A Hard Lesson

Speaking with an analyst about the 2008 financial collapse, I asked if the financial services industry had learned its lesson. She was in a good mood and shot back, "What -- are you saying that this might happen again?" Even though we were talking on the phone, I could almost hear her wink.

I went into my spiel. Look, I said, this is an industry with a lot of history, regulation and state-of-the-art technology. But -- and there's always a "but" -- it is run by people. (I could have added that it is run primarily by men, but that's a subject for another Editor's Letter.) And people always make mistakes; in fact, they often repeat the same mistakes, even when they should have learned their lessons the first time.

At times, the circumstances change slightly, so people think the old rules and experiences do not apply. At other times, despite the mistake, the consequences were small, so people think, "How bad could the price be now?" Perhaps disaster never occurred and therefore the limits of risk have not been reached? If a new airplane has not crashed, perhaps it never will, the thinking goes. Foolish? Yes. Popular? Absolutely.

We're experiencing this wishful thinking right now. Late last year, the U.S. government released a report on the fallout from the fiscal crisis in 2008. While the details were chilling -- McDonald's almost didn't make payroll, airlines nearly stopped flying, even the mighty Goldman Sachs teetered -- it feels as if it were so very long ago. Although a few major banks collapsed and merged, the remainder of the financial sector still is up and running. Investment firms are still paying huge bonuses and banks are raking in record profits. It's safe to wonder if we learned anything.

Still, hedge funds are bracing for new oversight, and we can be sure that they are hiring technologists to make their operations more transparent. We also can be sure that they are upgrading their risk procedures to make certain that the alarm rings more loudly this time when they reach the brink.

But have buy-side firms really learned their lesson in this post-crisis financial landscape? That's the question Ivy Schmerken seeks to answer in her recent cover story. She specifically looks at the steps the buy side is taking following this year's Flash Crash. While we won't quickly forget that day in May when the market lost nearly 1,000 points in a few hours, we also have seen more than a few mini-flash crashes since then that have not made headlines.

Meanwhile, Justin Grant has takes us inside the controversial topics of naked access and OTC derivatives clearing. As always, the remedies come down to that four-letter word: data.

We shall see if any lessons were learned or whether we are doomed to repeat the mistakes of the past. I know where I'm putting my money.