Harvard Business Publishing

Very interesting observations and thought provoking as well. I believe IT may be the gun, but the gun is still in the hands and control of senior managers.

There is a Wall Street culture of win at all costs; with rewards that can exceed anyone's dream. Since some investment bank leaders refer to their business as warfare, and success is measured quarterly, this outcome was inevitable. Enormous pressure on people to achieve breathtaking results every day.

Lets examine the logic. I will give someone, who is not credit worthy, the opportunity to achieve the American Dream. Own a home. We all know it won't last, so these same people have the opportunity to experience the American nightmare, losing a home. Then lets take the mortgage and create a sophisticated investment vehicle, so that significant revenue may be achieved. Lo and behold, the mortgagees default (what a surprise) and the ripple effect causes a financial crisis.

The number of subprime mortgages is stagering. The write-offs enormous.

The only way to cure the disease, is to identify all the symptoms
and formulate a response that makes it difficult to repeat.

Look at Enron and its progeny. The result was Sarbanes-Oxley. When highly intelligent and creative people work the system to
achieve victory in the war of Wall Street, or in any business environment, the end result will result in another version of Sarbanes-Oxley.

By the way, this is not a wholesale indictment of Wall Street operations. It happens in every field when the rewards are so enormous, and no one regulates condut. How does the system control this type of behavior. This type of activity cries out for government intervention and regulation, which no one really wants. How much is it costing corporate America to comply with SOX? What is it going to cost corporate America to pay for the subprime debacle and the next series of regulations? Were the rewards really worth the behavior? I guess in some quarters they were.

Thanks for the opportunity to express my opinion on a very relevant topic.

It is a GARMIN Navigation system, not a GARVIN Navigation system. I guess spell check doesn't make us better either.

Kudos to Sviokla and McGilloway for presenting such an insightful and smart blog. Would love to hear more from them!

Interesting take on the issue - I agree and so would the IT community that commitment and investment in IT is definitely a strength of Goldman that has been greatly working to its advantage.

Interesting thoughts, but this article lacks compelling evidentiary examples.

Mortgage officers have access to all the information they need to assess risk and make good decisions. The financial institutions in the news made conscious and deliberate decisions to assume additional risk.

A more compelling article would describe the variance in risk management practices through varying business and economic cycles.

Definitely some truth to this commentary, but there is another aspect of technology at play here which also contributed to the sub prime mortgage crisis. Contrary to the blog, it is the lack of technology and transparency and the subsequent commoditization of knowledge.

The housing industry is the last major piece of the consumer market in which the transparency of prices and product availability remains essentially opaque until after the sale, and even then, it is an exercise in data mining which exceeds the abilities of the typical consumer. The price and availability of all other major consumer goods is widely available and accessible on the Internet. But, the monopoly of pricing and availability data enjoyed by professional real estate brokers under the Multiple Listings Service (MLS) and its variations serves to artificially inflate the real estate market. In addition, prices are artificially inflated by the very nature of the economic incentives associated with the real estate profession-- commissions. We have not enabled technology in a way to commoditize the knowledge required for purchasing and buying a home—i.e., consumers who fear or lack the knowledge are forced to engage brokers whose financial motives are driven by sales-price commissions, not the true value of the home. The lack of transparency around pricing and availability created the market for predatory sub prime loans— it was the perfect storm of coinciding events. Sites like www.zillow.com represent the beginning of the end of the real estate profession as we know it today. In the not too distant future, we will enable consumers to shop for and purchase a home with the same ease and transparency as buying a car from a no-commission CarMax dealer. Maybe CarMax should extend their business model to homes… hmmm… HomeMax.

Sounds like a big unseen systemic problem that accumulated over some time and due to the silo thinking nobody really realized what this was all leading to.

Technology alone is never a problem solver and we should use people's creativity and knowledge in order to straigthen processes in a "lean thinking" way.

This will be a great case study for the system dynamics field and the lean thinking community as well. Let's hope that we can take some good out of the crisis in the future.

Best regards from Leipzig, Germany (where banks also feel the downslope;-()

Ralf

I completely agree with the article.Focus on technology with an urgency to implement and show results, made it more vulnerable to such things. I think every company should go back to 10-20 years back and look at technology from that perspective and implement where and when required focusing on the real benefits it brings.

Rgds,
H

I think the article meant 'mark to market'.

The strong tie of financial management (note i didn't say leadership) driving IT management was faulty and it was noted as such by the IT community long ago as a disaster in the making. The communication path as an acceptable corporate idiom always be top down with IT as the bottom of the information chain. If we take advantage of circular management theory this misuse of funds, and talent, would not have been so widespread.

Much emphasis was placed on how things were done (management) and not what was done (leadership). It is time that IT is recognized as a partner and a facilitator instead of a means to the end. An organization is only as strong as all the links (silos) in the chain. If they do not interwine as they are built the chain cannot stand the test of time.

As a consultant of sorts; namely Information Technology and Real Estate Finance, (i.e. Mortgages), I cannot agree more with the writer(s).

The need for the allignment of information technology with clear business objectives and processes is ever more urgent in today's high technology and complex business environment.

However a clear distinction in the role of technology as it relates to loan(s) and mortgage origination and the mortgage industry as a whole and the capital and money markets i.e. the securitization of the same mortgage products and subsequent disposal as financial instruments on wall street should be made here.

"After all, the subprime mess was not a conspiracy cooked up by a few investment bankers; it arose from practices that were endemic to Wall Street." - Financial Times

My two cents!

Too much of performance orientated approach and irrational expectation coupled with high rewards, leads this kind of situation. A very good article.

I also agree with the article about argument that current problems with credit crisis and resulting loses at major financial institutions are mainly due to silo or disparate systems leading to the prevention of well-integrated information flow.

As authors pointed out, I also think most of these problems were not driven by technology initiative but encouraged by short-term incentives focusing more on "partial optimization of specific functionality" than on "integrated IT architecture". In most of cases, this kind of IT silo is a result of organization structure designed in that way intentionaly by management while what company as a whole needs is a circulating information flow of early warning signal captured at the very front end of business.

Maybe CEOs of today's financial institutions should benchmark the way national weather foreast department monitors and takes actions for hurricanes approaching to us after all.

From the information I have gathered on this debacle, it wasn't a lack of a sophisticted information technolgy systems at fault here. It was simply a lack of ethics operating at every level of the business entities involved. From the customer who lied about their annual income levels, the mortgage sales reps who encouraged it, the mortgage management and investment bank community who ignored the due diligence process when securitizing the loans, to the mortgage guarantors who insured the mortgages, so the securitizition process could take place without the otherwise required disclosure requirements.

What do you expect? We live in an age where we expect our elected representatives to be corrupted by special interest and ignore the general citizenry, expect our athletes to take steroids on the sly, and expect eveyone on board the business enterprise to wink and nod when confronted by questionable business practices.

Technology, indeed! Guilty, guilty, guilty.

When the final bill comes due on this notion that things will be all right as long as everyone buys in to the lie, it will bancrupt us. And we will only have ourselves to blame. Everyone of us.

Beautiful article. Makes complete sense.

While I write this, I gaze with horror at the trading terminals. All world indices, including Sensex (India) has plunged like never before. I cant understand why all the smart people around completely forget fundamentals again; and again. For me, once a stock is priced at 15 times or more of its EPS, I dont go anywhere near it. Of course, I understand that sun-rise industries are bound to see their earnings grow exponentially, but for that I need real insight into their ops, leadership and strength of vision.

And now, wait with bated breath. I have this funny feeling that Hedge Funds are in for some real mothering in the days to come. Watch out.

With all due respect this argument and the following dialog totally misses the point. It is not technology or the system but intrinsic human nature what is at the root of all our pains. Bubbles and crashes are all too normal (remember those tulips?)

You know, the perception of reality is always influenced by recent events but ultimately people have a need for change. And therefore an overreaction happens.

Look, things have not changed that much, interest rates are still low and employment and consumption are holding, yes there are some foreclosures but hardly enough to bring the system down. I may be missing something since I have not perfect information but to me this situation looks like an irrational panic more than a symptom that technology spells the end of the world.

Well said, well done.

What about the Credit Rating agencies that assigned ratings to these pieces of paper?

It would be interesting to read a well researched piece on how the various Credit Rating agencies have rated these papers? What went wrong?

Kevin

Taking liberties with Mark Twain: "There are three kinds of lies: lies, damned lies, and statistics from the IT department." Regardless of the advance in technology, it can never keep pace with the scheming of energetic human minds fueled by irrational bonuses.

Good observation
to me it appears lack of blend between Enterprise Strategy Management and control issue.
Both needs panel or group of right people who could really contribute.i could notice with the name of cutting down the costs Higher management overlooks choosing right personnel/ control points/to gather internal information before judging contributions at various levels they end up making expensive mistakes ,the out come would definitely appears as if the problem is masked for short term but during long run it would bulge as ugly out come like this for any organisation

i would strongly agree with the point ignorence of information and service integration in the present industry would lead to adverse reactions..........no shot cuts for any system
is really possible beyond certain limits .

assumption of unrealistic figures is the biggest and costliest risk i see in the present BOA 's deal

thank you for opo
Shiva Tatineni