There has been a lot of discussion suggesting that if there had been an XBRL taxonomy for MBSs and other CDOs (etc) and a taxonomy for government stimulus spending, that somehow the next crisis can either be averted or reduced - that the lack of transparency was a cause of the last crisis, and will contribute to the next.
I disagree with this view, and while I advocate the expanded use of XBRL for an increasingly wide range of business reporting applications, I do not think that a taxonomy or MBSs and CDOs (etc) would in any way either have avoided the crisis, or reduce its impact. Yes it would have increased transparency, but no, it would not have avoided the last crisis or the next one.
More data is a good thing, but data is not the same as political or business courage. Reasoned thinking has been disengaged, and "Its different this time" is the prevailing view. The last crisis was caused by a failure of trust, while the next one will be caused by a lack of political courage.
Trust, not Detail
The crisis was caused by a common group-think that said that house prices would continue to go up, that there was no bubble, and that when an agency gave a CDO a AAA rating, that the rating could be believed. Ratings serve as a form of trusted assessment of detailed information, and as such it was (and is) the responsibility of the rating agency to assess the risk of default on a total CDO package, and on the individual tranches of the package. Equally, no matter how complex the merging and re slicing of such tranches, it remained (and remains) the responsibility of the rating agency (or other rater) to understand what is in each tranche and to assign an appropriate rating.
The facts are that investors trusted rating agencies, and added their own prejudices, allowing that to drown out market indicators. "But this time it is different" is the common refrain during all bubbles, and this one was no exception.
But some were watching, and some were speaking about the potential risks. Others were watching, and were making their own investment decisions based on what their models told them.
I remember Chris Whalen in his weekly article (www.instituationalriskanalytics.com) warning of CDOs and subprime resets as far back as 2005 and 2006. Most recently, Dennis Santiago, CEO of Institutional Risk Analytics, told me "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."
Likewise, there have been a number of stories about the major players, and Goldman Sachs in particular. From Vanity Fair, January 2010 article on Goldman Sachs:
In the aftermath of the crisis, criticism erupted that Goldman had continued to sell mortgage-backed securities to its clients while betting against those very securities for its own account. Clearly, in the simplest terms possible, this is true: while Goldman was never the biggest underwriter of C.D.O.’s (collateralized debt obligations—Wall Street’s vehicle of choice for mortgage-backed securities), the firm did remain in the top five until the summer of 2007, when the market crashed to a halt.
Goldman argues that the buyers of their C.D.O.’s were themselves sophisticated investors who were capable of making their own decisions. In other words, they were counterparties. “You don’t shut your franchise down just because you have a view of a market,” says Cohn. “When we do an I.P.O., people don’t ask us our view of the stock market.” But a less generous interpretation was given in a recent McClatchy Newspapers series, which quotes an analyst report that describes Goldman as being “solely interested in pushing its dirty inventory onto unsuspecting and obviously gullible investors.” (A Goldman spokesperson says, “The statement is not true. The McClatchy series was characterized by unsubstantiated claims, innuendo, and outright falsehoods.” McClatchy, however, stands by its work.) And so, if the old Goldman was defined by its refusal to do hostile takeovers, the new Goldman is defined by its skill at protecting its own interests.
Clearly this was a case of a seller being happy to sell a product that the client wants to buy, regardless of how good or bad it is for the client. Sort of like a non-smoker selling cigarettes. All the additional XBRL tagged information would not have changed investment decisions, certainly not on a scale that would have influenced the outcome.
To use another analogy, paper based maps have improved in their level of detail and quality of content. In addition, technology has allowed the development of the GPS (Global Positioning System) and Google Maps applications, to mention just two. Yet the data is still there at the detailed level for anyone to look at. It is called the Yellow Pages and the local Printed Map.
Yet to day we get in cars are program in a destination, and blindly follow the instructions given to us, regardless of the outcome. We TRUST the GPS system. Hell, I bet if the GPS system suddenly went out, half the moms in America would not be able the find the soccer fields that they've been taking their kids to for the past years. They would be lost without the trusted system.
We TRUSTED the rating agencies and sellers of securitized debt instruments.
More data would not have changed the outcome, because investors would not have looked at the data, they TRUSTED the analysts and rating agencies. They also listened to the voices that said what they wanted to hear - "Its different this time".
The Next crisis
Just like the are listening to the same voices saying "Its different this time" about the 10% of GDP that the United States is borrowing last year, this year and for years to come. "It will be different this time, we are not Argentina". But it is not different this time.
And yet the data is there for everyone to see. I.O.U.S.A. was frightening before the crisis. It is just plain terrifying now, yet nothing is being done about it. The data is all there. Yes, a taxonomy for public spending to push that information where it belongs, into the public domain, is important and must happen. We will then be able to actually, as individuals, dissect government spending at the lowest level. The give winners will be the opposing political parties who will use the data to prove that one part or the other is spending money wastefully (usually in amounts that appear huge - $10s or even $100s of millions). These exposures will certainly bring some "discipline" to spending, but will do nothing, absolutely nothing, to avert the coming crisis.
Tagging data at the lowest level is about efficiency and effectiveness, and must happen.And XBRL is the most effective standard for the tagging of business (that's what this is after all) information.
But all the stimulus money, line by line, tagged in XBRL at the lowest level will not change the simple fact that the next crisis is not about the data, it is about the decision making that says "Its different this time". So lets make the case for XBRL on the basis of what it will do, improve efficiency and effectiveness, not avert or limit the impact of the next crisis. That is not a data issue, and is a political issue.
Detailed data does not make political courage.