The role of the database in the financial crisis

By Felix Salmon
November 23, 2009
this paper, by Norm Cimon, is still very interesting for where it places the blame for a large part of the financial meltdown: the rise of computing power generally, and the relational database in particular.

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It’s over a year old now, but this paper, by Norm Cimon, is still very interesting for where it places the blame for a large part of the financial meltdown: the rise of computing power generally, and the relational database in particular.

All securitizations, after all, are based on computer analysis of a database of underlying assets. And Cimon explains:

The development of a good relational database design relies on the sort of cooperative effort that only exists in a handful of companies. That’s because extracting all the information from the involved parties is a daunting task. The rule of thumb is that it can represent upwards of 85% of the effort involved in re-engineering a corporation’s data assets, while the actual code to accomplish the job accounts for less than one-fifth of the work…

Now imagine coordinating the collection of such information across something as vast as the global mortgage-backed security industry which developed over the last 5-10 years. It never happened.

The investment banks and ratings agencies who were putting this stuff together simply never stopped to dot their i’s and cross their t’s — they were originating bonds at such a torrid pace that they didn’t have the time to make sure that reality was well represented in the way their models were constructed. Anybody who tried to create the kind of well-formed database that Ted Codd would be proud of would fall far behind the pack, and never sell anything.

Cimon concludes:

Weizenbaum’s book contains a very powerful argument for exerting human control over important business processes. He understood intuitively what we would end up doing to our accounting practices, our banking concerns, our investment houses, and all the other institutions when easily automated tasks could thoughtlessly be driven by limitless computing power. With networked computers now cast by all organizations, including the financial sector, into the role of wizard-behind-the-curtain, we all live in Oz. It’s long past time we pull back the veil and call a halt to the mindless application of this supreme and supremely dangerous creation before the damage gets any greater.

In the age of zero-price computing power, it’s far too easy to cut corners and trust in black boxes. What’s more, it’s incredibly difficult for any regulator to audit such things: I don’t think the Fed or the SEC has a department of relational-database integrity. Maybe they should think about starting one up.

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