If you haven’t read it yet, those who are interested in how global finance could lose so much money on structured derivatives so quickly should definitely read this article by Michael Osinski in the New York Magazine. Titled “My Manhattan Project: How I helped build the bomb that blew up Wall Street”, it tells the story of the guy who wrote one of the key piece of software that allowed mortgages to be structured and sold by the investment banks – a tool that led to other CDOs and squared versions of the same.
It’s a great piece, reminiscent (as well as invoking) Michael Lewis’ Liars Poker. But one sentence that jumped up on me is one of the paragraphs where the write tries to justify his feelings of semi-guilt in relation to the recent turmoil:
The fact that my software, over which I would labor for a decade, facilitated these events is numbing. Is capitalism inherently corrupt? I don’t think the free flow of goods in and of itself is the culprit. No, it’s the complexity masked by thousands of unseen whirring widgets that beguiles people into a sense of power, a feeling of dominion over the future. (emphasis added)
This gets to the heart of a few ideas that I’ve been discussing recently, and another insight from my boss on a different topic (facilitating scenarios) today. Foremost among these is that tempting as may be, it is supremely dangerous to design systems that hide complexity or smooth over uncertainty – for this increases our tendency towards an illusion of control, which in turn leads to a lower sensitivity to risk (known and unknown), increased leverage, metastability and, finally, crisis. Which, taken all together, is not cool at all.