Monday, November 21, 2016

Might BlackRock Become the Next Lehman Brothers?

America desperately needs better leadership and we in Texas should step up and provide that leadership.  We must understand banking and finance to safeguard America from more calamities like the Great Depression and the Great Recession.  One example of a company that deserves careful attention is BlackRock, Inc., a multinational investment management corporation based in New York City.  A recent article in the New York Times, This Man Oversees $5 Trillion by Landon Thomas, Jr. was published in the Sunday September 15, 2016 edition.

Here is what we need to notice.  The company was founded and is led by Laurence D. Fink, who  while at First Boston pioneered securitized mortgages along with Lewis Ranieri at Salomon Brothers, which led to the subprime melt-down and the Great Recession.  Now Mr. Fink has built up BlackRock and his firm has a software program called Aladdin (Asset Liability and Debt and Derivatives Investment Network).  This software is supported by 2,300 of BlackRock’s 13,000 employees.  Seventy-five firms — including Deutsche Bank and Freddie Mac — managing a total of $10 trillion, now use it.  BlackRock believes by feeding data to this program they can master risk.  Aladdin might be due for a fall.

Remember Knight Capital Group suffered a software problem that destroyed the company.  On August 1, 2012, Knight Capital deployed untested software to their production software systems, not a test system, but the real-deal.   The company quickly lost $400 million and was liquidated.  The Aladdin program is used to manage $5 trillion of BlackRock assets and another $10 trillion of assets in 75 companies that use the program.  Do you remember the Flash Crash on May 6, 2010?  Hundreds of billions of dollars were quickly lost on the stock market.  The market recovered.  The real losses were not divulged.  Imagine what a $15 trillion death dive would do to the world financial system.

Consider software design and reliability.  In November 1999 the Mars Climate Orbiter burned up because of a trivial software error, a failure to convert units from English to metric.  Then in December 25, 2003 the European Space Agency  ExoMars lander Schiaparelli crashed into Mars.  The heat shield and parachute ejected too early.  Another software error.  If rocket scientists cannot guarantee flawless software on something as simple as Mars satellites,  why would financial firms be more successful with more complex programs?

We in Texas need to master software design and software reliability so we can safe financial software, and so we can analyze and repair flawed financial software before it becomes too late.  Lehman Brothers was not as big as BlackRock when its demise dragged the world into the Great Recession.

John Connally and James Baker were Texans who were Secretary of the Treasury.  Surely someday another Texan will fill that roll and I hope that Texan understands the danger software poses to the world financial system.  But we  must do more than hope.  We must prepare our future leaders with education and experience to fill roles like Secretary of the Treasury.


This article is a thread within the The Texas Software Reliability Project.
This is also a thread within The Texas Banking and Finance Project

Saturday, October 22, 2016

Leadership and Morality in Dostoyevsky

The 2016 Presidential election has had people thinking about morality.  The Brothers Karamazov by Fyodor Dostoyevsky raises a few points about morality.  In this blog post I point out these points.

Dostoyevsky suggests a link between atheism and socialism.  He suggests that a person interested in doing good who does not believe in God would be inclined to become a socialist.  The passage below is from Chapter V:  Elders.

As soon as he [Alyosha] reflected seriously he was convinced of the existence of God and immortality, and at once he instinctively said to himself: “I want to live for immortality, and I will accept no compromise.” In the same way, if he had decided that God and immortality did not exist, he would at once have become an atheist and a socialist. For socialism is not merely the labor question, it is before all things the atheistic question, the question of the form taken by atheism today, the question of the tower of Babel built without God, not to mount to heaven from earth but to set up heaven on earth.

Dostoyevsky also suggests that without a belief in God, in immortality, then natural law is destroyed.  Because natural law is the foundation of the U.S. Constitution, Dostoyevsky suggests that atheism spells the death of the U.S. Constitution, the foundation of our civil government and our liberties.  Furthermore, Dostoyevsky suggests morality will be turned upside down.  That what was moral will become immoral, and what was immoral will become moral.  This moral inversion is coming true.  Presidential candidate Hillary Clinton has called Christians deplorable homophobes and the U.S. news media is uplifting trans-sexuals as the new American heroes.  Here is a long but important passage from The Brothers Karamazov, Chapter VI: Why Is Such A Man Alive?  There is a discussion in quarters of Father Païssy, a Russian monk.  Dmitri is the oldest brother, Ivan the middle brother, and Alyosha the youngest, who wishes to become a  monk. Adelaida Ivanovna Miusov is Fyodor Karamazov's first wife, Dmitri's mother

"Ivan Fyodorovitch is smiling at us. He must have something interesting to say about that also. Ask him.”

“Nothing special, except one little remark,” Ivan replied at once. “European Liberals in general, and even our liberal dilettanti, often mix up the final results of socialism with those of Christianity. This wild notion is, of course, a characteristic feature. But it’s not only Liberals and dilettanti who mix up socialism and Christianity, but, in many cases, it appears, the police—the foreign police, of course—do the same. Your Paris anecdote is rather to the point, Pyotr Alexandrovitch.”

“I ask your permission to drop this subject altogether,” Miüsov repeated. “I will tell you instead, gentlemen, another interesting and rather characteristic anecdote of Ivan Fyodorovitch himself. Only five days ago, in a gathering here, principally of ladies, he solemnly declared in argument that there was nothing in the whole world to make men love their neighbors. That there was no law of nature that man should love mankind, and that, if there had been any love on earth hitherto, it was not owing to a natural law, but simply because men have believed in immortality. Ivan Fyodorovitch added in parenthesis that the whole natural law lies in that faith, and that if you were to destroy in mankind the belief in immortality, not only love but every living force maintaining the life of the world would at once be dried up. Moreover, nothing then would be immoral, everything would be lawful, even cannibalism. That’s not all. He ended by asserting that for every individual, like ourselves, who does not believe in God or immortality, the moral law of nature must immediately be changed into the exact contrary of the former religious law, and that egoism, even to crime, must become not only lawful but even recognized as the inevitable, the most rational, even honorable outcome of his position. From this paradox, gentlemen, you can judge of the rest of our eccentric and paradoxical friend Ivan Fyodorovitch’s theories.”

“Excuse me,” Dmitri cried suddenly; “if I’ve heard aright, crime must not only be permitted but even recognized as the inevitable and the most rational outcome of his position for every infidel! Is that so or not?”

“Quite so,” said Father Païssy.

“I’ll remember it.”

Having uttered these words Dmitri ceased speaking as suddenly as he had begun. Every one looked at him with curiosity.

“Is that really your conviction as to the consequences of the disappearance of the faith in immortality?” the elder asked Ivan suddenly.

“Yes. That was my contention. There is no virtue if there is no immortality.”

America in 2016 has turned morality upside down.  According to Dostoyevsky, this is because too many of our leaders are atheists. It is up to you, my friends and neighbors, to ponder why morality in America has turned upside down. And to ponder how we can find moral leaders, if we have a true understanding of morality instead of an inverted sense of morality.


The version of The Brothers Karamazov by Fyodor Dostoyevsky from which I quoted was the translation by Constance Garnett and is available free, online, at Project Gutenberg: