Use wikinomics to whack financial crisis, says Tapscott

Last September, just before financial markets around the world began to collapse, Canadian technology author Don Tapscott found himself in Vienna, watching a room filled with smug Europeans thinking they were safe.

 “They were looking at what was going on in America with the sub-prime mortgage crisis, and I was surprised by their attitude. They were gleeful,” says Tapscott, who was attending the annual SIBOS conference of financial executives in Vienna. “I told them, ‘Don’t be gleeful, because you’re next.’”

 Tapscott spoke last week at the University of Toronto’s Rotman School of Business, where he had gathered together a group of leading economic thinkers to discuss the challenges facing financial institutions and regulators amid the deepening global recession. Tapscott’s consulting firm, nGenera, recently published a white paper that takes the core principles of his best-selling Wikinomics and proposes they be used to overcome the financial crisis and restore stability to markets. Instead of Web 2.0, think risk management 2.0.

 “What this situation requires is not just a fresh infusion of capital but a whole new operating model,” Tapscott said, adding that it will likely require more effort from the private than public sector. “Rather than being the recipients or victims of government, private companies need to collaborate on a global scale and work together.”

 End the opacity

 Guests at the Rotman panel suggested that one of the biggest problems that lead to the current financial market breakdown is its inherent complexity. Dan Borge, director of a consulting firm called LECG, said even some of the senior management team at major financial institutions didn’t fully comprehend what their employees were selling.

“There were instruments that nobody really understood because they were part of the financial system,” said Borge, who once lead corporate strategy at Bankers Trust and the designer of RAROC, one of the industry’s first enterprise risk management systems. Although financial institutions did a lot of data modelling, he added, that may have led to their downfall. “It just became obsessively analytical. That led down to complexity and then opacity.”

 Tapscott says a wikinomics approach would involve more transparency among financial firms, using digital tools to drill down into the underlying assets of things like collateralized debt obligations (CDOs) and other securities. Such tools are already used in business intelligence software to track sales figures and marketing campaigns, and similar dashboards could help CEOs get a handle on how risky certain investments are.

 “It’s never been more true that sunlight is the best disinfectant, and we need a lot more of the sunlight that these smart digital tools can offer,” Tapscott said.

 Now peer this

 Despite the assets at their disposal, many financial institutions have been slow to embrace electronic processes for key elements of their business. Tapscott referenced the mountains of paper that represent thousands of mortgage applications. The information in these boxes is usually accessed only by the rating agencies such as Moody’s to gauge how risky these lending agreements were.

 The second key principle of wikinomics, after transparency, is “peering” Tapscott said, which in this case would involve an unprecedented level of cooperation among financial institutions and regulators to do a better job of making information more available to outside parties.

 “We need to tag things in XML,” Tapscott said. “This is where you use SOA messaging to connect the data.”

John Hull, Rotman’s Maple Financial Group chair in derivatives and risk nanagement, said the technological facelift has to go hand in hand with a more personal analysis of financial data.

 “There’s no question that there was too much of a mechanistic application of risk management. (Investors) just relied on the ratings,” he said. “There wasn’t enough human judgement.”

 The great IP exchange

 The wikinomics approach goes one step further, Tapscott added, by suggesting financial institutions actually begin to share intellectual property around the models they use to evaluate risk.

 “Why don’t we open source our risk management model?” he asked. “We’ve tried in the past to keep this separate, but it didn’t work. It was no source of competitive differentiation.”

 Hull insisted there has, in fact, been some sharing of IP going on already. “JP Morgan shared their risk metrics models and opened up their database of market variables. They’ve made some of their calculation technology available as well,” he said. “It’s hard to get them to share technology for valuing complex deals.”

 Firms may one day have no choice. The nGenera white paper cites an unnamed CIO with more than 200 partially reconciled databases of customer information.

 The world-wide financial wiki

  One of the few tangible offerings to come out of the Rotman discussion came from Tapscott’s brother Bob, the interim CEO at consulting firm RIS. The company recently developed the Wiki Risk Assessment Process (WRAP 2.0), a global online community of expert modelers and modeling resources dedicated to unlocking today’s credit and structured asset markets. 

 If banks and other firms could tap into the “wisdom of the crowds” to better educate themselves on financial risks, we might avoid a similar recession, Bob Tapscott said. The market may also reward those who share more information compared with those who don’t. He acknowledged, however, the industry may have a long way to go before it acts more globally.

 “It’s going to be a major forensic exercise to go in and figure out the secret sauces of the financial industry,” he said.

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