The Financial Crisis and Big Data

Cathy O’Neil’s experience at the Shaw Hedge Fund led to what she calls a “journey of disillusionment.” She was working in the heart of Wall Street when the financial market collapsed because of fraudulent behavior by the big banks and investing groups. She describes “hearing of people being manipulated, controlled, and intimidated by algorithms”. O’Neil says that WMD of subprime mortgage securities, were being appraised as high value securities when in fact, they were highly unstable, given that interest rates were going to increase because of adjustable interest rate loans. These were being put together as financial tools called CDOs. The credit bureaus are supposed to be giving these CDOs credit rankings based on their risk. These CDOs had mortgages with a high chance of foreclosing and a low change of foreclosing. However, there was corruption rampant because of the lack of independence from the banks and credit bureaus. The credit bureaus were giving the banks the triple A rankings they wanted even if the loans in the CDO had a high probability of foreclosing. An example of this fraud was of a strawberry picker who makes $14,000 a year getting approval of a $720,000 house. My biggest takeaway from this chapter was that as technology adds more capacity to do things like organize the world, the technology rarely ever contributes to the greater good of society, and instead is exploited by the wealthy and powerful for exclusive gain. With all of this computer technology and mathematical models, there could be a sophisticated means of establishing security in financial markets, favoring long term growth over short term gains. Given the fact that the market imploded after using the CDO mortgaged backed securities as the banks were rigging the system, its evidence that the greater good rarely ever occurs when new technology is introduced.