February 13th, 2013
It turns out that we might have a new culprit to whom we can apportion a share of the blame for the financial meltdown of 2007/8. After the investment banks, the credit ratings agencies, ineffective regulators, politicians who preferred to look the other way and a section of the public that was in thrall to the idea that living on credit was a good idea, bring on Microsoft, for making Excel so temptingly easy to use any time you need to juggle some numbers. James Kwak takes up the tale:
I spent the past two days at a financial regulation conference in Washington (where I saw more BlackBerries than I have seen in years – can't lawyers and lobbyists afford decent phones?). In his remarks on the final panel, Frank Partnoy mentioned something I missed when it came out a few weeks ago: the role of Microsoft Excel in the "London Whale" trading debacle.
The issue is described in the appendix to JPMorgan's internal investigative task force's report. To summarize: JPMorgan's Chief Investment Office needed a new value-at-risk (VaR) model for the synthetic credit portfolio (the one that blew up) and assigned a quantitative whiz ("a London-based quantitative expert, mathematician and model developer" who previously worked at a company that built analytical models) to create it. The new model "operated through a series of Excel spreadsheets, which had to be completed manually, by a process of copying and pasting data from one spreadsheet to another." The internal Model Review Group identified this problem as well as a few others, but approved the model, while saying that it should be automated and another significant flaw should be fixed. [...] After the London Whale trade blew up, the Model Review Group discovered that the model had not been automated and found several other errors. [...]
Truth be told, this isn't really Excel's fault. If Lotus 123 for Windows and the rest of the IBM/Lotus SmartSuite had won out in the early/mid 1990s against Microsoft's Office bundle, they'd be saying exactly the same thing about Lotus 123 in that report. The real issue is that spreadsheets by their very nature just beg to be used as a quick, interactive tool for iterating your way to a solution that's 'good enough'. As various commentators at the associated Hacker News thread explain, the difficulty is that – unlike a formal programming environment used by someone who has learned the hard way that all programs have bugs so you need to test for them – spreadsheets provide almost no real framework for testing and debugging unless the user (who as often as not knows nothing of programming beyond creating Excel spreadsheets and has a worryingly elevated view of their own competence) implements one for themselves.
The two articles are fascinating; I'm going to be following some of the links in that Hacker News thread for days to come. I had no idea there was such a thing as a European Spreadsheet Risks Interest Group, but there's no denying that there absolutely should be one.
[Via The Browser]