New Threat to the Financial System: Gravity

Last week reminded everyone that the heart of our financial system remains in Lower Manhattan, just a few feet above sea level. Amid all the tragedy and hardship, Knight Capital—the firm that earlier almost collapsed because of asoftware glitch—had to shut down its trading operations on Wednesday when its backup generators ran out of fuel.

Why? The answer is so ridiculous you wouldn’t believe me if I summarized it, so here is the story, according to the Wall Street Journal:

The company calculated that its three fuel tanks held a total of 1,200 gallons, or enough to power the generators “past 2 p.m.” [CEO Thomas Joyce] wrote. But the generators unexpectedly shut down at about 11:45 a.m. The problem: Fuel still in the tanks was useless. “Turns out the intake pipes, which [get] the fuel from tanks to generators, are higher than the bottom of the fuel tanks,” Mr. Joyce wrote. “In short, we had fuel but the construction of the fuel tanks prevented it from getting to the generators.”

So somewhere in the operational chain of command, somebody overlooked the fact that the effective capacity of their fuel tank was less than its actual capacity, because fuel doesn’t levitate. It sounds crazy to me, too, but the alternative is that the truth is even more embarrassing, and this is the story they concocted to cover it up.

Let’s hope that Citigroup knows how to measure the capacity of its backup generators. Some Masters of the Universe.

This piece is cross-posted from Baseline Scenario with permission.