In a recent post It is NOT different this time, and XBRL will not avoid the coming crisis, author Daniel Roberts quotes Dennis Santiago, CEO of Institutional Risk Analytics, as saying: “bottom line is that as long as people are allowed to create opacity on purpose in finance these problems will resurface from time to time.” Something that strikes me as worth reflecting on.
The financial services industry can rightly be proud of the many innovations it has introduced in terms of the way money can be packaged and sold at a profit – junk bonds and mortgage-backed securities spring immediately to mind. We believed these ‘masters of the universe’ understood what they were doing and had carefully modeled the possible risk and impact scenarios they were creating. And we were all (well mostly all) complicit in going along with it while our 401K and our house price appreciated in value.
But I think Santiago is right. Whether truly deliberate or not, many financial instruments are purposely opaque, and can only be explained by experts – often badly. Which brings me to my point. I’m hoping that President Obama follows up his bonus-culture change with another cultural change proposal for ‘transparency on purpose’.
Basically this works as follows. Whenever someone comes up with a new financial instrument, it can only be marketed if explained by a ‘transparency taxonomy’ that has the sole purpose of preventing ‘opaqueness on purpose’. The transparency taxonomy must also be accompanied by a ‘what if everyone did this’ model that clearly visualizes the effect of this instrument being used in a ‘dominant way’ in a global context.
In fact this model might be a good thing for all product releases: The model for the birth control pill might show a world without children; the model for shoot-em-up video games, morgues full of corpses; the model for the Teenage Ninja Turtles toy, landfills full of plastic. With a quick look at these models we might at least think a little more about what we are buying. But back to transparency on purpose.
Cobblers, I hear you say. With this kind of transparency, who would bother inventing clever, new financial instruments? So reward transparency by granting some kind of ‘copyright’ that creates a commercial advantage for a year or two before everyone piles in. Then we’d all have a time window to be a bit clearer about what it is we are getting into while the impact itself would be more contained.
As Daniel Roberts suggests, considerable political courage is required for initiatives like transparency on purpose. Because it’s not really about data or XBRL it’s about changing a culture. An industry culture I mean – not a Yoghurt culture.
Tags: Transparency
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