The U.S. economy suffered a crippling financial recession that cost over $22 trillion in 2008. The financial securities industries’ incompetent information management is partially responsible for this financial meltdown. Had these companies followed a clear and effective information management strategy, they could have made different choices and perhaps prevented the crisis.
Missed information: Companies needed to identify and analyze available data to help avoid the crisis.
Uncollated data: There was no unified data platform for the industry, and no acceptance or mitigation of resulting risk.
Misinformation: Some data was ignored or inappropriately used, and a lot of data dismissed due to lack of regulatory oversight.
Misused information: The data wasn’t turned into actionable insights.
Absent data led to flawed assumptions
In the early 2000’s, the housing industry operated under the flawed assumption that real estate prices would continue climbing at their current accelerated rate. This assumption was not based on factual data and there was a lack of due diligence in collecting the data.
The banking industry could have identified the excessive valuation of many homes if they had sufficiently collected and analyzed the available data and applied appropriate financial models.
Hundreds of lenders didn’t capitalize on available data as there was no centralized repository for historical activity or economic forecasts. Without access to that historical data, investors purchasing the securities couldn’t recognize the repeated errors of their predecessors. This data could have predicted a volatile economic environment. However, information management standards were ignored and the financial industry crisis ensued.
Bad data used in mortgage bundles
Mortgage bundle investors who purchased subprime loans from the banks relied on bad data. These investors assumed their properties’ future valuations would continue to rise without quality data to inform analysis of the housing market and its financial health.
They believed, even if homeowners defaulted on their loans, increasing valuations would make these investments worthwhile. However, the financial institutions didn’t have the information management tools in place to predict the property values’ initial drop.
At the behest of the financial industry, lenders provided mortgages to homeowners with massive variable interest rates and delayed balloon payments. When interest rates rose and balloon payments became due, homeowners were unable to make their payments and eventually their homes fell into foreclosure.
Investors held properties that weren’t worth the amount of outstanding debt, costing them billions of dollars in their portfolios. These investors could have sidestepped financial ruin if they had insisted on proper investment principles, including the use of high quality data and correct analysis of that data.
Fraudulent misinformation and greed
Mishandling of data occurred with the ratings agencies responsible for evaluating loans and assigning value to the securities that traded loans. Data existed that identified these loans as risky. However, the ratings agencies had a vested financial interest in rating the securities artificially high; they were paid by the companies issuing the securities.
An information management strategy safeguards against these damaging conflicts and provides clear insight into the data. This strategy ensures a single source of conformational data exists without external influences, such as greed influencing data analysis.
Contact us for a complementary consultation on creating and implementing the right information management strategy for your business.