How Guilty Are CIOs (and IT) In The Global Financial Crisis?

When Things Go Wrong, IT Always Plays A Role…
When Things Go Wrong, IT Always Plays A Role…

Global financial crises are no fun. Those of us in IT find ourselves just like everyone else standing around and scratching our heads trying to figure out just what happened. It turns out that IT may have been a big part of the problem – we are part of the reason that the crisis happened in the first place. What do CIOs need to know about this and how can it be prevented from happening again?

What Does IT Do In Today’s Financial Markets?

It really doesn’t matter what market your products play in, if you’ve read any newspapers or watched any TV in the past 9 months, then you know that the world of finance has gone from bad to worse. Each one of the stories about this global crisis seems to have included the name of one of the guilty parties: IT.

It wasn’t always this way. Roman Beck recently wrote about how two dramatic events have shown just how resilient the world of financial IT systems is. The attacks on September 11, 2001, on the American financial district should have brought the U.S. financial clearing and settlement systems to a halt. But they didn’t. Instead, just a mere 3 hours after the attack the backup finance IT systems were up and running in international locations and U.S. currency processing was once again running normally.

The second major event was the attack on the London Stock Exchange (LSE) on July 7, 2005. In this case, the LSE could not handle the tsunami of automated trades that hit it when it was partially shut down. A few calls to trading firms got them to turn their “black box” trading systems off for a few hours and that gave the LSE IT systems enough time to get back up on their feet.

Beck points out that these were attacks that came from the outside and the financial IT systems were able to deal with them. However, the global financial crisis was caused by internal issues and this is where the CIO’s who are in charge of the financial IT systems dropped the ball…

What Happened To All Of The Liquidity?

In the current global financial crisis, what started as serious problem got out of hand quickly because of what was done with the financial IT systems that were involved. Everything started when Northern Rock, the 5th largest bank in the U.K. failed in February of 2008. This caused ripples, but not waves in the financial industry. However, when Lehman Brothers failed on September 15, 2008, everything came crashing down.

In the world of finance, Lehman Brothers acted as an investment bank. Basically, they were in the middle of other people’s financial transactions. When they went away, it caused everyone to have to rethink their risk exposure.

If Lehman Brothers could fail, who would be next? The IT systems that the financial firms were using automatically traded money between firms. It turns out that when Lehman Brothers failed, there were $100’s of millions of dollars in the system already flowing to Lehman Brothers – and there was no way to stop this from happening.

In order to prevent sending additional money to failing institutions, all of the CIOs in the financial markets instructed their teams to “pull the plug”. This brought the global financial IT infrastructure to a halt. This all happened because for one simple reason: financial firms had no way to calculate the credit risk at the same speeds that they were doing transactions.

The Problem With Exchanging Data

Ultimately this all comes down to a problem that financial industry CIOs have not been able to solve: how to exchange financial data. It seems strange that an industry that has been built on IT systems has not been able to solve such a fundamental problem.

One of the reasons that this has gone unsolved for so long is the simple fact that the modern financial market is driven by products – lots of products. The time between when a new financial product is dreamed up and when it starts to be sold is very, very short. Trying to standardize just exactly what is being traded would always be playing a game of catch up.

There are solutions out there that could at least start to address these issues. The Financial product Markup Language (FpML) is one such standardization approach.

Financial industry CIOs have a responsibility to change how they do business so that another global financial crisis like the one that has occurred recently does not happen again. To do this they are going to have to find ways to support the calculation of the risk of each financial transaction just as quickly as they support the transactions themselves. It’s not going to be easy to do, but it is going to be necessary.

What All Of This Means For You

Like it or not, IT is truly at the heart of almost everything that a business does. While this makes both IT and the role of CIO more valuable than they have ever been, it also means that IT plays a role in every unfortunate business event that occurs.

The recent global financial crisis came about due in part to the high-speed IT systems that made it so easy to quickly develop new financial products and trade them in milliseconds. What was lost in all of this was the simple fact that the risk of a trade had not kept pace and therefore trades were being made in which neither party had the IT tools that they needed in order to properly evaluate it.

CIOs run the IT department and ultimately they are responsible for the tools that IT produces and how they are used. It appears as though the world is going to eventually recover from this financial crisis. However, we might not be so lucky next time and so it’s the responsibility of CIOs to make sure that there is never a “next time”…

– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World IT Department Leadership Skills™

Question For You: Do you think that some CIOs should have gone to jail or lost their jobs because of their role in causing the global financial crisis?

Click here to get automatic updates when The Accidental Successful CIO Blog is updated.
P.S.: Free subscriptions to The Accidental Successful CIO Newsletter are now available. Learn what you need to know to do the job. Subscribe now: Click Here!

What We’ll Be Talking About Next Time

With a little luck, every CIO realizes that they are only as good as the people that they have working for them. What this means is that they need to be a good boss if they want to be successful. This leads to a critical question: how good of a boss are you? It turns out that most of us seem to think that we’re a better boss than we probably really are…