Friday, September 19, 2008

Wall Street Unfair to Computers

It’s Friday and I’m feeling opinionated. And poor. Poor and opinionated.

For my money - or whatever’s left of it when the seas stop boiling – this post yesterday by NYT technology blogger Saul Hansell (“How Wall Street Lied to Its Computers”) contains the key to The Great Financial Folderol of 2008.

I highly recommend reading the whole thing. Hansell’s point, gleaned from experts and insiders, is that “the people who ran the financial firms chose to program their risk-management systems with overly optimistic assumptions and to feed them oversimplified data.”

This isn't exactly news here at Proxyland, where "risk management" was last year's Oxymoron of the Year. Firms created cool structured products and used fancy computer models to evaluate the risks they carried, but this was a case of modeling while intoxicated. Drunk on greed, arrogance, and self-serving optimism, people excluded from their models those scenarios that might be too depressing. To their bonuses, I mean.

Sure, this crisis has other contributing causes, like cheesy capital requirements and greasy mortgage brokers. However, as they teach you in law school, there’s this thing called “but for” causation. Here’s how it works: But for Wall Street’s irresponsible behavior, I wouldn't have been too jittery this week to enjoy the season premiere of House.

Not everyone on the Street screwed up, of course, and many honest, conscientious souls work there. But given the popularity of structured products and the domino-ish nature of financial failure, it only took a few wise guys to mess it up for everyone.

As the bumper sticker says, “shit happens.” Now that’s what I call a risk model.

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