire codes at the time

    Prior to the 1968 building code (which the WTC sort of complied with), the fire code in NYC specified that buildings had to have multiple staircases that were "far apart" from each other. In addition, buildings had to have a significant amount of masonry and other heavy materials -- these materials would "fireproof" the building.

    Why was the prior code so restrictive?

    Well, people who wrote the code had experienced numerous calamities that caused them to be cautious. In their lifetimes:
    • Women jumped to their deaths in the shirtwaist factory fire of 1928
    • People were trapped in a tower in Chicago and unable to descend and ultimately perished
    • -- additional examples

    Based on these direct experiences (and having lived in these times), the authors of the prior code knew what restrictions had to be put upon high-rise buildings in order to ensure safety.

    Flash foward to a time 30 years later, the authors of the original code are dead or gone, and another generation is assessing fire hazards and building codes.

    To them, the code as written seems OVERLY cautious and unnecessarily safe. Lots of space that could be used productively (rented out, etc.) had to be devoted to "safety" measures, safety measures that in their mind were NOT necessary.

    So the codes were revised.

    Instead of [ ] staircases, only 3 were required. Instead of having them spread out in a building, they could be "as far away from each other as possible". And instead of using true fireproof materials, instead the steel frame could be fireproofed.

    This changes resulted in lots of savings and more efficiency.

    Well, the WTC towers went up based on the 1968 code (even though the Port Authority didn't actually have to comply with legal regulations and ACTUALLY did not fully comply [Find out why here.]).

    Ten years later, the folly of the new code could be seen as:
    • People died in Las Vegas in a fire, because they could not escape the building
    • These other people died...

    Experiencing this pain, the code was revised (again). Unfortunately, the new code didn't reotractively apply to already-built buildings, and it would be immensely expensive and difficult to implement the new code on the WTC towers.

    So the towers stayed as is... and we know today the impact of a large fire on the structural integrity of the WTC towers.

    (As an aside, isn't it interesting how important initial design is? It is SO MUCH more difficult to go back and revise something, than to try to anticipate the future and build in some room for uses beyond original intention. How many "temporary" systems are out there that are being used for purposes far behind what they were built to support?)
  2. Speculation and market bubbles
  3. Every thirty years or so, there is another market bubble and another giant collapse. In 1929, the stock market crashed, and a generation of people grew up fearing the market. Thirty years later, in the 1960's, the fears of burst bubbles had not resonated with a new generation of swashbuckling young investors. So they took the stock market to new heights, and they themselves, experienced their own burst bubble in [ ]. Finally, another thirty years later, the NASDAQ peaked at [ ] in [March] 2000 as another generation (not experiencing the pain of previous market crashes) gambled their fortunes on the market. In Peter Bernstein's book, The Four Pillars of Investing, he describes these bubbles in further detail. If you're really interested in bubbles, check out Manics, Panics... this book was written in [ ]! And its still relevant today.
  4. Finally, one more example of intergenerational amnesia, the repeal of the Glass-Steagal Act in 2001.

    What is the Glass Steagal Act?
    It was erected in [1936] after the great market crash of 1929 to prevent the abuses that in part lead to the crash (beyond regular ol' speculation of course).

    Prior to the Glass Steagal Act, any bank could offer investment banking advice. That is deposit-taking banks similar to Bank of America and Washington Mutual of today, could offer corporate advice.

    Why is this bad?

    Well, banks started to use their balance sheets in order to win business. They would offer loans and financings to companies at great rates in exchange for fees related to merger advisory advice.

    In fact, they would tie the financings to being hired as an advisor.

    What happened was, companies would then pick advisors based on their financing packages, not on the quality of their advice. And the companies took the savings and earnings of regular every day people and used them for their companies.

    When the companies went bust, so did the banks -- they lost all the money of the poor depositers.

    So when the Depression hit and you or I went to the bank to withdraw our money, suddenly, the money WASN'T there! It was gone, lost by the banks as they commenced their crazy schemes.

    The Glass Steagall Act was created to prevent such abuses.

    Well, 70 years later, here we are again. The Glass Steagal Act has been repealed, since the measures it tries to protect (the separation of commercial and investment banking) JUST AREN'T NECESSARY!

    Or are they?

    Today, we have again, commercial banks throwing their balance sheets around in bids to win business.

    Of the top 10 mergers advisors in 2004, [ ] were commercial banks. Do we believe that promises of easy money weren't offered to ensure these advisory assignments?

    Do you think that lenders don't sometimes say to young private companies, "Hey I'll lend you the money at this amazing rate, but only if you give me the lead underwriting position on your IPO" (Lead underwriters generally earn [ ]% of the total amount offered to the public when young companies IPO.)

    Some recent news articles on this phenomenon:
    • article 1
    • article 2

    So everything is fine and dandy now, but are we headed for something terrible?

    Only time and experience will tell!