Tim Bass
10-01-2008 11:33 PM
Yesterday I received a call from Penny Grosman, Senior Editor, Wall Street & Technology.** Penny was interested in my opinion, “are* CEP risk management applications will be the next killer application” for Wall Street. ** I enjoyed talking with Penny.* She caught up with me leaving a tailor’s shop in Chiang Mai, so I hope she did not mind hearing my stories of buying unique Northern Thai cotton fabric and designing my own casual shirts in the economic turndown.

We read many stories on the net where folks claim that the current financial crisis could have been avoided with more or better use of technology. * * This is expected, as software companies and IT professionals will often try to piggy-backtheir business development strategy on the “crisis of the day” to sell more goods and services.*** Honestly, in this current situation, the main technology that we needed was simple, accurate financial models.

For example, in the chart above, the US economy was doing quite well with US federal funds rates low.** Housing prices in the US were skyrocketing and there was a concern about inflation.*** There was an understandable concern the sustainability of that economy.


So, in perhaps one the most ill-advised Federal Reserve actions of many decades, the folks at the helm of the Fed decided to raise their lending rates around 500 percent over a two year period.

As we all know, primarily because of the action by the Fed, the world faces perhaps the worst economic disaster in modern times, while the US Executive Branch and the Congress fight over how to spend $700 Billion taxpayer dollars to inject liquidity into the markets to try to head off a global financial disaster.

It is amazing to me that the US Federal Government, or their advisors, does not have simple financial models with cause-and-effect analysis such as:

• Homeowners with adjustable rate mortuages will not be able to make payments;and
• Housing prices will fall dramatically; then
• Homeowners will default on loans where the collateral is much less than the asset value, and
• Banks will suffer great losses, and
• Lending will come to a halt, then
• Banks will collapse, then
• Wall Street will exit the markets in panic
• … and more trouble….. !!

There are and continue to be a lot of discussion and opinions about how risk management needs improvement. and I agree.** We will also read folks talk about how technology can be used to help solve this problem, including CEP/EP and related software (see also Capital Market CEP Fantasy Land). However, as much I would be pleased to see more CEP/EP applications and use cases, I do not believe that event processing technology is really very useful to solve the core problem of the current financial crisis.

The core problem is, seemingly, that our “financial experts” do not even have simple models that will illustrate what will happen when you rate the fed lending rates 500 percent in two years in an economy pregnant with adjustable rate mortgages.

To me, this does not appear to be rocket science.* The negligence by the US Federal Reserve and their advisors is astonishing.



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