gdp's Comments

paulwilkinson.com : Davos Mistakes about Securitization

Wed, 31 Mar 2010 10:09:53 +0000

When "disclosure" is only boilerplate, it leaves retail investors where you indicate -- purgatory at best. Even when disclosure is substantive, we probably won't get rich, but at least we benefit from general economic growth from better capital allocation.

Rivet Software : Financial Data Democratization

Fri, 26 Mar 2010 13:46:09 +0000

Darn transparency! May be bad for the princes of opacity, but if were lucky it will democratize data enough so more normal people will be able to afford that Porsche too, or at least a nicer VW. By the way, not only does it support data democratization -- it supports data populism. You know about the Move Your Money campaign -- http://techcrunch.com/2010/01/14/is-the-internet-... -- using XBRL reports to the FDIC to help people find sound local banks, right? Er, that could be bad for Porsche sales, at least in New York, too.

paulwilkinson.com : Crowd Sourced Legislative Tracking for Crowd Sourced XBRL Disclosure

Thu, 10 Dec 2009 19:39:03 +0000

On Thursday, Dec. 10, 2009, the House Oversight and Government Reform Committee unanimously approved S. 303, a bill to improve the administration of federal grants. (The Senate previously approved S. 303.) In doing so, the House Committee added the language of H.R. 2392, which it previously approved unanimously. While the bill does not mandate XBRL specifically, it sets forth a series of criteria that only XBRL now meets. Just as corporations are now voluntarily adopting XBRL to provide for more accurate and reliable data reporting -- a new interview with new insight was published just today at http://hitachidatainteractive.com/2009/12/09/xbrl... -- so too is the House Government Oversight Committee supporting XBRL, for the simple reason that the Committee is responsible for ensuring that taxpayer money is spent for purposes that Congress intends. Just as investors now benefit from more accurate financial reporting from public companies using XBRL, taxpayers may soon enjoy similar benefits. Moreover, XBRL's capability to bring an end to what is often known as "spreadsheet hell" with an open standard subject to automated validation will reduce paperwork and administrative costs. The House should quickly approve this legislation and return it to the Senate for final passage. Video of the Committee meeting is here: http://www.youtube.com/watch?v=W2_Dk0cSx3o

paulwilkinson.com : Could New SEC Disclosure Rule Revive Asset-Backed Securities Market?

Tue, 24 Nov 2009 19:02:30 +0000

Official comments are here: http://sec.gov/comments/s7-23-09/s72309.shtml

KeithHennessey.com : 20 questions for the Financial Crisis Inquiry Commission

Fri, 18 Sep 2009 04:38:34 +0000

11.It depends what the alternative to mark-to-market was. Using traditional cost accounting from the outset might have lessened the crisis; using models might have worsened it. However, since GAAP-style disclosure didn’t extend to an estimated 20,000 asset backed securities with notional values comparable to small public companies, the crisis cake was baked in an oven separate from the fair market value debate. 12.Some short sellers were merely trying to profit; others may have been illegally manipulating the market. The latter can only be proven in a court of law by a preponderance of the evidence; not an appropriate topic for this forum. 13.They probably did not miss the first element; in fact, I understand large financial institutions were in compliance with the Basel requirements in effect at the time. Regulators are not necessarily trained to evaluate the quality of bets. As a product of sophisticated European consideration, the Basel requirements were probably too readily accepted as a matter of convenience, when in the event, only a fully informed open market is up to the task of pricing large complex risks. 14.Self-monitoring facilitated excess risk but stronger government monitoring may have resulted in suboptimal risk. Risk is generally probability times consequence. Government is poor at anticipating the probability of a particular financial risk event. It is better equipped to measure the potential consequence of a risk event. In the future, policy should focus on limiting the consequences of particular risk of the events by, for example, ensuring that large financial instruments are subject to disclosure that enables investors in the open market to price that risk. 15.It would have been helpful to know that hedge funds had used XBRL to ascertain the risk of mortgage-backed securities well before the general market became aware of those risks. It would have been helpful to have similar information about other securities and financial instruments. However, it remains doubtful regulators could have acted on that information, particularly given the politics of home ownership. It seems more likely that exposing that information the market would have successfully identified problems before the consequences of delayed discovery grew as large as they did. 16.Defer to SEC Office of Economic Analysis. 17.Defer to SEC Office of Economic Analysis. 18.Excessive risk-taking is activity in which there is a material probability of a consequence that has not been adequately disclosed to investors who would suffer material harm from the consequence. Perhaps the most significant contributor to compensation structures that reward risk-taking is tax policy that encourages the use of short term stock options as compensation at the expense of cash and other compensation. Equalizing the treatment of cash and options compensation (by eliminating the arbitrary $1 million cap on corporate deductibility of cash compensation) would enable shareholders, through their boards of directors, to establish deferred cash compensation for employees based on long-term company performance. 19.The substantially weakened balance sheets of the United States and of the Federal Reserve disadvantage large U.S. financial institutions relative to global competitors. Incentives for personal and professional development are weaker given the future tax burden likely to stem from crisis policies. As President Reagan said, “Tax rates are prices—prices for working, saving, and investing. And when you raise the price of these productive activities, you get less of them and more activity in the underground economy, tax shelters, and leisure pursuits.” 20.Government policymakers should ensure that public markets have access to all information necessary to restore securitization at an efficient level of lending and funding flow. Government policymakers are incapable of determining what that proper level of lending and flow should be. Only a free and informed market can do that.

KeithHennessey.com : 20 questions for the Financial Crisis Inquiry Commission

Fri, 18 Sep 2009 04:38:04 +0000

1.Defer to John B. Taylor. 2.The relaxation of lending standards was caused in part by mortgage securitization regulation providing for disclosure favoring the sell side over the buy side. Mortgage securities listed on EDGAR to satisfy registration requirements (despite conflicting rules encouraging their treatment as private securities) comprise a vast collection of examples of instruments full of data in forms not useful to investors. The lessons of structured disclosure with respect public companies learned in the 20th century were not applied to asset backed securities in the 21st century. Instead, the SEC permitted issuers to use simple ASCII text – not at all comparable in its structure to US GAAP – to register instruments representing vast future cash flows. This lack of structure limited transparency to investors willing to manually structure the data for themselves. For example, Philip Moyer, the CEO of EDGAR online, has been quoted in the media with respect to hedge funds that paid to structure this data and then profited from the possession of that information. See http://www.wired.com/techbiz/it/magazine/17-03/wp... Because of the information advantage the sell side enjoyed over the buy side, demand for mortgages to securitize flowed to mortgage originators who in turn were driven to lower lending standards – increasing risk that was only passed back up the chain in the form of difficult-to-analyze ASCII text. 3.Government policies distorting the market to favor homeownership, ranging from the home mortgage interest deduction subsidizing real property investment to the government imposed 15% or greater penalty tax on business investment (compared with capital gains exclusions for residential property) distorted market operations. Neutral and stable tax policy would mean fewer chances for political problems to cause market problems. 4.See responses to questions 2 & 3. Furthermore, it was evasion of market mechanisms, i.e., subsidizing investors who made mistakes in purchasing or holding asset backed securities, which discouraged price finding. The reluctance to permit price finding, based on the fear that market pricing would hurt large institutions, contributed to the duration of the crisis. If the existing bankruptcy system is incapable of rapidly resolving large financial institution failure, either the bankruptcy system should be made more robust or large institutions should be made smaller. 5.Unclear; however, primary dealer status was thought by some to be an important consideration. 6.No. No. No. No. The panic caused by seeking such an unprecedented amount was counterproductive. 7.The stress tests were not in the long-term national interest. The better solution would have been public disclosure of all material information with respect to the public financial institutions. There should be no “too big to fail” exemption from the securities laws. 8.In the absence of adequate disclosure of financial instruments in which companies invested, yes. The 20th century disclosure framework proved inadequate for 21st century financial instruments. The flight to regulatory safety was convenient in light of the failure of disclosure. 9.The distortion of the supply and demand curves with government policies resulted in the sort of unpredictable valuations and volatility one might expect when arbitrary policies replace market forces. 10.The most effective way to save Lehman would have been to permit Bear Stearns to enter an expedited bankruptcy proceeding in which the judge was given equitable powers to claw back compensation, at his discretion, over several years. Whether Lehman could have deleveraged quickly enough to save itself remains uncertain, although management would likely have been more interested in making arrangements with more solvent parties in an effort to minimize the impact of its weakened holdings.

paulwilkinson.com : Standards Question: NIEM is to XBRL as United States Customary Units are to the Metric System?

Tue, 15 Sep 2009 16:21:52 +0000

UBmatrix has a helpful white paper entitled "NIEM and XBRL Collaboration," here: http://www.ubmatrix.com/downloads/UBmatrix_NIEM_X...

paulwilkinson.com : Miscellaneous Communications in an Age of Structured Data

Thu, 4 Jun 2009 19:15:17 +0000

Since posting, I've found David Weinberger's blog, where he discussed XBRL in 2003: http://www.hyperorg.com/blogger/2003/11/10/are-we... "We all like standards that help." he says. "But the supporters of the Semantic Web aren’t saying simply, 'Standards are good!' They are suggesting that when these standards are put together, they will form something more than their parts. ...But history has shown us that it’s really hard to get domain-specific metadata to work together. Maybe this time it’ll happen. Maybe. But that it’s happened in this or that domain should not lead us to generalize about it happening generally." I've had nice responses to recent Tweets on potential XBRL use for drug development and for disclosing how Congress spends money on itself. With competition for software to make XBRL data useful across multiple domains, maybe it can happen generally. Maybe. It worked well for short sellers who used XBRL to understand mortgage backed securities risk before the crash--and mortgage backed securities data is by far a different domain than public company financial data.

paulwilkinson.com : The Search for Killer Apps in the Knowledge Capital Economy and XBRL World

Fri, 29 May 2009 15:43:01 +0000

[continued] Great that you're working with Congress, too. The cost of supporting the standards to make this work is trivial relative to the benefits of better standardization and structure (and the cost is trivial relative to the bailouts, too). It would be great to get bipartisan support for Rep. Issa's bill. Oregon and Nevada are both using XBRL at the state level, so I wonder if Sen. Wyden or Sen. Reid might use one or both of those experiences to build on the Issa bill? Cheers, Paul

paulwilkinson.com : The Search for Killer Apps in the Knowledge Capital Economy and XBRL World

Fri, 29 May 2009 15:42:25 +0000

Thanks, Cate! Great Wiki headline: "Riski" This all goes back to a basic idea that if you're going to use other people's money, you need to disclose material information to market scrutiny in a structured format. U.S. GAAP worked pretty well as a structure over the years, but Enron's SPE's and the i-banks' ABS were the results structure evasion. Freerisk.org looks like a great start on the road back to effective market scrutiny. If it's too complex for the market to value using accurate material well-structured information, it's too complex for investment at levels that create systemic risk. A few billion in knowing investment in opacity could be fine; a few hundred billion in investment of other people's money in opacity is catastrophic. [more]

paulwilkinson.com : XBRL US Posts Testimony on Using Technology to Address Credit Crisis

Fri, 17 Apr 2009 15:18:32 +0000

Dennis & David -- sorry for the delay in posting the last comment from David. The IntenseDebate spam filter flagged it despite the ongoing discussion. Was only non-spam item in a folder of 1,000+ items. Still, hope they've improved their filter by now. Paul

paulwilkinson.com : Wacky Rookie Wiki Idea or Regulation Writing Revolution?

Wed, 15 Apr 2009 15:14:03 +0000

Interesting. There has been talk over the years about the SEC becoming a self-financed agency like the Federal Reserve. This would have interesting consequences, including not needing to go to Congress annually for appropriations (in recent years, the SEC has run a profit for the government, sending the fees it collects to the Treasury. Congress then sends back only a fraction of those fees to the SEC). As capital transitions from primarily money form to primarily knowledge form, the SEC will become more important relative to the monetary authority. Too important to be constrained by a clumsy 535-member board of directors? (House + Senate) Will it need the more customer-focused management mechanism that Internet technology supports? As of now, you need a federally regulated exchange to provide for open access to the capital markets, but the self-regulatory mechanism underneath federal regulation has worked very well. (The most recent crisis emerged outside of the federal/SRO world in a regulatory netherworld that foreshadows what could happen if regulatory technology fails to keep up with market technology.) Perhaps the future is an SRO model constrained by radical transparency? Takes me back to the Wired article from February, the subject of a prior blog....

paulwilkinson.com : Victories for Market Transparency

Fri, 3 Apr 2009 15:15:35 +0000

Key questions. Re the first: From a legal perspective, whether an investor needs to know asset ownership depends on whether the fact is material. From a business perspective, it depends on the risk of not knowing relative to other investment opportunities. I think the question is best answered in the marketplace, as long as the basic rule -- securities issuers must disclose all material information when offering securities -- is observed. The specific identities of a large number of owners of underlying assets may not be material, as long as aggregate information is disclosed. However, voluntary disclosure of additional details may serve the mutual purpose of reducing the risk of investing for investors and the cost of capital formation for issuers. (See today's new post on transparency as a business model.) Re the second, the answer may be complicated depending on the legal rules. Section 3.2 of Posner's 4th Ed. of Economic Analysis of Law is succinct: "Property rights are not only less exclusive but less universal than they would be if they were not costly to enforce." 1L Property Law students know what professors can do to confuse classes about ancient document-based title systems. Data-based title systems may not make life easier for 1L's, but hold the potential to make property rights less costly to enforce. The clearer the property rights, the easier they are to enforce. The easier they are to enforce, the lower the investment risk. The lower the risk, the more liquid and less expensive capital becomes. Finally, the more one can do with capital, the greater the incentives to create it in the first place by adding real value to the economy (as opposed to shuffling paper around and creating new exotic and opaque financial instruments). In a sense, better legal systems, then, are a supply-side economic stimulus without the downside of controversial revenue effects.

paulwilkinson.com : Victories for Market Transparency

Sun, 29 Mar 2009 18:33:26 +0000

James K. Glassman has a nice explanation of how FMV, defended by the SEC staff, is the pro-market approach: http://www.jameskglassman.com/?p=20

paulwilkinson.com : Economic Activity, Public Trust, XBRL, and Property Law

Sun, 29 Mar 2009 01:26:39 +0000

How about this? The current crisis represents the recovery of the accounting firms form the Enron/WorldCom debacles. With PCAOB, SOX, more skeptical equity analysts, increased penalties for violations, etc., people looking to earn economic rents in the finance sector were forced to flee outside of the GAAP/public company world if they wanted to earn more from their work than they added in value, either deviously or by deluding themselves into thinking they were actually adding value. They found an escape valve in ABS, which aren't subject to GAAP or to the degree of accounting firm scrutiny applied to public company finances. Is GAAP itself a financial taxonomy or an ontology? With more than 25,000 pages of documentation and with it being at the heart of what are still the world's strongest capital markets, I'd say it's both complex and successful -- albeit far from perfect. The point is that precisely because financial (and other business) institutions have evolved in such a complex fashion, if they want to raise capital from the public, they must be forced to describe themselves according to common principles. I think that's why transparent capital markets generally work. The SEC is writing validation mechanisms that are described here: http://www.sec.gov/info/edgar/xbrlerrormessages.h... My old friends there are scary smart, but they would be the first to admit that if they can do it, lots of other folks can do it to. :)

paulwilkinson.com : Economic Activity, Public Trust, XBRL, and Property Law

Sat, 28 Mar 2009 23:23:24 +0000

On the address issue, I just stumbled across an innovative site, http://static.zumbox.com/mk_about_zumbox_overview... which aims to replace postal mail using an on-line postal metaphor. If you sign up, they say they'll send you a postcard to verify your address and facilitate the use of the system for secure communications -- at least as secure as postal mail. Among other things, I'd hope such a system might eventually contribute toward the standardization of data for all consumers and empower consumers to verify their data without needing to draft actual postal letters or stay on hold for hours with call centers. Finally, I watched a C-SPAN rerun this morning of the new SEC Chair's testimony to the Senate Banking Committee this week. She was too polite when it came to questions about jurisdictional reform in the financial sector and I found myself almost yelling at the TV: "Why don't you say, 'We regulate real stocks and real bonds for real public companies! You outlawed us from even thinking about regulating whatever that crap was that AIG created! You can't blame us for letting fake financial instruments be traded one on top of another until they collapsed of their own weight. Treasury and the banking regulators couldn't control things either. Perhaps we let too many people have too many exemptions for too many private offerings built on top of too poorly disclosed asset backed securities. When so-called "sophisticated" investors took advantage of those exemptions, they took 100% of the responsibility to analyze and monitor them. Even for public investments, we expect investors to perform due diligence. No regulator can be expected to permanently guarantee the safety of anything beyond the $250,000 in bank savings that Congress has decided is appropriate based on decades of review and analysis and the $500,000 coverage for brokerage insolvency under SIPC. Give us the authority to stop people from building needless complexity into financial instruments and we'll shut 'em down. When instruments are built for the convenience of people selling them, instead of for the convenience of investors, they should be shut down. The ability to hedge risk is critical, and we shouldn't discourage genuine hedging. But the so-called "investment banks" were neither investment houses nor banks, and too many "hedge funds" simply didn't hedge. If nothing else, well-structured data requires clear, transparent, and accurate labels. Job one is to give the SEC the resources to mandate the use of industry standard taxonomies for every investment in every business or asset offered to the public and every private instrument large enough so that its failure would be likely to cause material harm to the investing public. When this universe of investments is properly disclosed, the need for and value from building a financial house of cards on top of these investments will disappear." Or something like that....

paulwilkinson.com : Economic Activity, Public Trust, XBRL, and Property Law

Sat, 28 Mar 2009 23:22:38 +0000

Thanks. Agree 100% that data quality is even more important than whatever language is used to tag the data. Also, the language must be of sufficient quality to make the data meaningful. The key, it seems to me, is having systems in place to validate both data and the mark-up language. As I understand XBRL, it's easier to write rules to validate data in that format than in other popular formats. And an XBRL taxonomy can be crowdsourced, reviewed by experts, crowdsourced again, etc., in a never ending cycle to improve the taxonomy. My take is that bad data that's exposed to the market or privately exposed to the people the bad data describes is likely to be detected sooner than bad data that's hidden or only seen by insiders who make money when they sell financial products based on the bad data. Also, silly assumptions like consistent permanent smooth upward trending housing prices are likely to be detected sooner if more and more dispassionate eyes are focused on the facts that would reveal such underlying assumptions. To the maximum extent possible, investors should be able to pick and choose which information is useful to them before they entrust their money to others, and to get that information quickly and accurately. That's why, for example, I think much of the debate over mark-to-market is needless. Why not let investors see both mark-to-market and held-to-maturity values and let them decide? I realize a choice of valuation data doesn't solve the regulatory capital problem, but it does illustrate the problem with regulator regulation vs. market regulation. Regulators operating in a non-competitive environment are precisely the opposite of investors operating in a competitive environment. Regulators MUST pass judgment on what they regulate, no matter what information is available to them. Investors have another option -- if the information isn't of sufficient quality and quantity and relevance, they can go find another investment with information that is. And investors can diversify their risk across a wide range of investments, whereas mistakes by regulators can damage trust across the board, regardless of the quality of the information disclosed and the quality of the format in which it is disclosed. Perhaps the most efficient use of the time and authority of regulators is, as you suggest, making sure data is accurate and truthful -- at least "materially accurate," which seems to work fairly well as a standard. Obviously regulators can't review all of the data, which is what makes the use of surrogates, like accounting firms and auditors, important, and which is also what makes civil and criminal penalties for fraud important as a deterrent. --more--

paulwilkinson.com : Risk, Transparency, and Secrecy

Tue, 17 Mar 2009 02:06:22 +0000

I didn't see the NY Times article until you pointed it out -- thanks! I have two of Frank Partnoy's books on my bookshelf. Wish there had been time to study his work more carefully four years ago. Thumbing through them now only reinforces my opinion that better disclosure at the ground level could have prevented the house of cards.Of course, it would have prevented a lot of market incumbent profit, too, which I expect was responsible for the fact that Partnoy's warnings went unheeded. Will be interesting to see what William Cohan's take is -- my copy of House of Cards is supposed to arrive tomorrow.

paulwilkinson.com : XBRL US Posts Testimony on Using Technology to Address Credit Crisis

Fri, 13 Mar 2009 18:43:05 +0000

In a thread on security (financial, not defense) identifiers, I just posted the following to a Yahoo XBRL list (http://finance.groups.yahoo.com/group/xbrl-public... and figured I'd post it here, for what it's worth. Identification seems a particular issue in the RMBS world, particularly protecting the privacy of individual mortgage holders whose personal loan information has been posted in public on EDGAR for years, albeit in a format making it difficult but probably not impossible to cross-reference the loan data with other personally identifiable information. With all the personal data security technology created for Web 2.0 heretofore, perhaps there is a commercial off-the-shelf solution: The main reaction I've seen in discussion of CIK issues is frustration with the pre-XBRL scheme. Perhaps my perspective has been backwards: the problem isn't that a particular CIK itself changes, but facts related to a particular CIK change in ways that the current system of disclosure does not contemplate. This creates challenges if users want to compare facts over time. Perhaps mergers and spinoffs are a larger challenges than restatements, but I'd hope this community could use the new standards to at least mitigate frustration on any and all fronts, whether by making better software applications or by suggesting refinements to the standard. I'd think there'd be a healthy appetite for such tools and, if necessary, rules to improve such tools. Re your CUSIP and SEDOL questions, Dan, I don't know the current state of the IP rules, but it's an important question that would seem to be good to clarify for this group. It's also interesting to contemplate the future of proprietary schemes in a world of open data standards and global securtization. The U.S. standard for a security -- investment of money in a common enterprise for profit derived from the efforts of others -- obviously applies many places besides public companies. Improved identification standards integrated with the various XBRL taxonomies, including GL, would seem to hold the potential to make private securitizations, not to mention other financings, much more transparent and efficient to those who rely on the information. What might be done to unify various public and private and national security identification schemes to help investors get the information they need and make capital allocation more efficient? I understand private securities can get identifiers, but just as an example, the process of going from (1) assumptions about future real property values, to (2) investment in securities based on those assumptions, obviously broke down. In retrospect, it would have been nice for investors to have had an identifier showing exactly who was accountable for the particular assumptions upon which the private securities were based. Systemic risk seems to have been "hidden" in plain sight during the housing bubble and it's tautological that assigning an identifier to something means it's no longer hidden. Now more than ever, there's a compelling public interest in providing for the most reliable and efficient financial information stream possible, and identification schemes must be a vital part of that work. A new speech on the topic of the data Web by Tim Berners-Lee has the Twitter world excited today -- for those who didn't get a Tweet, it's at http://www.ted.com/index.php/talks/tim_berners_le... It's a nice big-picture think piece worth its 16 minutes and 23 seconds, and inspired the preceding rant, for which I apologize. Expect readers of this list will get much more out of the Berners-Lee speech.

paulwilkinson.com : Administration Memo on reccovery.gov Falls Short

Thu, 26 Feb 2009 19:16:50 +0000

The audio from the Dec. 15.2004, meeting, where the Dec. 22 rule was discussed, is interesting, particularly the discussion by Commissioners of "static" information: http://www.connectlive.com/events/secopenmeetings...