GIGO: How Lying to Computers Helped Meltdown Wall Street

The old computer science saying “garbage in, garbage out” has a very obvious meaning. If the data you’re feeding a computer is bad, or not complete, no miracle in the world is going to make it work.

A recent New York Times article by Saul Hansell explains how companies in the troubled financial industry tried to fool their computers (and themselves) by entering only partial information into risk management programs. With the programs running off incomplete data, things looked grand. But as we all know, this short sighted game did not last long. A poignant quote by Hansell sums it up: “Lying to your risk-management computer is like lying to your doctor. You just aren’t going to get the help you really need.”

From the NYT article:

Top bankers couldn’t simply ignore the computer models, because after the last round of big financial losses, regulators now require them to monitor their risk positions. Indeed, if the models say a firm’s risk has increased, the firm must either reduce its bets or set aside more capital as a cushion in case things go wrong.

In other words, the computer is supposed to monitor the temperature of the party and drain the punch bowl as things get hot. And just as drunken revelers may want to put the thermostat in the freezer, Wall Street executives had lots of incentives to make sure their risk systems didn’t see much risk.

“There was a willful designing of the systems to measure the risks in a certain way that would not necessarily pick up all the right risks,” said Gregg Berman, the co-head of the risk-management group at RiskMetrics, a software company spun out of JPMorgan. “They wanted to keep their capital base as stable as possible so that the limits they imposed on their trading desks and portfolio managers would be stable.”

NYT: “How Wall Street Lied to Its Computers”