that financial industry professionals in investment banks, brokerages, pension funds, and other organizations lacked the tools to treat simultaneous crises from operational, credit, and market risks through an integrated risk assessment. This was not the kind of crisis IT specialists planned for.

Liquidity crisis

The collapse of Northern Rock, the U.K.’s fifth-largest bank, was the visible warning of the debacle to come. When Northern Rock was taken over by the British government in February 2008, no one considered the problems as related to IT. The crisis of Northern Rock was not big enough for that purpose. However, when Lehman Brothers failed on September 15, 2008 the role of IT in the debacle became clear. When Lehman Brothers faltered, financial institutions around the world were forced to reevaluate their risk exposure almost instantly. All of their IT systems were built on presumptions of an orderly flow of prudent business transactions; no one had imagined that the transactions themselves might be the problem. Lehman Brothers was an investment bank, an essential intermediary in global credit markets. Many banks had hundreds of millions of dollars queued up in payments to Lehman Brothers when the news broke. There were no IT routines in place to stop such transactions once they were initiated.

When it became clear that money was about to go into a black hole, the IT specialists in the banks did the only thing they could do: they pulled the plug on the IT infrastructure, thereby halting all operations. Banks around the world became risky partners simply because no one knew who was risky and who was not. All transactions were stopped and cash flow came to a halt. This was the dreaded “liquidity crisis” that is still being discussed widely. The only way banks could avoid sending good money after bad was to disconnect the IT systems from the global financial networks. Within hours, the lightning-fast global financial system had slowed to the speed of the pre-computer era. The effects were pervasive, hitting even the smallest financial institutions in the most remote corners of the Earth.

This crisis was not caused by IT, but an imbalance in IT infrastructure

it was not possible
to assess risks of
transactions as they
occurred, so financial
industry experts
simply assumed the
transactions were oK.

played a major role in its origin. The problem was a discrepancy between two essential capabilities: the ability to execute transactions and the ability to comprehend the implications of the transactions being executed. IT departments within financial institutions were able to deliver “millisecond information flows” for real-time processing of transactions. However, they could not support counterparty credit risk calculations at speeds to match the transactions. It was not possible to assess risks of transactions as they occurred, so financial industry experts simply assumed the transactions were OK. A few experts making risky assumptions might be protected if the vast majority of experts are executing due diligence and evaluating risks carefully. The few benefit from the equivalent of “herd immunity” in vaccinations against disease. When all of the experts assume the transactions are OK, serious trouble can follow.

Credit risk calculations require a lot of work. The data for them must be gathered from many—sometimes several hundred—data warehouses. Data in such systems is often inconsistent and subject to quality control problems. During crises expert analysts often face absurdly simple but debilitating problems, such as trying to determine what the headers in their data sets mean, or trying to deduce which financial partners have provided given data. It seems difficult to believe that such data problems were allowed to continue even as IT sped up transactions to light speed. But as it often happens with IT, different parts of the IT ecology develop at different speeds.

Calendar
of Events

May 17–19
Computing Frontiers
Conference,
Bertinoro, italy,
sponsored: siGMiCro,
Contact: Nancy M amato,
email: [e-mail]

May 26–28
The international Conference
on advanced Visual interfaces,
rome, italy,
Contact: Giuseppe santucci,
email: [e-mail]

June 1–4
23rd international Conference
on industrial, engineering &
other applications of applied
intelligent systems,
Cordoba, spain,
Contact: Moonis ali,
email: [e-mail]

June 1–4
international Conference on
supercomputing,
Tsukuba, Japan,
Contact: Taisuke Boku,
email: [e-mail].
ac.jp

June 3–4

The 20th international Workshop on Network and operating systems support for digital audio and Video, amsterdam, Netherlands, Contact: dick Bulterman, email: [e-mail]

June 4–5
design science research in
information systems and
Technologies,
st. Gallen, switzerland,
Contact: Purao sandeep,
email: [e-mail]

June 5–7 international symposium on Memory Management, Toronto, oN Canada, Contact: Vitek Jan, email: [e-mail]

June 5–6
aCM siGPLaN-siGsoFT
Workshop on Program
analysis for software Tools
and engineering,
Toronto, oN Canada,
Contact: atanas rountev,
email: [e-mail]