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.

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.

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

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

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.

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.

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

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.

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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

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.

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