Why the Mighty Financial Companies Have Fallen

I feel like I’ve written this column before.  The headline could be, “How could Wall Street companies invest so much in technology yet know so little about their businesses?”

We’ve recently watched the Lehman Brothers meltdown, Fannie Mae and Freddie Mac become wards of the state, and once-big, strong companies such as AIG and Washington Mutual run with tin cup in hand to anyone who might have two quarters to rub together. It all makes me think that an awful lot of tech investment was misdirected, miscalculated or simply wasted.

I’m sure there are many Ivy Leaguers on Wall Street who can provide some quant or other high-flying-sounding analysis on why the technology systems in place were not sufficient to sound the alarm for Lehman or Bear Stearns or Fannie Mae, and so on, when their respective risks far exceeded any rational investor’s willingness to invest.

Here are my considered guesses as to what happened.

The smokescreen of “alignment of business and technology.” Ask any CIO what his or her job is, and chances are you will hear about business and technology alignment. But what happens when the real business of the company isn’t the one marched out in board meetings and PowerPoint presentations?

I doubt that any of the companies now shaking the financial foundations of Wall Street and beyond ever said, “Our business is to invest in ever-more-arcane financial derivatives tied to a real estate bubble until we get to the point where we don’t know where our money is, the risks involved or what will happen to us when this foolish bubble bursts.”

You won’t see that investment objective engraved in marble, and no one was trying to align his or her technology to that statement of purpose, but the real company strategy was the one that brought down these financial giants.

Outsourcing. This is a touchy subject. The best financial technology systems are the ones that are flexible, robust and secure, and that have an interface and user capability where you don’t need a programmer to perform every what-if scenario. A good financial business intelligence system would have been able to alert its users that things were getting mighty shaky in a world built on splintered financial instruments traded in the dark.

Outsourcing works best when you can precisely define what operations you want to hand over to an outsourcer, and then you don’t make a whole lot of changes in those definitions. I think Wall Street’s infatuation with outsourcing led it to save a lot of IT dollars and lose its ability to build new IT systems for new financial environments. Dumb move.

The lack of adult supervision. While the post-Enron era provided a host of regulations looking at reporting requirements, e-mail archiving and tracking of corporate financial data, a very big something was still being missed by the regulators.

It seems like the classic IT problem of building systems that can track a process down to its most minute details but are never able to roll up all those details into a strategic vision. Did all those government compliance regulations keep everyone so busy complying with the details that they missed the hurricane on the horizon?

Could be.

eWEEK Editor at Large Eric Lundquist can be reached at elundquist@eweek.com.