Train wrecks

Sometimes a little bureaucracy is a good thing.

Los Angeles Times writer Steve Hymon reports today on Metrolink, the regional transit agency responsible for the worst train crash in modern California history, the September 12 head-on collision with a Union Pacific freight train that killed 25 people and injured 135 more.

Metrolink was created in 1992 when five Southern California counties were buying up freight train lines for use by commuter trains. "To keep it from becoming a large transit agency that would have to grapple with bureaucracy and labor unions," the Times reports, "Metrolink was purposely designed to keep expenses low -- its current operating budget is $159 million -- by relying on subcontractors."

Metrolink has just two hundred employees and is overseen by an 11-member board made up of people who have full-time jobs doing something else. It contracts out for almost everything, including engineers and maintenance staff.

Metrolink, the Times says, "has one of the worst fatality records of any commuter rail system in the nation."

Ron Roberts, chairman of the Metrolink board, told the Times, "It looks like we didn't have as much knowledge as we should have had."

If they'd had more knowledge, they might have had more redundancy, otherwise known as back-up. There was no one standing next to the engineer when he apparently ran through a red light and into the path of an oncoming freight train. There are reports that he may have been sending a text-message. Or he may have fallen ill.

Board chairman Roberts said he asked Metrolink's staff on Thursday what type of system is in the cab in case the engineer becomes unconscious. "They still haven't sent an answer back to me," he told the Times.

Maybe that is their answer. Nothing.

Maybe a sluggish, redundant bureaucracy with a little union feather-bedding would have saved the lives of 25 people who were just trying to get home that night. Maybe too much "efficiency" is a bad idea when safety is, or ought to be, the prime consideration.

Which brings us to the week on Wall Street.

On Thursday night, Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke went up to House Speaker Nancy Pelosi's office to meet with a select bipartisan group of congressional leaders and committee chairmen to explain the situation in the financial markets.

When the lawmakers came out of the meeting, they were ashen.

Secretary Paulson reportedly told them the United States financial system was days away from a complete collapse. He explained that the credit markets had dried up and were about to strangle the economy. He painted a picture of Americans losing their jobs, their retirement savings, and their homes. He explained the domino effect that the collapse would have around the globe.

"This is a very serious moment, very serious. It was a very sober gathering," Senate Banking Committee Chairman Chris Dodd said after the meeting. "I’ve been in the Senate for 28 years, Congress 34, there has never been a moment as serious as this one."

More serious than the 9/11 attacks, when lawmakers in the Capitol literally ran for their lives?

Secretary Paulson must have told them the markets were about to crash and plunge the country into a second Great Depression, just six weeks before voters go to the polls and decide whether to re-elect their congressman.

Here's some financial advice for you: Never play poker with Henry Paulson.

Secretary Paulson successfully silenced talk of hearings, amendments and deal-brokering that would delay new legislation needed to bail out the mortgage market. Treasury and the Fed apparently have exhausted the remedies available to them under current law. They took over Fannie Mae and Freddie Mac, forced a fire sale of Merrill Lynch and virtually nationalized AIG insurance, all to prevent the meltdown that is still imminent, or so the Treasury secretary persuaded the lawmakers.

Now the taxpayers are on the hook for as much as a trillion dollars, or who knows, maybe more.

Could anything have prevented this train wreck?

Funny you should ask.

In 1933, four years after the stock market crash that marked the start of the Great Depression, Congress passed a piece of legislation called the Glass-Steagall Act. The new law separated investment banking (issuing and selling stocks and bonds) from commercial banking (holding deposits and making loans).

Forbes Digital's Investopedia explains the reasons for the Glass-Steagall Act as follows:

Commercial banks were accused of being too speculative in the pre-Depression era, not only because they were investing their assets but also because they were buying new issues for resale to the public. Thus, banks became greedy, taking on huge risks in the hope of even bigger rewards. Banking itself became sloppy and objectives became blurred. Unsound loans were issued to companies in which the bank had invested, and clients would be encouraged to invest in those same stocks.

To prevent that kind of thing from happening again, the Glass-Steagall Act set up "a regulatory firewall" between commercial and investment bank activities and put curbs and controls on both. Banks were forced to choose whether they would become commercial or investment banks. The idea was to prevent losses in the investment banking business from bleeding the commercial banks, drying up the credit markets, and strangling the economy.

A similar firewall was built in 1956 by the Bank Holding Company Act. It separated insurance underwriting from banking. The idea was to prevent losses in the insurance business from bleeding the commercial banks, drying up the credit markets, and strangling the economy.

What a stale, old-fashioned, retro, backward, unenlightened, bureaucratic idea!

Who needs firewalls!

Do you realize how much more efficient it is to merge investment banks, commercial banks and insurance underwriters? Why, you can probably fire half the employees at each company! They're redundant!

Millions of dollars in campaign contributions rained down on Washington, and in 1999, Congress passed and the president signed the Gramm-Leach-Bliley Act, repealing Glass-Steagall and all those other stuffy bureaucratic regulations that modern people are too smart to need.

It only took nine years for the financial system to go from dull and safe to thrilling and catastrophic.

A lot of people did very well on the way to the precipice. Many collected multi-million-dollar bonuses for printing up exotic new financial instruments on the letterheads of companies that still had a fine reputation for safety, built during decades of stale, old-fashioned, retro, backward, unenlightened, bureaucratic regulation.

One of the people who did very well for himself is former senator Phil Gramm, who left the Senate in 2002 and accepted a lucrative job as vice chairman of UBS Warburg investment bank. Thanks to the legislation that bears Gramm's name, UBS was able to buy the Paine Webber brokerage firm for $12 billion in 2000.

Senator Gramm told the New York Times he believes he was hired for his "expertise and abilities, not as a reward for his work in Congress."

That's nice. Everybody should believe in something.



Copyright 2008

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