Friday, October 31, 2008

Victims of the Crisis (I): XBRL?

This is the first installment in an loose series about victims of the current market crisis. We'll do a triage of the patient with a bit of a health check for cases of potential resilience. To be sure: we don't think the crisis is over ...

Just a few months ago, the XBRL bandwagon seemed unstoppable, set to take the world of financial reporting in a storm. Now,  we're not so sure. The all-important US SEC rule to make XBRL mandatory for US filers is overdue, and some doubt whether it will be coming forth at all, given the SEC's backlog of far more urgent things to do and only a few more weeks to go until the administration changes. 

On top of that, XBRL is increasingly seen to acquire a stigma of failure in the public eye because it is often identified as the hobby horse that detracted Chairman Cox from attending to his real job, for which he is under heavy fire. If that stigma persists, then Mr Cox' successor may be loathe to finish up, even if he were to share a similar level of enthusiasm for XBRL (which is a tall order). 

The user community is well known for suffering from ADD, so if the momentum of the move towards global XBRL disclosure is seen to be broken and availability of comprehensive XBRL coverage becomes a thing of the distant future, it will quickly loose what little interest it has had so far.

All that being said, the case for XBRL is as strong as ever. In fact, if accounting standards convergence is on the back-burner for the foreseeable future (more on that in a later installment), then a new use case for XBRL as a meta-standard for comparison and valuation purposes could emerge. 

Tuesday, October 28, 2008

Innovative ways of financing retirement

In this day and age where financial innovation is (wrongly!) blamed for the end of capitalism and the world as we know it lock, stock and barrel, the title of SwissRe's latest edition of Sigma is courageous. Nevertheless, it is a comprehensive assessment of the growing role that insurance will have to play in the provision of old age retirement funding, where insurance is to be understood in a functional rather than an institutional sense. 

An important section of the study is dedicated to managing retirement product risks. Longevity risk is identified as prominent among them, but its management is limited by the rather shallow depth and breadth of longevity risk markets. Notably absent from that section, however, are considerations on valuation techniques. If there is one thing that we can learn from the current crisis, then it is how crucially important it is to value & stress test innovative products properly over their entire life cycle.

Wednesday, October 22, 2008

XBRL for Investment Professionals

It's nearly a month that said conference took place in London, and I have yet to blog about it ... some of the reasons for that delay probably coïncide with the reasons why a relatively small group of less than fifty professionals came together for an event that has been organised by CFA Institute, EFFAS and the IASCF, namely current market dislocations. In the face of that, an infrastructure undertaking such as XBRL takes second place with many.

Nevertheless, participants tended to be quite happy with the conference and commented favourably on the quality of the audience as well. The relatively small size of the audience made it possible for the audience to interact with each other and to participate actively in the Q&A session, which is very helpful when you're the moderator ...

Here are the presentation slides. It's a pity that David McGraw's slides are not available, because his and Homi Byramji's presentations struck a strong chord with me. In David's case it was the breadth of the potential applicability within a leading institutional investor's processes, and the challenges that XBRL has to respond to (data governance!), whereas Homi was demonstrating clearly that, other than Encyclopedia Britannica, Thomson Reuters is not going to be asleep on the wheel in the face of the challenge to the middle man posed by XBRL. Personally, I am fairly confident now that XBRL is a sustaining innovation for information intermediaries. 

Shortly before the conference, Finanz und Wirtschaft published an XBRL update that I wrote. And there is one more update: XBRL CH is now officially a provisional Jurisdiction!

Deconstructing financial mythology

In its aptly numbered working paper 666, the Minneapolis Fed deconstructs (for the USA) what it claims to be the following four credit crisis myths from publicly available data up to 8 October 2008:
  1. Bank lending to non…nancial corporations and individuals has declined sharply.
  2. Interbank lending is essentially nonexistent.
  3. Commercial paper issuance by non-financial corporations has declined sharply and rates have risen to unprecedented levels.
  4. Banks play a large role in channeling funds from savers to borrowers.
There is not much reading to do as the authors rely on graphical evidence. (via MR)

P.S. And here's follow-up ... I'm sure there's more to come.

Tuesday, October 21, 2008

Confidence in accounts

Today's FT has an article referring to a letter that we've co-signed. The letter's signatories object to the ongoing political activism to relax accounting standards relating to the measurement of financial instruments. 

I am concerned that this is the most ill-conceived part of ongoing bail-out activities, which have started on a wrong footing and which threaten the long-term functioning of capital markets through political interventionism rather than a calm hand. Corporate accounting is aimed to reflect economic reality, and thus must not be subject to political fiat. The current thrust of activism aims to put the ostrich's head back in the sand. But guess what - it doesn't belong there! The consequence of such ill-advised changes would be that users of financial statements will loose confidence in corporate accounts, which is expressed directly in valuations. So, the effect will be contrary to intentions.

Sunday, October 19, 2008

Truth or dare?

EDHEC has made available an interesting survey of current European investment practices, comparing actual practice with recent state of the art in the investment literature. It's a feature of such a survey that practice cannot really look all that good since there will invariably be a time lag between conceptual groundworks and practical implementation. But it transpires from the results that practice does not seem to look to finance literature for competitive advantage by implementing the latest innovations, such as how to handle tail risk.

This conservative approach is probably due to a behavioural bias in the investment community to avoid the risk of being wrong and alone, and it is not likely to change anytime soon, what with the bad press that financial innovation has these days. But in true contrarian spirit, I'd like to point you to this insightful praise of financial innovation.

Consult the survey and compare it with your firm's practice for your own private game of truth or dare ...