Why the Bankers' Models Failed in Crisis: A GPS Program is Not the Same as Real Traffic

Lost, trapped and at risk of a serious crash.

That could very well describe the participants in the financial markets turmoil of the last two years. Instead it was my experience last Saturday afternoon – as an anxious and helpless rear-seat passenger during a frustrating hour fighting the exit traffic after a major college football game.

Autumn weekends in America are given over to exotic rituals. Cult-like herd behavior, irrational devotion to long-odds causes, microscopic analysis of esoteric game plans, prayerful invocations of last-minute rescues, and the frequently-literal intoxication of victory and defeat -- all the ways that bankers and investors behave during the routine work-week are migrated on Saturdays to tail-gate barbeques and stadium hoopla.  

Among a hundred thousand fans choking the bottle-necks of the parking lot, our driver was hopelessly conflicted. We were trying in futility to drive against the overwhelming flow toward the tollway. Normal daily street patterns were closed against us, and stern patrol officers blocked our turnings and waved off our intentions.

Trying at the same time to cope with the double distractions of his co-pilot working a cell phone and the urgently artificial voice of the dashboard GPS that insisted we should be taking forbidden routings, he also faced the threatening reality of aggressive crossing traffic at each frustrating intersection.

The recent banking and credit markets crisis was perfectly reflected in our dilemma: ordinary daily transaction flow was overwhelmed by an exceptional one-time event – an unruly horde in single-minded escape mode had nowhere to go – and an on-board warning system could not comprehend the disruptive effects of events beyond its programming.

The disconnection for the driver between the seductive directions of the GPS, to plunge into the systemic dysfunctionality of the streets, would perhaps have resembled the state of market unreality, going back to Jimmy Cayne’s dislocation as the presumptively risk-managed real estate funds of Bears Stearns spun into collapse.

Think of a traffic-guidance system as a risk management tool, in other words: it can start as an aide – but becomes a dependence -- and then an addiction. However luxurious the vehicle, it is a dangerous instrumentality when the driver’s ability to reckon direction has atrophied under commitment to a model that seizes up under stress.  

In short – as the data loaded in a GPS cannot imagine or replicate a post-game traffic jam, neither can a triple-A rating or a quantitative calculation of daily ValueAtRisk hope to capture the no-exit entrapment of an interlinked portfolio of subprime mortgage-based securities.

There are three further comparisons – one being the common and universal nature of the predicament. Equally pinned in the single-lane mess were the limousines of the VIP alumni, the high-end sports vans of the tail-gaters, and the boisterous bus-loads of drunken end-zone fans – all were as captive as Citi’s Chuck Prince and the feckless vision he imposed on the entire industry in July 2007, to keep dancing “as long the music is playing.”

Also, with every state trooper and traffic monitor devoted to prodding the crowd on its way out of town, the overload on law enforcement was evident. Marauding gangs could have been looting the Food King or emptying the town’s ATM’s – while the over-stressed constables echoed the SEC’s paralysis during the banks’ disintegrations or its curbside blinking at the predations of Bernie Madoff.

And finally: dispersion of the congestion was inevitable, and we eventually broke free. Accelerator down at last, our driver was excited: “Full speed at last,” he crowed.

“Yes,” said the still-befuddled navigator from behind his map. “Unfortunately, we have no idea which way we’re going.”

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Comments

[charlie]

Yes, isn't that football GPS analogy accurate to the recent banking crisis. All the world's a football game and we are merely the drunken fans in hysteria following each other to sport's GPS mecca!

[Software companies]

Cool,

Keep up the good work,

Thanks for writing about it