Aug 5, 2008

Weather Report - Perfectly Stormy

Lately, the "Perfect Storm" metaphor has returned with gale-like force to explain all manner of business failures. This buzzphrase hasn't enjoyed such popularity since the collapse of the bubble in 2001-2003. Most recently, WCI Communities (NYSE:WCI) , a developer of luxury homes and towers in southern Florida invoked the meteorological metaphor to explain its bankruptcy filing.

(Read article from NY Times Dealbook)

And WCI is not alone:

(Read article from

As I recall it, a perfect storm is a "100-year" storm, a weather event so unusual that one should expect it to occur only once in a (very long) lifetime. Of late, however, every corporation that runs into a patch of rough water seems to blame a perfect storm of economic headwinds for its difficulties.

It's ironic that Wall Street types use such an extraordinary metaphor to describe the utterly predictable. Notwithstanding the dramatic moderation in the cyclicality of the U.S. economy since 1982, the U.S. has suffered a recession roughly every decade since then. We suffered through the savings & loan crisis in the early 1990's and today -- only fifteen years on -- we are in the midst of yet another real-estate related banking crisis. We've had a bubble market and crash in tech stocks and residential real estate in the first decade of this new century alone. These are hardly once-in-a-lifetime events.

Even more ironic, if the Wall Street whiz kids who created (and the credit agencies who rated) AAA-rated CDO securities had actually understood what it means for a borrower to maintain the ability to pay uninterrupted interest and principal notwithstanding predictably improbable adverse economic events, Wall Street would've avoided much of its current mess.

Consider what a "once in a hundred years" event might look like. World War, perhaps? That's happened twice. Besides two World Wars, the last hundred years have witnessed the rise and fall of the Soviet Union, four different governments in Germany, uncontrolled hyper-inflation of the deutschemark, 25% unemployment in the U.S. and exactly one World Series championship by the Chicago Cubs.

Many statistically improbable events actually do occur in a hundred years, and some of them naturally merit the "perfect storm" designation. But residential over-building in Florida, followed by a collapse in housing starts during a period of tight money ain't one of them.

For another well-written article on the topic, see:

(Long-Term Capital: It's a Short-Term Memory)