Financial Markets are Graphs
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The credit default swap is connected to the CDO. The CDO is connected to the bond. Bond is connected to tranche. And it's all a house of cards! The Big Short helped many understand for the first time what actually happened during The Great Recession and this webinar will help you understand how connected data analysis and graph theory can prevent it from happening again.
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Financial Markets are Graphs
- 1. Building your own Doomsday Machine with Graphs The Big Short Kevin Van Gundy
- 3. What was the Great Recession?
- 4. What is a Recession?
- 5. "EVERYTHING IS GOING TO BE AWESOME FOREVER!!!" "EVERYTHING IS AWESOME" "It's just a setback, I'm still awesome" "I've made terrible choices" "EVERYTHING IS AWESOME"
- 7. Graph Theory is rooted in the methodology used by Leonhard Euler in 1735 to solve the Seven Bridges of Königsberg problem.
- 9. V4 V5 V1 V2 V3 V = { V1,V2,…,V5} E = { (V1,V2), (V2,V5), (V4,V5), (V4,V5), (V5,V5) }
- 10. "Interesting"
- 11. The sub-prime mortgage crisis is graph.
- 12. YOU
- 13. :Borrow er
- 20. These interest payments are swell…but is there a way I could get more cash to make more of these awesome loans?
- 21. Collateralized Debt Obligation - CDO "A structured financial product that pools together cash flow-generating assets and repackages this asset pool into discrete tranches that can be sold to investors." investopedia.com
- 27. RDBMS RDBMS RDBMS RDBMS Mortgage Mortgagee 91651729 519237 55192623 42797018 85612763 88107359 71837725 32906169 49429020 66929260 42494465 99134777 39146181 32475511 66372990 85804350 88931189 50456427 18175687 61112838 12145664 33772417 47577318 67071960 39443706 55598119 66256087 8491222 80145674 78098371 43719159 21406069 11659966 39861986 426710 3295824 4901813 71655474 32787669 90755200 93491793 54022990 97377090 28094494 Mortgage CDO 93731642 6 90753803 1 67978217 10 17395136 7 39931295 7 11030481 1 8614291 6 60507740 4 45250794 5 3967482 6 70158644 10 57905080 5 33824421 6 76315487 7 83496510 1 5464919 3 85272273 4 813653 9 80365451 10 39694496 10 21323306 3 99299958 3 CDO CDO 78249394 51476963 85564824 54301263 57969062 13496451 73998739 42387919 91669472 86951724 8353726 91752869 2832666 54862413 9332422 56579885 83248100 87884824 34092628 9470010 39201348 36252847 22500537 7674316 38408927 43336835 77879678 57707850 56377196 58005075 50534094 94412066 37285127 96044629 53364905 83305892 71960914 3571722 45530002 64088257 49769372 5634884 9378251 54931785 CDO CDO 96060505 66755411 34587321 90376917 68096802 13237329 1440323 23002632 29280500 77945703 83284299 40533715 90867599 20676826 19387945 11144544 9220061 58121014 90015438 5368910 3010113 16737179 42741034 88594199 5537961 26783548 88510223 14232404 6826523 24358742 82670620 73235616 11152889 90672861 17811221 9689782 85746917 43661617 21903196 44156952 5993667 7606153 67176869 40415984 Mortgage CDO 59769099 5 46158482 8 81992989 1 93920491 2 80048306 1 35844588 10 22348051 7 23750498 8 16549878 1 5586012 5 53514084 5 45861207 7 99792762 1 82696389 3 30434781 7 71725562 5 36378590 3 54112007 7 14487204 9 38519441 2 81261932 4 97156862 2 RDBMS
- 28. So…we just closed our eyes and hoped for the best
- 29. "EVERYTHING IS GOING TO BE AWESOME FOREVER!!!"
- 31. Is there a better way?
- 32. Yes.
- 33. Graph Databases
- 34. MATCH (c:CDO)-[:COLLATERALIZED_BY*]->(m:Mortgage) WHERE c.rating IN ['A','AAA'] WITH c, avg(m.applicantCreditScore) as avgCreditScore WHERE avgCreditScore > 500 RETURN c
- 35. Since that ship has sailed…
- 36. What else are Graphs?
- 37. Asset Graph
- 39. #1 Asset Graph
- 40. Customer Graph
- 42. Payment Graph
- 44. A Graph of Money Laundering #3 Payment Graph
- 46. Systems Planning, Impact Analysis, Data Governance, Micro-Services Enterprise Architecture | System of Systems #4 Master Data Graph
- 47. #4 Master Data Graph • Organizational Structures including sales territories, reporting structures, geography • Product Structures including product & feature hierarchies, time dimension • Network Inventories including configuration management, physical and logistics networks Enterprise Hierarchies
- 48. What have we learned?
- 52. Graphs Databases are the Answer
- 53. Thank You!
Editor's Notes
- I'm going to be upfront here— if you're looking for an ultra technical discussion about graph databases vs. traditional stores. This is not that talk. If you're looking for a talk that will help you sound smarter at dinner parties. You've found it.
- What is the Big Short? It's the story of how this guy…we not actually this guy, but the guy that Christian Bale plays in the movie, Michael Burry predicted the subprime mortgage collapse and subsequent recession. We're probably not going to talk a lot about Mr. Burry— but if you haven't seen the movie / read the book. It's quite good. What we are going to talk about is the underlying structure of the markets that led to the Great Recession. Which leads to the discussion of…
- This is an important question, but to start, we probably should answer the more basic question…
- This is the general shape of a recession. In economics the natural cycle of growth and contraction of a market is referred to as a business cycle. Wherein the contraction phase is called a "recession." These periods of economic decline, typically identified as any two consecutive quarters where GDP has a negative growth rate. Which to those of us without PHDs in economics…the key main thing to remember is that we as humans have incredibly short memories Click 1: In the expansion phase (aka boom times) we're happy as can be, wages are strong. We're consuming a lot. Everything is awesome. Click 2: As these boom times continue, we start to believe that everything is going to be awesome forever. Recessions are for schmucks. And pretty much, I'm going to be Warren Buffet by the end of the year. Click 3: We stay confident, we're CERTAIN that the market is coming back. There's an air of anxiety, but we're trying not to panic. Click 4: Yeah, things aren't going well. We realize it. The house is on fire and well so are we. Click 5: At this point, we're convinced that the world will always be awful. I will never own a Porsche nor a microwave that heats up my hot pockets evenly. The good times are over…. Click 6: Until things are awesome again. What recession? In retrospect, it's easy to categorize and define these different phases of
- Now that you feel all warm and fuzzy about the world…
- For ye the uninitiated Graph Theory…
- This is the 7 Bridges of Konigsberg problem…take a moment know and mentally try to solve it. Can you take a touch each land mass in the city crossing each bridge EXACTLY once. Well…the answer is no, you cannot. However, it is difficult to know for sure with out (click) graph theory!
- Or in a more general form, graph theory is the study of points and lines. More specifically, it is the study the ways by which these points or "vertices" are connected by lines or arcs called "edges"
- I know you're probably thinking to yourself this is interesting…..But it is! Because, what we can do using these core ideas is model complex domains and then be able to operate on them. The latter fact being key. I can hear the eye rolls from here…but I think here is the best place to kick of the discussion of the subprime mortgage crisis. Let's start with a basic mortgage transaction.
- I know you're probably thinking to yourself this is interesting…..But it is! Because, what we can do using these core ideas is model complex domains and then be able to operate on them. The latter fact being key. Let's start with a basic mortgage transaction.
- Let's start with you, we're vain people.
- I'll call you "borrower" I found a cool picture of you online.
- and you found this cool house that you want to buy… but, you don't have enough money. you're a cool person with a good job
- and you found this cool house that you want to buy… but, you don't have enough money. you're a cool person with a good job
- so you find a bank and you ask them to borrow money
- they say "sure" and issue what's called a mortgage. Meaning they'll give you some money, but just in case you don't pay them back. You offer the house you want to buy and collateral.
- In the beginning there are vertices and edges.
- Now that you feel all warm and fuzzy about the world…
- Investors, especially during the boom time prior to the great recession focused on the returns these CMOs were providing rather than the underlying mortgages.
- So the banks hold all of these mortgages, to both turn a larger profit on these obligations and bring in additional capital… that they'll eventually lend out again. They group these mortgages under an umbrella term called a "collateralized debt obligation."
- They then split these groups of mortgages into
- And sometimes in their infinite wisdom the banks think…hey, why not mix it up a bit and offer CDOs on the CDOs?! So they'll issue new bonds backed by these other bonds…this is where things get messy. When these new pools of investment are taken out against these underlying assets— those products are then rated again. During the boom leading up to the great recession, ratings organizations failed to adequately grasp the underlying assets beneath these products and rated these products as much safer than they should have been.
- Now, this is a complicated network of financial products… and we only went two steps deep in terms of debt obligations collateralized by other debt obligations And we're only looking at a single bank issuing maybe 50 mortgages click… consider what that might look like for the entirety of the United States…10s of 1000s of financial products
- And operating on these highly connected datasets using traditional methods can be less than optimal not only in terms of our ability to understand how these products interrelate but the technical implications are astronomical.
- I think not only was it our greed that drove us to take mortgages that we couldn't pay and the banks to offer products with shaky underlying assets…but also the difficulty of regulating these markets.
- This is the general shape of a recession. In economics the natural cycle of growth and contraction of a market is referred to as a business cycle. Wherein the contraction phase is called a "recession." These periods of economic decline, typically identified as any two consecutive quarters where GDP has a negative growth rate. Which to those of us without PHDs in economics…the key main thing to remember is that we as humans have incredibly short memories Click 1: In the expansion phase (aka boom times) we're happy as can be, wages are strong. We're consuming a lot. Everything is awesome. Click 2: As these boom times continue, we start to believe that everything is going to be awesome forever. Recessions are for schmucks. And pretty much, I'm going to be Warren Buffet by the end of the year. Click 3: We stay confident, we're CERTAIN that the market is coming back. There's an air of anxiety, but we're trying not to panic. Click 4: Yeah, things aren't going well. We realize it. The house is on fire and well so are we. Click 5: At this point, we're convinced that the world will always be awful. I will never own a Porsche nor a microwave that heats up my hot pockets evenly. The good times are over…. Click 6: Until things are awesome again. What recession? In retrospect, it's easy to categorize and define these different phases of
- I guess the whole point of this discussion is to answer this fundamental question. Is there a better way? Can we stop things like this from happening again?
- I guess the whole point of this discussion is to answer this fundamental question. Is there a better way? Can we stop things like this from happening again?
- And, I think the answer is clear. Yes. Yes. 1000 times yes.
- The answer is graph databases. The way the data is actually structured is in a complex network like we've described that inherently facilitates answering these types of questions. Along some path, what are the down stream effects? What are the assets underlying this investment 5 hops out? What about 15? These questions are arbitrary in a native graph.
- For example…this is how simple it would be to find all of the poorly rated CDOs. Assuming the data model we've discussed here, find my all of the CDOs with great rating but poorly performing underlying assets, AT ANY DEPTH. Not just one step out, but even for a CDO to the 15th power… sniff out the dog poo.
- And, I think the answer is clear. Yes. Yes. 1000 times yes.
- And, I think the answer is clear. Yes. Yes. 1000 times yes.
- Or it could be people who know other people – who know other people.. who studied together, who work at the same place – who studied with other people, who works somewhere else… etc.
- And, I think the answer is clear. Yes. Yes. 1000 times yes.
- And, I think the answer is clear. Yes. Yes. 1000 times yes.
- And in the end? It's all about relationships!
- And, I think the answer is clear. Yes. Yes. 1000 times yes.