Steve Randy Waldman and Gary Silverman on the Virtues of Risk-Bearing

by Reihan Salam

Steve Randy Waldman, the blogger behind Interfluidity, is one of the more interesting thinkers on the web. Earlier today, he wrote the following tweet:

a “risk-taking culture” is fantastic, if risk-taking means risk-*bearing*. problem is risk-*shifting* re @johngapper

I then went to the Gapper blog post, which led me in turn to Gary Silverman’s (paywalled) FT column on the Triangle Shirtwaist fire:



At the time of the Triangle disaster, technology existed to mitigate factory fires. By the 1880s, the standard New England cotton mill was equipped with automatic sprinklers, reflecting mill owners’s efforts to band together in a “factory mutual system” in which they all insured themselves against fire.

But New York had a different insurance model and sprinklers were virtually non-existent in its garment factories. Here, the threat of fire was good for the city’s well-connected insurance brokers who made big commissions selling expensive policies. Garment makers, meanwhile, played the game the other way – and factory fires were all-too common at times when unsold inventories were high. 


To use Wall Street parlance, the Triangle owners were positioned to go long or short on shirtwaists – with fire insurance serving as their hedge. Before the Triangle disaster, Blanck and Harris collected tens of thousands of dollars on several late-night fires at their facilities. By March 25 1911, they had insured the factory for more than it was worth. Afterwards, they collected insurance payments exceeding proved losses – while also avoiding conviction on manslaughter charges. 

Silverman goes on to argue that there is a parallel to the financial markets:


In the years leading up to the turmoil, I can’t recall our leading bankers bragging that they had made mortgages easier for consumers to understand or had developed retail financial products that lowered the risk of defaults. Safety wasn’t the big concern; the profits came from churning out risky mortgage products and then helping investors bet against them, without much regard for the social consequences.

This is an interesting argument in itself. But Waldman adds a very valuable wrinkle. His tweet implicitly suggests that what we’ve seen here is “risk-shifting,” from bankers to borrowers and, ultimately, to taxpayers. And that is why he emphasizes the importance of risk-bearing, i.e., actually internalizing the risks that you’re taking and not just “taking” them in such a way that you only capture the upside. 

Waldman touched on this theme in August of 2008:


Of course we should regulate and manage the risks that were the proximate cause of the credit crisis. Anything too big to fail should be no more leveraged than a teddy bear, and fragile, poorly designed markets should be fixed. But that won’t be enough. We’ve trained a generation of professionals to forget that investing is precisely the art of taking economic risks, then delivering the goods or eating the losses. The exotica of modern finance is fascinating, and I’ve nothing against any acronym that you care to name. But until owners of capital stop hiding behind cleverness and diversification and take responsibility for the resources they steward, finance will remain a shell game, a tournament in evading responsibility for poor outcomes.

Investors’ childlike demand for safety has made the financial world terribly risky. As we rebuild our broken financial system, we must not pretend that risk can be regulated or innovated away. We must demand that investors choose risks and bear consequences. We need more, and more creative, risk-taking, not false promises of safety that taxpayers will inevitably be called upon to keep. 

This makes a lot of sense to me.