ntsb as a model for systemic risk mgt

8/4/2019 NTSB as a Model for Systemic Risk Mgt

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The NTSB as a Model forSystemic Risk Management

2011 by Fielding, Lo, and YangAll Rights Reserved

Eric Fielding, Andrew W. Lo, Helen Yang

ECB/NY Fed/CFS Conference on Alternative

Approaches to Modeling Systemic RiskJune 9, 2011


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NTSBDisclaimer

The views and opinions expressed in this presentation

are those of the authors only, and do not necessarily

represent the views and opinions of AlphaSimplex

Group, MIT, the National Transportation Safety Board,

or any of their affiliates and employees. The authors

make no representations or warranty, either expressed

or implied, as to the accuracy or completeness of the

information contained in this article, nor are they

recommending that this article serve as the basis for anyinvestment decision. This presentation is for

information purposes only.


9 June 2011 Slide 2


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NTSB


9 June 2011 Slide 3

What Is Systemic Risk?

Systemic Risk Is Not Just Market Risk

April 14, 2000: U.S. stock market lost $1.04T

Shadow banking system is not the problem

Shadow hedge fund system is the issue!

Systemic risk arises when losses are unexpected

Banks

Money market funds

Mutual funds Pension funds


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9 June 2011 Slide 4

Implications for Systemic Risk

Current Regulatory Structure Is Inadequate

OCC, OTS, FDIC, Fed, SEC, CFTC, Treasury have

distinct objectives and tools

Sometimes objectives add to systemic risk! For example, Khandani, Lo, and Merton (2009)

Private sector cannot address these issues Not privy to systemic information

Not designed to account for systemic risk Analogy with pollution (Acharya et al., 2009)

What to do?


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NTSBHow Do Other Industries React To Crises?


Slide 59 June 2011


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NTSBHow Do Other Industries React To Crises?


Slide 69 June 2011

Pain and negative feedback produce a response

Fear learning, preventive measures

Many regulations arise from pain

The gift of pain

What if we felt no pain? Methamphetamine (crystal meth)

Disrupts feedback control loop

No learning, or incorrect learning

Studying failure is painful, but useful!

We need more negative feedbackloops


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NTSBThe NTSB

An independent federal agency:

Investigate transportation accidents

Develop safety recommendations

Origins of the NTSB:

Air Commerce Act of 1926

Civil Aeronautics Board Bureau of Safety (1940)

Independent agency within DOT as of 1967

In 1974, moved outside DOT completely

(Independent Safety Board Act in 1974)


Slide 79 June 2011


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NTSBThe NTSB

Reason for separation from DOT:

No federal agency can properly perform such(investigatory) functions unless it is totally separate

and independent from any otheragency of the

United States No regulatory authority

FAA, FRA, FHWA, and USCG are regulators

NTSB is free to criticize regulations and regulators Focus is on fact-gathering and analysis


Slide 89 June 2011


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NTSBThe NTSB

Organizational Chart


Slide 99 June 2011


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NTSBThe NTSB

Organizational Chart

Presidential appointees with 5-year terms

Chairman has 2-year term

Requires Senate confirmation No more than 3 can be from same party

A small agency (400 people) with huge impact


Slide 109 June 2011


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NTSBThe NTSB Accident Investigation Process

NTSB Responds 24/7/365 When Accident Occurs

Go Team arrives on-site within hours Investigator In Charge (IIC) manages the process

Team of experts who have worked together before

Member-on-call is the spokesperson Public affairs officer provides information flow

NTSB communicates with the media

Regular and frequent briefings

Focus on facts, not speculation or rumor

All information goes through one point of contact


9 June 2011 Slide 11


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Investigation has two distinct phases:1. Fact-gathering (may also include public hearing)

2. Analysis

1. External parties are invited to join Phase 1 All stakeholders included (airlines, pilots, FAA, etc.)

They receive access to information as its collected

Competition among parties is beneficial

Access may be withdrawn if parties act badly

NTSB leverages its resources through party system

May hold public hearings




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2. NTSB internal staff conduct Phase 2 (analysis): Reduces chances of conflict of interest

External parties can submit their own analysis

Must rule out other possibilities to determineprobable cause

Accident report is written Contains facts, analysis, recommendations

Must be approved by ORE, OGC, board membersbefore release

Not admissible as evidence in court!




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NTSBExample 1: Colgan Air Flight #3407



2/12/09, 22:17 ESTNear Buffalo, NY

All 49 on board and

1 on the ground

were killed


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Also called Continental Connection (code-share)

Crashed near Buffalo, NY, 22:17 EST, 2/12/09

All 49 on board died, and 1 person on ground

NTSB Go-Team led by IIC Lorenda Ward Arrived at the scene early next morning

Member Steven Chealander was spokesperson

Accident report adopted 2/2/10 First time investigation took less than 1 year




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The National Transportation Safety Board determines that the

probable cause of this accident was the captains inappropriate

response to the activation of the stick shaker, which led to an

aerodynamic stall from which the airplane did not recover.

Contributing to the accident were (1) the flight crews failure to

monitor airspeed in relation to the rising position of the low speedcue, (2) the flight crews failure to adhere to sterile cockpit

procedures, (3) the captains failure to effectively manage the

flight, and (4) Colgan Airs inadequate procedures for airspeed

selection and management during approaches in icing conditions. NTSB/AAR-10/01




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http://www.ntsb.gov/Events/2009/Buffalo-NY/AnimationDescription.htm


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Accident Report Contained Several Insights

Pilot Error Captain took exactly the wrong action

Pilots failed to follow Sterile Cockpit Rule

Hiring and Training Practices at Colgan Air Captain failed numerous tests during his career

Manifestation of bigger issues

Code-sharing practice Regulatory capture


Slide 189 June 2011


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Source:

NTSB


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NTSBExample 2: Minneapolis I-35W Highway Bridge

8/1/07 18:05 CST

13 people werekilled, 145 injured


Slide 209 June 2011
http://upload.wikimedia.org/wikipedia/commons/9/9d/35wBridgecollapse.gif


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NTSB does not have primacy for highway accidents

State police, local police, DPW, etc.

NTSB a welcome addition on the scene

Technical expertise

Communication with the public Objectives complement those of the police dept

Consulting firm hired by MN governor for parallel

investigation

NTSB established its authority

Consulting firm supported through party system


Slide 219 June 2011


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Party system in action

FHA, MN DOT, MN state police, Minneapolis police, HennepinCounty sheriffs office, Progressive Contractors

(maintenance), Jacobs Engineering (bridge design), etc.

Former Ph.D. student with thesis on this bridge

Cooperation and competition among the parties Finger-pointing between MN DOT and PCI, the construction

contractor (section 4.2 in paper)

Collectively revealed complete set of facts

Time constraints imposed by other parties

Controversies related to lack of public hearing

Accident report released 11/14/08


Slide 229 June 2011


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Source: NTSB/HAR-08/03 Report (2008, Figure 6)


Slide 239 June 2011


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The National Transportation Safety Board determines that the probable cause

of the collapse of the I-35W bridge in Minneapolis, Minnesota, was theinadequate load capacity, due to a design error by Sverdrup & Parcel and

Associates, Inc., of the gusset plates at the U10 nodes, which failed under a

combination of (1) substantial increases in the weight of the bridge, which

resulted from previous bridge modifications, and (2) the traffic and

concentrated construction loads on the bridge on the day of the collapse.

Contributing to the design error was the failure of Sverdrup & Parcels quality

control procedures to ensure that the appropriate main truss gusset plate

calculations were performed for the I-35W bridge and the inadequate design

review by Federal and State transportation officials. Contributing to the

accident was the generally accepted practice among Federal and State

transportation officials of giving inadequate attention to gusset plates duringinspections for conditions of distortion, such as bowing, and of excluding

gusset plates in load rating analyses.

NTSB/HAR-08/03




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NTSB accident report (NTSB/HAR-08/03):

Released 11/14/08 (accident happened 8/1/07)

Additional time required to rule out other

factors:

The following factors were considered, but

excluded, as being causal to the collapse:

corrosion damage in gusset plates at the L11

nodes, fracture of a floor truss, preexistingcracking, temperature effects, and pier

movement. (NTSB/HAR-08/03, p. xiv)


Slide 259 June 2011


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NTSBWill This Work For Other Industries?

Transportation accidents are discrete in time and

limited in scope Permits in-depth forensic investigations

Financial crises are continuously evolving andmarkets cannot easily be paused

Transportation accidents are clearly defined

NTSB mostly reactive but still highly effective

Financial crises not always easily defined

Transportation accidents are cause-and-effect Financial accidents can be more complex


Slide 269 June 2011


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In transportation, nobody profits from an

accident (except undertakers)

You can trust people to be honest and moral about not

killing themselves. (Jeff Marcus, NTSB safety specialist)

How many lives is $50 billion worth? (7,761)

Intellectual property protected by patents

Financial firms use trade secrecy instead

However, we believe that several key elementsare transportable


Slide 279 June 2011


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Crisis management and communication

Board structure

Independent, non-regulatory status

Non-partisan investigations and party system Subpoena power

Focus on fact-gathering and analysis, not policy

Inadmissibility of report as evidence Reputation for accuracy, integrity, usefulness


Slide 289 June 2011


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NTSBConclusion

What role did securitization play in the crisis?

Were regulators asleep at the wheel?

If yes, which ones; if no, whats missing?

Are subprime borrowers better or worse off? Was bank accounting sufficiently accurate?

How much did monetary policy contribute?

Did the repo market fail? Should we change it? What are the welfare implications?


Slide 299 June 2011


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NTSBConclusion

Accidents happen (normal accidents)

How we choose to respond is critical

Forensic investigation is the starting point Independence, objectivity, expertise

The party system can leverage resources

Studying failure is critical for prevention

Financial accidents may be even more serious

Official of Financial Research may play this role


Slide 309 June 2011


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Thank You!

ntsb as a model for systemic risk mgt

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