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October 1, 2008

Wall Street and Data Management

Well folks, I have been on a little hiatus from blogging but now I am back andthis debacle that is hitting the U.S. and world economy has me a bit steamed. So by now you have all noticed that the stock market is a little down, OK, well, way down and that Lehman Bros. is bankrupt, Wachovia just got bought, Freddie Mac and Fannie Mae were nationalized and AIG received a government guarantee.

All of this was caused by the collapse of mortgage backed securities that are a kind of mathematical product that is based on mortgages that people like you and me take out to buy a house. So in the end, the collateral for these securities are the homes that people own and in many cases, the homes that the banks now own after people defaulted on their loans because they couldn't afford them in the first place. Note that I am not blaming the homeowners any more than the lenders. They are both complicit in this whole thing.

Anyway, in the end, these securities are based on loans that are bought and sold from bank to bank and the securities then get packaged up and resold and then repackaged and resold until eventually it becomes extremely difficult to trace back what mortages are actually tied to any particular mortgage backed security that was sold/bought.

So while a significant portion of what has gone on in the past few months is simply about people getting greedy and assuming the housing market would continue to go up, part of this also has to do with poor data management practices.

So what does data management have to do with any of this?

One of the reasons for the meltdown is that the banks don't have the ability to price these mortgage backed securities because they lack traceability back to the source. They can't tell you what mortgages map to a particular financial product and as a result, no one can say if a certain set of securities is better or worse than another set. Now this particular problem is all about data management. The ability to accurately show the lineage that links the underlying asset to a complex financial instrument based on that asset is not a skill that most banks have. As a result, this only inflames the lack of confidence that has been injected into the market due to the housing bubble bursting, people not being able to pay their variable rate mortgages or refinance those mortgages at a lower rate. So while all of those non-data effects cause concern, lack of good data management to price out the true cost of those effects only pours gasoline on an already raging fire.

In my next post, I will talk about what companies can do or should have done to deal with this situation.

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