naked capitalism

Swedish Lex says:

Yves,

There is nothing like a bankruptcy if you want to perform a post mortem. The obvious answer to me is to point to poor regulation and need for reform but those who argue that the core of the problem was that Lehman was allowed to fail probably feel vindicated.

Michael says:

COTS isn’t really all it’s cracked up to be … you just end up with another set of undocumented bugs to deal with for example, and a whole new knowledge set you need before you can even start. The only ‘plus’ is that this is handled by a third party you can ask later on down the track. But that isn’t much of a help when the logic is coded in some proprietary system glued messily to another, ad infinitum.

The other issue is any complex software is simply complex – no framework or tool can remove the complexity. Although coders might joke that ‘if it’s hard to write it should be hard to read’; this is simply a reality of any complex system. It’s simply the outcome of the fact that almost every non-trivial piece of software really constitutes some of the most complex machines ever designed by humans. It’s more like an oil refinery than say a car or truck.

Oh, and documentation takes too long to write and even longer to keep up to date. You’re almost certainly better off with no documentation beyond the source code, vs documentation which doesn’t reflect it – which is more often the case when it does exist.

I wonder if the knowledge has ‘evapourated’ on purpose anyway.

(i’m a software engineer, but never worked in a bank)

25Bankstreet says:

there are so many issues here it would be imposible to sum them all up here. what you have to know is that at any one time NO ONE EVER KNOWS how it all works. the systems which enable the global financial system are complex beasts and to understand even a single system truly you need not only someone very highly trained and motivated but someone who understands the full context of a system the traders who use it the business which is done through it. the algorithms and models which operate on it. the inputs it takes from markets and the numbers which come out of it and what they mean. In the Lehman case the firm had gone throgh 3 waves of redundancies pre bankrupcy where the human and intellectual capital of the people who ran many of those systems was eroded like a tsunami. when the non IT literate administators turn up they can barely operate a spreadsheet let alone a Complex exotics Off balance sheet fixed income trading and valuation system. because supporting and developing such systems is expensive and requires 3l33T 34NK1N $kills. and this is before the corrupt management and traders who fiddle the trade books for the benefit of PnL… and stuff… its just how it works…

Blissex says:

«the cost of documenting software (as in having the developers write up what they did in sufficient detail so a third party could maintain the it) was an additional 20%»

That is very optimistic if that refers to development costs. It is about reasonable if the base is total IT spending.

A famous author (Brooks) said that if writing some sw costs 1, turning it into a maintainable product costs 3, and if it is system/complicated sw that involves another factor of 3.

That is BTW one of the 2 reasons that free software is an economically sustainable activity: because just *writing* software is rather cheap. Turning it into a product is far more expensive, and selling and marketing it, and profits for shareholders, are even more expensive (most companies that sell software spend less than 15% of sales on developing the software; salesmen/marketing expense accounts in many cases total more than the cost of developing the software).

«the technology costs for derivatives have been underestimated.»

This is just a general case of a principle that I (re)discovered: that essentially all financial fraud (as opposed to simple embezzlement) is based on under-depreciation, that is running down assets. eating the seedcorn.

It is the age-old sharecropper problem, the quintessential agent-principal issue: that anybody who is given temporary control over an asset and gets a share of profits, will try to boost profits by running down the assets with too little depreciation (maintenance, repair, sustainable levels of use). Recognizing early the income and late the expenses associated with deals does the same of course. “Picking pennies in from of steamrollers”, ignoring longer term risks and failing to provide for them, is another variant.

The reason why this is almost always the basis of any fraud is that it is difficult to prove that under-depreciation is happening, and then things blow up because of it, then usually it is too late.

DownSouth says:

q,

There is undoubtedly a great deal of truth to what you say.

It all harkens back to something Keynes wrote to his lover, Lytton Strachey. “I want ot manage a railway or organize a Trust or at least swindle the investing public,” he said, “it is so easy and fascinating to master the principles of these things.”

So while some top intellectual talent has undoubtedly gravitated to Wall Street over the past couple of decades, that gravitation pull certainly hasn’t been to the trading pit or executive suite. And like you say, the real brains behind the operation certainly don’t bring down the kind of pay the thieves running the organization do.

That’s why pseudo-scientific nonsense like this from Luigi Zingales (see yesterday’s post “Capitalism After the Crisis” and “Free Markets” Newspeak) is so grotesque, and would be risible if it weren’t for the fact that this type of claptrap is used to justify the exorbitant salaries of traders and executives:

The explosion of wages and profits in finance also naturally attracted the best talents–with implications that extended beyond the financial sector, and deep into government. Thirty years ago, the brightest undergraduates were going into science, technology, law, and business; for the last 20 years, they have gone to finance.

Shoo! One wonders how Zingales keeps a straight face when he says these kinds of things.

But I think there’s a much larger question here, one that Hannah Arendt alludes to in Crises of the Republic:

The enormous growth of productivity in the modern world was by no means due to an increase in the workers’ productivity, but exclusively the development of technology, and this depended neither on the working class nor on the bourgeoisie (capitalists), but on the scientists. The “intellectuals,” much despised by Sorel and Pareto, suddenly ceased to be a marginal social group and emerged as a new elite, whose work, having changed the conditions of human life almost beyond recognition in a few decades, has remained essential for the functioning of society. There are many reasons why this new group has not, or not yet, developed into a power elite, but there is indeed every reason to believe with Daniel Bell that “not only the best talents, but eventually the entire complex of social prestige and social status, will be rooted in the intellectual and scientific communities.”

(It should be added that Arendt did not include the field of economics, nor any other of the social disciplines, under the rubric of science. Quite the contrary, she was most adamant in insisting that the behavioral sciences were a very different animal than the natural sciences.)

DoctoRx says:

The above comments (plus original post) represent a most interesting contribution to non-finance, non-techie people such as me. Appreciated . . .