BRUSSELS–As I’m enjoying outstanding Belgian cuisine with the family of a CLOUD, Inc. colleague after a day of meetings about how computer standards can improve the clarity and efficient use of information and provide for more accurate evaluation of the trust that one might place in information, a 500-mile drive south of here the world’s financial leaders are contemplating the future of finance.
My hope is that my modest contribution (Chapter 2.2, page 72) to a book published at the World Economic Forum in Davos entitled “Trust Meltdown: The Financial Industry Needs a Fundamental Restart” finds its way into enough reading stacks of enough of those in attendance to make a difference.
My chapter — “Transparency and Verification from a Regulator’s Perspective: Using XBRL to Restore Trust in Finance and Government” — is a disclosure-based alternative to the “Volcker Rule” to revert to more substantive regulatory interference in the asset-backed securities market. I propose structured disclosure of the sort accountants have used since the invention of double-entry bookkeeping to supply better information to the market about the latest highly-touted investment opportunities.
Will this be a magic bullet that magically restores economic health around the world? Of course not. But it’s the best idea I’ve seen to date about how to empower crowds — what my economics professors called markets in the last century — to evaluate particular investment opportunities. An excerpt:
After all, the most powerful form of market regulation is the price regulation that results when well-informed and willing buyers and sellers disagree on values of particular rights with respect to goods, services, and securities. The more information held by both sides, the more likely they will bargain to a sustainable price.
In other words, the madness of crowds may always be a problem, but better information holds the potential to restore sanity sooner and thus limit damages from madness.
“Structured finance,” using unstructured information, failed to achieve sustainable pricing. XBRL makes it possible to structure business information in the 21st century similar to how accounting standards made it possible to structure financial information in the 20th century. Anyone have any better ideas?
I’d welcome your comments on any of the topics covered in the book, from the foreword by Kofi Annan to the chapter on peer pressure by Robert Zoellick.
A critical issue in the transparency of the information in the MBS/ABS market is how the documentation deals with the issue of risk in the event of default. The devil is in the detail of the documentation and even when standardised documentation is used, there have been cases where the standardised documentation has been altered without the knowledge of all parties.
Moyler [http://xbrl.us/documents/RMBSwhitepaper.pdf ] talks about the but seems to focus on the unknown cash flows: my fear, based on experience, in the MBS/ABS market is unknown documentation.
Therefore I would suggest that in an XBRL world the key risk paragraphs are tagged like footnotes and extracted out of the bowels of the documentation which can run to several hundred pages.
Default risk is, indeed, important information. I don’t have the taxonomy with me and my Internet connection on the road is a bit slow to search, but maybe someone can tell us if it already includes tags covering default risk. I’d be surprised if it didn’t, but even if they’re missing, they shouldn’t take long to write. Give a tag writer copies of the standard agreements and depending on how many options there are maybe a day to write the tags? Find a few industry technologists to double check the work. Then it merely becomes a data entry challenge. For atypical default risk terms (how many permutations can there be?), perhaps the need to create extensions to handle them would at least be a disincentive to excessive future innovation — or at least make unusual arrangements more obvious. Of course, the system will work best if default risk provisions enjoy the sanctity of contract important to well-functioning markets. It’s been a bit of a challenge to enforce contracts recently, but technology infrastructure making contract terms easier to understand, analyze, and access could only help support the rule of law.
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