How Financial Crises are Like Hurricanes

Felix Salmon opines on how financial crises are similar to huge storms, such as the impending Hurricane Sandy barreling down on New York and the rest of the East Coast:

Financial crises are similar to storms: they require humility, not hubris. Being prepared can be helpful at the margin, but ultimately it doesn’t matter how good your liquidity management teams and risk ledgers and counterparty hedging operations are: if everybody else is blown over by forces beyond their control, then you will be too.

That’s why skyscrapers always used to be built well above the water level, and that’s why we used to have dumb regulations like Glass-Steagal and Basel I, which weren’t very sophisticated, but which generally did the trick. Buildings like 200 West are a bit like Basel III: they’re built with models, so that they can withstand certain forces. But if an unprecedented storm arises, they’re still more at risk than, say, Trinity Church, built more than 150 years earlier. Sometimes, simple common sense (high ground is safer, huge books of complex derivatives can blow up in unpredictable ways) does a lot more good than any amount of sophisticated preparation.

The gist of Felix’s post relates to how Goldman Sachs is protecting its multi-millionaire dollar headquarters with sandstorms, but the analogy can be expanded to all the big banks.

Waffle House and Hurricanes

After Hurricane Irene last week, you might have become more familiar with the Saffir-Simpson scale that assigns a number, from 1 to 5, for hurricane strength based on wind speed. But in today’s Wall Street Journal, I learned of another measure. It has to do with Waffle House…

Turns out that Waffle House gains goodwill from being open when customers are most desperate, and so they try to either keep their establishments open during a hurricane, or recover as soon as possible.

Per the WSJ, after Hurricane Katrina, Waffle House decided to strengthen its crisis-management processes:

Senior executives developed a manual for opening after a disaster, bulked up on portable generators, bought a mobile command center and gave employees key fobs with emergency contacts. In a recent academic paper, Panos Kouvelis, a business-school professor at Washington University in St. Louis, pegged Waffle House as one of the top four companies for disaster response, with Wal-Mart Stores Inc., Home Depot Inc. and Lowe’s Cos.

So how can you glean the intensity of a hurricane? Cue the Waffle House Index:

Green means the restaurant is serving a full menu, a signal that damage in an area is limited and the lights are on. Yellow means a limited menu, indicating power from a generator, at best, and low food supplies. Red means the restaurant is closed, a sign of severe damage in the area or unsafe conditions.

The article is interesting throughout.