A Most Excel-lent Whale

Is there a whale in your future?

Recently JP Morgan released its internal investigation of what went wrong with its “London Whale” trade—the ill-conceived credit “hedge” that cost the bank between 5 and 10 billion dollars. Buried on page 127 of the 132 page document is this nugget:

Risk was monitored “through a series of Excel spreadsheets, which had to be completed manually, by a process of copying and pasting data from one spreadsheet to another.”

A couple of simple errors in this process led the bank understate its risk. Then the market turned against the bank and—poof–$7 billion gone.

Excel is perhaps the most important business software application of all time. It allows analysts to do sophisticated statistical analyses, create pro-forma financial statements, and format sweet-looking reports, all while letting you see what happens to the data as you manipulate it.

But its very power is its danger. Amateur hacks create quantitative monsters, with no sense of versioning, testing, or regression. There are millions of spreadsheet mavens out there who don’t know the first thing about programming in a methodical, well-documented way. They just start with a little model that grows and grows and grows.

Excel is everywhere. And who knows what it will blow up next?

Douglas R. Tengdin, CFA

Chief Investment Officer

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