Shameless Self-Promotion: CI and the financial crisis

[Ken Sawka]

Kiplinger's Business Resource Center asked me to comment on whether better CI could have foreseen the financial crisis. Loaded topic to be sure. Here's my Kiplinger's post: http://www.kiplinger.com/businessresource/recommend/archive/2008/me...

Any thoughts? Did, or should have, CI played a role in helping foresee this mess?

[Tim Powell]

It's a really complex issue, as you say Ken, and there was lots of early warning.

Yale Economist Robert Shiller -- who coined the term "irrational exuberance -- has just just published a book, The Subprime Solution (Princeton). You can get a free chapter here: http://press.princeton.edu/chapters/s8714.html

Among other things, he says "...the current situation is really an opportunity to redouble our efforts to rethink and improve our risk-management institutions, the framework that undergirds our increasingly sopisticated financial sector." If you see intelligence as a part of risk management, as I do, his answer would be we "should have" seen this coming -- but didn't, because people suspended due diligence, fiduciary responsibilities, and plain old common sense in the pursuit of making more money.

No earthquake happens without preceding tremors. There were plenty of early warning signals here, some of which Shiller describes. CI professionals could play a lead role in identifying the many points at which financial intelligence failed, and how it can be fixed.

The undermining of financial data calls into question much of what we all do as "CI professionals". Like most of you, I use audited financial data constantly, and (up until summer 2007) have tended to assume it is more or less correct.

For us, it's more than a financial crisis -- it's an information crisis. I've written my own interpretation to that effect ("Our Radar Has Failed") here: www.knowledgevaluechain.com.

[Eduardo]

Kenneth: Good business models, even risky ones, may (or may not) prove to be successful. One does not know at the beginning and projections should consider a couple of possible scenarios (including worst case). Should anything go wrong, one should be prepared to face "results and/or consequences". It is not as simple as overbooking a flight. The dot.coms are clear examples, since not all resulted in successful stories. Nevertheless, JB and amazon proved to be worthy of billions of dollars of trust; even against the odds. There was reasoning behind it. There were even fall back positions. In the case you address I am missing both security parachutes. Ethical practices (it is not only about regulations) "seem to be missing" (!!!). External CI could have maybe helped; who thought about it? Internal CI was probably looking another way. So, what come next; who will be the next one...? Eduardo