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The troubles in the financial system are big and complex… as the various public and private parties take their star turn you see a certain frisson pass over their eyes as they are increasingly emboldened to state that “Yes… this will require a trillion dollars of taxpayers funds at least…”. As this or that politician or administration member utters the gigantic number the magnitude of the wealth transfer awakens them to their purpose… “Bail out the big banks“…

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This trillion dollar song we are singing is not for a frozen credit river… or distressed homeowners… or jumpstarting American manufacturing… no…  we are mounting a full chorus paean to a handful of institutions which have “captured” the political process… the oligopoly of money center liquidity flows… oligopoly >>

A market structure with few sellers who realize their interdependence in making strategic decisions, for instance, on price, output, and quality. In an oligopoly, each firm is aware that its market behaviour will affect the other sellers and their market behaviour. 

Here is the recent statement of one Too Big Too Fail CEO … from Bloomberg…

“If we act like a dysfunctional family and we don’t finish these things and we’re forever debating them, I think this will go on for several years,” Dimon (JP Morgan CEO), 52, said at a conference hosted by the U.S. Chamber of Commerce in Washington. “It’s completely up to us at this point.”

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Transparency helps us learn in real time if the dance between private interests and public funds has some safeguards … transparency is the binding thread of democracy… transparency informs the people and engenders confidence and trust in our institutions… transparency unravels the rush of special pleadings that batter at the doors of our nation’s Treasury… so little stands between the greed of Wall Street and the people’s patrimony… so little courage… so few voices… those who stand to gain from this wealth transfer have employed all the channels of communication … 

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So many other alternatives exist… the massive toxicity of collateralized debt obligations and credit default swaps is concentrated in a handful of large institutions… we have a whole whiteboard full of possibilities… but the major stakeholders in this race keep edging up to the front of crowd and with their big megaphones chant “Bailout… Bailout” …

Here is another option reported today….

~~~~ “Interim Assistant Secretary for Financial Stability Neel Kashkari, who testified before the House Committee on Oversight and Government Reform Domestic Policy Subcommittee on Wednesday, said a common reporting format for filings related to the Troubled Asset Relief Program such as XBRL (Extensible Business Reporting Language) would greatly improve transparency….”~~~~

Combine XBRL with the electronic trading of securities and leverage provided from central banks… all institutions will then have access to this pool of assets… by standardizing and opening the process electronically you get the entire set of global market participants to bid on these securities … you don’t need any broker dealer intermediaries… with tagged data and electronic trading these assets can be bid on by any institution…small US institutions…  the investment arm of Singapore… the real money in London…  financial advisors on behalf of high net worth individuals… if the assets are transparent and there is a pricing tape to compare quotes to completed trades this market will unlock in an electronic minute…

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::::::::::: A global, financial “Marshall Plan” :::::::::::

Global financial institutions holding RMBS (and other illiquid assets) are  encouraged to participate in a global, over the counter auction process.

Assets are tagged with the global XBRL standard to identify loan level data and performance qualities.

Using FIX, the global standard for the electronic trading of securities, bid lists of securities  are circulated to institutions around the globe.

The Federal Reserve and other central banks offers lending to any “legitimate” counterparty on a 5-10 times levered basis.

The US regulators and their global counterparts develop an open, end of day price reporting system to disseminate trade prices.

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The FIX Protocol Global Fixed Income Committee

Teleconfernce on 

 17 Mar 2009 10:30 AM – 11:00 AM (New York)
 17 Mar 2009 14:30 – 15:00 (London)
 17 Mar 2009 22:30 – 23:00 (Hong Kong)
 17 Mar 2009 23:30 – 00:00 (Tokyo)

…Email me for details…

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From the testimony of the Director of USXBRL to the House Committee on Oversight and Government Reform Domestic Policy Subcommittee on Wednesday (page 12)

~~~~ Description of the MBS Marketplace

There are perfectly good cash flows to be found in many of the investment vehicles now clogging the American credit system, but the entire re-securitization market lacks the information and reporting standards necessary to untangle the good loans from the bad.

As a result, investors will not buy what they cannot understand, the value of these assets is being marked to zero and the entire market has seemingly turned toxic.

The cost of analysis is overwhelming because there is no standard data set to access, adding to the paralysis in the market.

The same principles of XBRL that are working for bank call reports and for public company reporting can be brought to bear in the MBS market.

The concept is simple: provide loan level detail for every MBS from cradle to grave in an automated form that is easy to analyze so that investors can value the actual cash flows of these investments cost effectively.

The industry is awash in a sea of incomparable data In the current decentralized and self-defined reporting model, access to MBS information is out of reach for most investors because it is locked up in incompatible data formats and subject to inconsistent reporting.

The price of extraction, standardization and analysis has been too costly and time consuming to be viable for any single participant.

As a result, issuers, investors, rating agencies and regulators have built sophisticated systems and financial models to get around the problem, and rely on probabilities of default and on mark-to-market accounting to value these assets.

No one understands which loans are bad and which loans are good among the 10 million loans currently sitting in approximately 100,000 re-securitized products.

Investors and regulators simply cannot discern the good from the bad.

We believe that MBS and the loans that are in MBS are publicly traded instruments, and all investors are owed regular public reporting on the health of the assets.

What is needed is the political will to bring standards and open access to this information — in the same way that the Securities Act of 1933 and the Securities and Exchange Act of 1934 brought standards and open access to financial reporting for public companies after the 1929 market crash.

Specifically, our recommendations for the MBS market are:

1. Define the information disclosures necessary to evaluate a security across the entire MBS supply chain, including mortgage origination, MBS issuance, rating, and loan servicing.

2. Require reporting in a proven technology format already in use for financial data reporting, specifically XBRL (eXtensible Business Reporting Language), to ensure the quality, compatibility, and comparability of the information reported.

3. Require a common reporting system – similar to the SEC’s EDGAR System – and ensure equal access to the information by market participants.

4. To value the existing pool of securities will require identifying the underlying data for each loan within the securities pool and reporting it back through an XBRL dictionary of terms, e.g., the prototype for RMBS developed by XBRL US. Industry participants that have ownership of this information must become part of the process in order for this initiative to succeed.

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CDS is another “can of worms”

That problem awaits a new day…