An Open Source Strategy for Our Financial Mess
posted by Danielle Citron
In an article published in Harper’s Weekly in December 1913, Louis Brandeis prescribed “publicity” to remedy the financial system’s ails: “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.” As Wired reporter Daniel Roth explains, those words resonated for President Franklin Delano Roosevelt, when he wrestled with our last shattering financial crisis, leading him to support a bill that required companies to file detailed accounts of their financial health and activity.
Fast forward to our current financial crisis where the problem is not a dearth of information, but a broken system of disclosure. According to Roth, we may be awash in information about our financial system (e.g., 200 gigabytes of Edgar filings each year), but that information is so complex despite the SEC’s plain-language efforts that quick and easy answers to simple questions like “How much is my bank’s capital tied up in risky debt obligations” elude us. Part of the problem is that the information appears in plain text format, preventing cross analysis and easy searchability. Our financial data diet is like a box of chocolates: it looks good, but offers little value and risks serious problems.
Fixing our broken system of disclosure will involve new technology: by 2011, public companies will have to submit their financial filings in a standardized format (Extensible Business Reporting Langage aka XBRL) that can be easily searched, exported, and mashed up for analysis. This creates an open-source(ish) dynamic: the interested public can crunch the financial data, creating “an army of citizen-regulators.” This technology-enabled participation may allow users to contribute to the analytical and factual mix. This is something that Archon Fung and his co-authors call “collaborative transparency.” Of course, the success of such collaborative transparency depends upon the public’s participation and the the willingness of government officials to respond to the public’s valid concerns. It also may have a limited impact as only public companies must use the XBRL, excluding hedge funds, pension funds, and other non-publicly traded entities. Moreover, effective disclosure may require the reporting of data more frequently than on a quarterly or annual basis. But XBRL would surely liberate data and, in that regard, has great potential to transform the transparency of the financial system.