The Silo Curse

Excellent work Waking up to the 'silo curse' is far from the end of the problem by Gillian Tett

When Larry McDonald, a former bond trader at Lehman Brothers, recently wrote an exposé of that broker's collapse, he vented his rage at the ineptitude of former Lehman bosses, such as Dick Fuld.

Almost inadvertently, though, his colourful tale also highlights another curse of the modern financial world: silos.

For, as McDonald narrates in breathless detail, long before Lehmans collapsed in the autumn of 2008, its own fixed income department was already so alarmed by the real estate market that they were trying to go "short".

But, while one department of Lehmans was exceedingly bearish, other departments, such as the mortgage securitisation team, were aggressively bullish - and the different departments were in such rivalry, that they barely communicated, let alone co-ordinated.

The consequences of that unhappy tale are now crystal clear. But the saga raises a much wider moral, not just for bankers, but investors too.

In recent months, vats of ink have been spilt on the macro-economic and regulatory reasons for the financial crash. But one issue that has received less attention is the problem of how financial companies are structured - most notably, in terms of their tendency towards both structural silos (ie: departments that do not talk), and mental silos (financiers with tunnel vision).

This "silo curse" was central to many recent failures of public policy. Just look at how at the activities of groups such as AIG fell through the cracks of oversight because there were so many competing regulatory bodies in the US. Or note how British policymakers split monetary policy (managed by the Bank of England) from financial regulation (handled by the Financial Services Authority) and thus failed to curb the credit bubble.

Of course we see this all the time in information systems, where data, events and processes are highly optimized in one area but impoverished in other areas.

For one paradox of the modern age is that while technology is integrating the world in some senses, it is simultaneously creating fragmentation too. Moreover, as innovation speeds up, it keeps creating complex new activities that are only understood by technical "experts" in a silo.

Add to this the issues around a single, say insurance claim, that in its lifecycle must traverse 50 or 60 applications, different databases, security technologies and the fragmentation problem looks somewha daunting.