Listen to Al Berkeley, former president of NASDAQ and a participant at a previous SEC XBRL Roundtable…
” [Financial] data is trapped inside an iceberg. With XBRL, we can melt the iceberg…. he also referred to “documents so long, only the sell-side ever reads them.”
This seems like such an unimportant bit of regulatory activity on it’s face… is it important? Does a new method of disclosure for public companies and mutual funds have importance to our more significant financial and economic problems?
Let’s walk through some potential uses of interactive data for the Credit Crisis of 2007/2008 …
For some background here is Joe Mason talking about the credit and banking crisis…
~~~~ “Monetary policy effectiveness relies crucially on banks’ willingness to lend, which all agree is now sorely lacking. The important consideration, however, is why?
The fact of the matter is that, without adequately transparent financial measures investors and banks alike will not allocate funds to any borrower.
With over fifteen times “off-balance sheet” exposures as “on-balance sheet” exposures in US commercial banks and the demonstrated possibility for those “off-balance sheet” items to unexpectedly come back “on-balance sheet” in times of distress, investors and banks are loathe to lend and will remain so until the absurdity of “off-” and “on-balance sheet” distinctions is put to rest.” ~~~~
Here is a chart from Joe’s paper on the off-balance sheet assets of US commercial banks…
Recent accounting interpretations shone a light on off-balance sheet entities (QSPEs) and required many of them to be brought onto the balance sheet of filers …. but what about new flavors of QSPEs and other yet to be born methods of spread and duration carry? Will they get snuggled into the voluminous filings of firms ? Will the black practitioners of regulatory arbitrage find new ways to gild the lily and hide the evidence?
The newly adopted XBRL rule, after phase-in, will require filers to tag the narrative content of their footnotes… what is in the footnotes?
The junk… the off-balance sheet assets were in the deep, murky footnotes… the hidden, unsayable, unpleasant bits of nonsense that many large issuers (particularly financial firms) collected and underwrote as they rolled through the credit crisis … I’m not an accountant so I can’t name names (but here is an initial >> “C”) … the magic acts of financial reporting are typically performed in the dark… the dark, dark Enronesque footnotes…. the shiny light of interactive data will remove a fair amount of illusion…
(illusion = credit haze = credit crisis)
Here is Joe Mason again…
~~~~ “… The credit channel of monetary policy transmission consists of banks lending the proceeds from Open Market sales of Treasury debt to customers who use the funds to purchase goods and services, the sellers of which redeposit the proceeds in their own banks who relend the money again and again.” ~~~~
Banks are the conduit of monetary policy for the Federal Reserve… they are the amplifiers of the fractional banking system.. our current crisis intensified because institutional investors and banks were petrified about the balance sheets of their counterparties and borrowers… they couldn’t see into the murky, off-balance sheet slush of mortgage backed securities, CDOs, ABS, derivatives… etc… and in the dark everything froze… debt and money markets froze… it’s cold in the dark… and fear can be stronger than profit (imagine… a natural restraint on greed…)
So the natural functioning of the banks in our system was frozen by the dark of clogged, opaque balance sheets…
Interactive data and transparent balance sheets would of been so powerful in unlocking the understanding of true leverage and concentration of poor assets and duration mismatch for banks… investors and lenders could have had more confidence in being repaid and would not have hoarded cash…
On a macro level with XBRL market participants could have aggregated domestic financial assets and started to question what was the black hole that swallowed all the MBS that was issued in 2001-2006… hedgies had some on their balance sheets but the ”shadow banking system” swelled up in plain view of regulators (the Federal Reserve) and market participants seemingly never had sufficiently broad data to grasp the individual and collective leverage that built the most fragile credit system ever…
Graphs from the BIS via The Capital Spectator
One of the best things which I heard Chairman Cox say was the cross agency discussions of the potential use of interactive data for tagging asset backed securities and the underlying securities which they were structured from… this potentially represents an enormous step forward for the industry, regulators and the global economic system… there are now various proprietary standards for the nomenclature of ABS… so the knowledge of this class is hard to aggregate and parse… but if regulators jointly mandated an interactive data standard that fulfills the information needs of market participants, banking regulators, securities law enforcers, and monetary policy makers that could be tremendous… a level information field… transparency as a lubricant… a lubricant of capital flows and information… information as a force of market discipline… information as a protector of value… information as the essential key to measuring risk and return…
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Kudos to all the staff of the SEC who pioneered this effort… it is so paradigmish that its importance may easily be overlooked… take heart friends… it’s value will be exponential to your efforts… I’m paraphrasing something said about Gutenberg’s development of movable type…
It caused a revolution in the development of capital, equalled by hardly any other incident in the computer era. Facility in disseminating the information of capital was a necessary condition for the rapid development of new economic growth in modern times.
The advantages to retail investors and others will be profound… yesterday the SEC held it’s first blogger webinar to demonstrate the IDEA interactive data viewer… and hint at things to come… the viewer allows users to download interactive data to Excel spreadsheets for analysis… one webinar participant asked if the data could be dumped into a Google spreadsheet then embedded in Google charts… he came back later in the webinar to report he had done exactly that…
Yes… information will flow like lava… and like lava it will move everywhere… and like lava it will heat up those things which it touches… information lava… warm stuff… good stuff…
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There is only one good namely knowledge and only one evil namely ignorance. Socrates
Henry Bursill, Hand Shadows to be Cast on the Wall
Joseph Mason, Off-balance Sheet Accounting and Monetary Policy Ineffectiveness
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