Separated at birth: Lehman Brothers, nukes

Great post from Nils Gilman on Small Precautions:

In 2006 RAND staged a wargame to think through the implications of a nuclear terorr incident. They created a specific scenario – a tactical nuclear device being detonated by a terrorist organization in the Long Beach harbor – and then staged a role-play to determine how key stakeholders would react and work together. The experience must have been incredible, because even the write-up is riveting. When I revisited this text today, however, what struck me with particular force was RAND’s assessment (this is in 2006, remember) of what the longer-term economic implications of such an event would be:

“The attack is likely to have dramatic economic consequences well beyond the Los Angeles area:  

  • Many loans and mortgages in Southern California might default. 
  • Some of the nation’s largest insurance companies might go bankrupt. 
  • Investors in some of the largest financial markets might be unable to meet contract obligations for futures and derivatives. 

“While exact outcomes are difficult to predict, these hypothetical consequences suggest alarming vulnerabilities. Restoring normalcy to economic relations would be daunting, as would meeting the sweeping demands to compensate all of the losses.”

As some of you will no doubt observe, all of these consequences in fact did come to pass just two years after this report was issued - as a result of the Lehman Brothers default, the consequent collapse of AIG, and the cascade effects which are still creating malign reverberations throughout the global economy, above all in the Eurozone.

Usually when people say that something would be “like a nuclear bomb going off” they are exaggerating; but in the case of the Lehman default, it is accurate.