Editor's Desk The Financial Crisis on Wall Street: Complexity, Stability, and Information Technology Barry Shore, Barry.Shore @unh.edu Sham Manwani, sharrnrn@btopenworld.com While there have been many attempts to explain the factors behind the current economic crisis, few have alluded to the lessons that can be learned from the role of information and information technology. In recent years the use of derivatives such as Collateralized Debt Obligations, and Credit Default Swaps had contributed to a system, not unlike complex information systems, that made it difficult to understand how all of the components interact and how these components have the capacity to jeopardize system stability. As with all information systems, the aspirations and incentives of stakeholders were key factors in the outcomes. COMPLEXITY The complexity of the financial system becomes apparent when the interaction among borrowers, financial instruments, and financial institutions is traced. 1. A prospective home buyer, having found a suitable property, applies for a mortgage. A mortgage broker, motivated by earning a substantial commission, reviews the mortgage application and initiates the mortgage process, even when the ability of the borrower to meet the monthly payment may be uncertain. 2. The mortgage is then sold to a mortgage consolidator who bundles it together with other mortgages into a financial instrument called a Collateralized Debt Obligation (CDO). The objective of this bundling process is ostensibly to spread the risk much like purchasing shares in a mutual fund spreads investment risk. 3. Even when the CDO may include mortgages where the borrowers are unlikely to meet principal and interest obligations, the CDOs receive reassuringly high ratings from respected agencies such as Moody's, Fitch, and Standard & Poor's. These CDOs are then sold as high yield investments to banks, securities firms, and insurance companies.