by Paul Murphy
October 8th, 2008 @ 12:15 am

The essence of the recent credit meltdown is simple: American banks are forced by law to value their mortgage portfolios at what others will pay for them, but because they also face minimal book equity percentage rules, a drop in the third party market for mortgage derivatives can force a bank into technical bankruptcy - and because that triggers a range of creditor protection measures which effectively shut down the bank’s day to day operations, financial institutions participating in inter-bank transfers with banks rumored to be headed for trouble either refuse to lend or raise their overnight rates and either way push their partners over the brink into insolvency.

On the surface the roots of this are well known - I believe the rather overtly partisan summaries provided by Charles Smith ( Cover-Ups Led to Financial Crisis), in this article by Thomas Sowell or in this eight minute youtube video are actually pretty close to what an unbiased person would have made from the facts.

None of the public finger pointing I’ve seen, however, addresses the IT role in this - specifically the general willingness of the IT people involved to quietly go along with senior management wishes instead of holding their collective feet to the fire on either, or both, the practical problems with risk valuation or the moral issues raised by public financial statements that must have seemed obviously dishonest to insiders.

Now on a personal basis I need to mention that reporting to the assistant deputy minister responsible for systems that he had neither the authority to embark on a hundred million dollar IT redevelopment nor the skills to pull it off, got me blacklisted by Alberta Health - and raising the issue, with the president of a mid range public company, that his finance vice president had just told analysts about the outstanding success of a major financial systems change that hadn’t actually started yet, got my contract pulled in short order.