Friday, November 21, 2008

Graveyard Spiral

While descending turns are commonly performed by pilots as a standard flight manoeuvre, the spiral dive is differentiated from a descending turn owing to its feature of accelerating speed. It is therefore an unstable flight condition and pilots are trained to recognise its onset, and to implement recovery procedures safely and immediately. Without intervention by the pilot, acceleration of the aircraft will lead to structural failure of the airframe, either as a result of excess aerodynamic loading or flight into terrain. Spiral dive training therefore revolves around pilot recognition and recovery.

— "Aircraft Dynamic Modes," Wikipedia

I do not know whether you already know this, O Dearly Beloved, but apparently human beings are not well designed for powered flight. No, no, I am not pointing to the incontrovertible fact that few humans outside of the occasional Managing Director at Goldman Sachs possess either wings or the chest and back muscles to power them. Rather, I refer to the rather more subtle limitation that our internal mechanism for determining motion and orientation is not well suited to many of the maneuvers one can and does perform in three dimensional space at the controls of an airplane.

Especially when one does not have an external visual reference point to fix on, executing a gradual, sustained, or slow turn in flight can trick the inertial orientation system in your inner ear (and hence you) into believing that you are not turning, but are rather holding to a straight course. This can be disorienting when you attempt to change direction, since your body has no kinesthetic clues as to your current course. All sorts of spatially disoriented behavior can result, including my favorite, the "leans."

[While I have never piloted an aircraft myself, I have experienced a rather similar disorientation now and again when I have unexpectedly discovered myself listing to port or starboard on the perch of a barstool somewhere in the Midwest while plying clients with booze and other controlled substances. The bartender moves away, and suddenly you notice a thoroughly disreputable character, tilted thirteen degrees from vertical, leering at you from the mirror, with the tip of his Hermes tie swimming in his neighbor's Budweiser. It's not a pretty sight, and it's even less pretty when you realize that's your tie which now needs to be drycleaned. But I digress.]

Among the most dangerous maneuvers resulting from this disorientation, the cheerfully named "graveyard spiral" usually happens when a pilot loses sight of the visual horizon and enters a gradual turn. After 20 seconds or so, the pilot loses all sense that he is turning, but rather feels that the plane is descending in a gradual straight line. If the pilot does not consult his instruments to check whether he is indeed level or in a turn, he will likely try to pull out of the dive by pulling back on the stick and applying power. Unfortunately, if you are already in a turn, aeronautics dictates that doing this will only tighten and accelerate the turn, locking the plane even tighter into its downward spiral. Eventually, if the pilot does not correct, he gets trapped in a high speed spiraling dive that is almost impossible to pull out of.

The right thing to do instead, apparently, is cut the throttle to reduce acceleration, check your instruments, and gently turn out of the spiral. This will feel weird, but the point is that you have to trust your instruments, not your gut, the seat of your pants, or your inner ear.

* * *

As we witness the increasingly fast, increasingly narrow turns that Citigroup is making this week on its continuing spiral toward a sticky end, I wonder whether it is too late to give CEO Vikram Pandit a little in-flight training. Clearly he thinks the appropriate response to Citi's sinking stock price is to pull back on the stick and goose the throttle, proclaiming ever more strenuously that all is well and that he intends to stay the course. But Citigroup is not in a straight line level dive.

What Pandit does not seem to realize—and what Bear Stearns' Alan Schwartz and Lehman's Dick Fuld failed to realize before him—is that his company is experiencing a potentially deadly spiral of evaporating confidence. The more loudly he proclaims his own confidence in Citigroup's solvency and bright prospects—which may, for all I know, be objectively true—the more investors take a look at Citi's swooning stock price and rocketing default insurance premia and conclude he doesn't realize how desperate his situation is. They think management is in denial, or uninformed, or lying. This, in turn, destroys even more confidence, and the downward spiral speeds up. Trying to halt a slide in confidence by boosting confidence alone is not only futile: it is counterproductive.

No, what he obviously needs to do is slow things down, and begin acknowledging to his stakeholders that Citigroup needs to change course. (How he should do this, and what changes he should propose, are above my pay grade, although I might be persuaded to take the job for $25 million a year plus options.) Only these actions have a chance of persuading investors that Citigroup can last the weekend. Once they believe Pandit and the board acknowledge the seriousness of the situation, and are examining every alternative to correct it, they will stop running for the exits in panic. Confidence will stop evaporating, at least temporarily, and the company will have a few more days or weeks to pull some rabbits out of its hat.

(Of course, you still have to land the plane after you pull it out of a graveyard spiral, but at least you have more time, and a chance to do it without executing that charming maneuver, "flight into terrain.")

* * *

The real question of interest for me, Dear Readers, is what this promising but perhaps painfully extended metaphor means for the future management of highly leveraged, public financial institutions like commercial and investment banks. It is clear from the spectacle of Bear Stearns, Lehman Brothers, and other victims of the current panic that many if not most top managers of these firms were the rankest amateurs, in terms of management or piloting skills. Give them a clear, cloudless day, gentle supporting thermals, and no other traffic in the sky, and these panjandrums were more than capable of piloting their tricked-out Cessnas the five hours from Reno to Orange County. They got paid ridiculous amounts of money for flying under perfect conditions, too, almost as if they were personably responsible for the favorable weather.

But put them over unknown terrain, in fog, cloud cover, or at night, and let them drift into a gentle turn, and they fell apart. They had neither the sensitivity to tell when they were drifting into trouble nor the training and skill to recover from it. Their insensitivity to changing conditions, exacerbated by arrogance, swollen heads, and the echo chamber of handpicked loyalists in the executive suite put them all on the path to doom and destruction. They just kept listening to their inner ears and staying the course, never realizing they were steering directly into the ground until it was too late. Even now, most of these guys have absolutely no idea what they did wrong or how they should have acted differently to avoid cratering their once-proud institutions. Just ask Dick Fuld.

Fortunately, however, now that the United States government owns every financial institution larger than a piggy bank, we can make sure that this type of disaster never happens again. I recommend we institute a federally mandated Financial Institutions Piloting course for every executive with management responsibility over more than 10 people. Perhaps there could be a tiered license system, with candidate CEOs for large financial institutions only eligible to take the job after they have proved their skill by not cratering a regional bank and putting in 1,000 hours of Executive Committee flight time.

Either that, or we can conduct regular ear exams.

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