I'd love to contribute to this project, especially since I wasted years of my life mining and forecasting data on financial institutions - it would be nice to put that skill to a good cause. But if the goal is really to make financial institutions more accountable, my years of experience working in the industry tell me this will be a largely fruitless exercise. I expect the yield on mining public data for that nugget of information to nail a financial institution is going to be extremely low if not nil.
Financial institutions only have to disclose the highest, most superficial levels of information to the public when it comes to the breakdown/allocation of their assets and liabilities. If you open up central bank data or the notes to a FI's financial statements, you will not find a meaningful delineation of where a banks assets are or what risk profiles they have.
Having worked in a very large commercial/investment bank and directly with the CFO, I know first hand that although banks avoid doing anything illegal, they will have no qualms with bending the rules in their favour. Most well run banks know exactly which rules are being bent and they will know exactly how to classify it in any public submission to prevent any smell. They have large finance and investor relations teams who pore over every decimal point in any report and have prepared answers to virtually all regulator questions.
The information you need to properly regulate banks are not in the public domain.
Take the last financial crisis for example. I don't think any publicly available financial statement or report would have told you that banks were holding onto a tremendous volume subprime mortgages classed as 'AAA'. This only emerged when huge holes appeared in balance sheets when the US economy slowed and a whole bunch of assets had to be written off.
The kind of remedy required to mitigate the chance of another crisis is a systemic overhaul of how banks are allowed to operate and how they are regulated. I'm sorry, but holding them to account with data provided by banks themselves will not yield much result.
EDIT: Sorry for being a jerk/cynic about this effort. I'm actually a big fan of OpenCorporates. But I'm still a bit disillusioned having quit in 2011.
Banks are inherently opaque -- in many cases their own management doesn't understand their own balance sheet.
One of the great changes over the past few decades has been the migration of investment banks from partnerships to public equity structures. When an investment bank was a partnership, its "shareholders" were bankers and former bankers, with a deep understanding of the assets and liabilities _and_ of the ways in which management could manipulate their accounting. Those owners were highly incentivized to make sure the bank was properly run, as much of their wealth was tied up in that equity, which was in an illiquid form that couldn't easily be sold or hedged.
The commercial banks were always public equity, but until a few decades ago generally took considerably less risk.
Investment bank managements have since discovered that the public markets were willing to provide plenty of capital, with much less rigorous and careful oversight. So they've migrated those partnership structures to public equity, which enables much larger and riskier balance sheets.
If we were seriously interested in regulating these institutions, we'd require them to be partnerships in the old form. Nothing unconstitutional about it, the Fed could make such structure a requirement for access to its desk. Yes, we'd have much smaller banks, and less liquid markets, but their self-regulation would be far better.
Your input is absolutely spot-on. IMHO, MapTheBanks should be enticing people to join to make it faster and easier to perform the kind of Palantir-like big data intelligence analysis upon relationships between entities that make it feasible to identify influences. Hoping to "nail" someone for their part in the crisis is interesting and looking to the past that cannot be changed.
More forward-looking is the following. Make it easy for the public to formulate queries and datamine against a structured dataset and unstructured data to accrete competing, evolving intelligence analysis models (that square off in prediction markets for rankings) of market entities (including individual executive participants).
This could be a far more powerful deterrent against activities that have bad optics than any regulatory framework. It can also drive a useful feedback mechanism to tell the regulators (via a mass of competing models all screaming for it) what objective data is needed to refine the models' predictive capabilities when backtesting revealed data in the aftermath of market failures like 2008.
OpenCorporates could get some funds by running the exchange services for the prediction markets, and/or setting a small fixed cut for supplying the platform to intelligence analyst teams that use the system for selling competitive intelligence analysis services to anyone who wants them to focus on a specific detail using their specific model (perhaps through metering API access to the data and processing instead of only GUI-level notebook-style access).
But that doesn't make it useless. Merely having lists is an important step.
For example, I do a lot of work with unstructured text (eg, news reports, transcripts). Having a list of names of financial entities means it is possible to link statements made by office holders to their entities much easier.
But again, this doesn't fix the financial disclosure problem..
I agree. The real benefit here will be a more coherent and digestible understanding these entities and their relationships, such that other actions can build off it. Using this data itself to litigate is a non-starter.
And how many billions of dollars in fines and settlements have all those big banks paid in the past year for all those legal acts they've committed?
At the end, many of the "AAA" mortgage-backed securities were fraudulent: backed by "liars' loans" backed by fraudulently inflated appraisals, and fraudulent statements of buyers' ability to pay.
Contrary to media perception, the FI I worked with did put a huge amount of resources into preventing illegal activity. Of course trying to avoid legal trouble doesn't necessarily prevent it.
In my brief and painful experience, FIs genuinely do avoid breaking the law. But they don't mind breaking the spirit of the law by finding a way around it.
Bankers don't really care about fines. Sure $16B here or there hurts, but as long as no one goes to jail most of those losses are absorbed by shareholders. Top management already got their bonuses.
I've seen some argue that the sheer volume and complexity of financial law actually makes it easier for bankers to find loop-holes and insulate themselves. I'm not familiar enough to truly judge the truth in that theory.
I'm positive banks here in Spain were doing illegal stuff. And most likely still are if you ask me.
Just google about the very recent case of Rodrigo Rato and Bankia. That man was our Minister for Economy for 8 years and also head of the FMI for a smaller period. Bankia faked its own accounts prior stock listing at IBEX, among other beautys. It's a comic read if you are into that kind of stuff.
I understand what you ment, it just doesn't apply here. In fact, i think there is a market with reclamations to banks on behalf of clients.
Things are changing. If I understand Dodd-Frank/EMIR correctly, every OTC derivatives trade now has to be reported to the regulator within something like 15 minutes (or was it 15 days?).
Anyways, the regulators now will have a pretty complete picture of what each bank holds, at least for a single asset-class.
Though, I suspect information on exchange traded stocks, and centrally cleared swaps are also available to the regulators, via the respective exchanges and execution facilities.
In reality, the swap data repositories are finding the data submitted by each institution very difficult to reconcile - it's a step in the right direction but the goal of constructing a full representation of each financial institution's derivatives exposure is still a way off.
Not knowing about what would be required to model these full representations, is it just a typical "too much data, not enough data scientists" problem, or are there fundamental research questions to be answered here? For that matter, does the SEC even employ or contract/grant big-data researchers for these types of problems? It seems like it's exactly the type of problem that a government research grant should be intended to solve!
Defining a swap: the OTC market is complex and there is no standard representation for many of the products - this makes reconciling data submitted by each of the firms complex. A simple interest rate swap report could contain up to 1,000 elements to fully describe a trade.
Volume: the 2 major OTC reporting regimes, Dodd-Frank and ESMA, both generate tens of millions of trade reports daily. This data needs to be correct; needs to be both ingested and retrieved quickly and needs to support complex post-reporting processing and queries.
Complex workflow: each swap undergoes many changes during it's lifetime, which complicates the workflow and data for reporting. For example, you may trade a block CDS, which is split into 20 allocations, some of which are new trades and some that alter existing trades (step ins; step outs; terminations; reductions...). Each of the allocations may require different reporting treatments.
And yes, the 'too much data, not enough scientists' problem with interpreting the submissions. Bear in mind that the SEC reporting hasn't started yet - that's 2015...
I am interested in "no-one" knew versus my (anecdotally limited) understanding of "well we the ratings agencies all knew we just were not allowed to tell by our bosses"
It seems the sub prime mortgage problem was an industry open secret, it's just that short of regulator action it was not clear what to do. And as we prosecuted nobody the next crises will have fewer whistleblowers.
But I am interested in what might be solutions to regulation - should global financial transparency be a goal? Should removing excess profit from banking be a goal?
True, but this project is mapping that public opaque surface and providing a foundation for examining other datasets.
Imagine if in the future there is leaked dataset. That can then be analyzed using the subsidiary and location information assembled here. Or to note what the public financial statements were and to notice anomalies compared to the leaked dataset.
Its really about keeping track of who all the players in the game are and tracing connections between them.
Financial institutions only have to disclose the highest, most superficial levels of information to the public when it comes to the breakdown/allocation of their assets and liabilities. If you open up central bank data or the notes to a FI's financial statements, you will not find a meaningful delineation of where a banks assets are or what risk profiles they have.
Having worked in a very large commercial/investment bank and directly with the CFO, I know first hand that although banks avoid doing anything illegal, they will have no qualms with bending the rules in their favour. Most well run banks know exactly which rules are being bent and they will know exactly how to classify it in any public submission to prevent any smell. They have large finance and investor relations teams who pore over every decimal point in any report and have prepared answers to virtually all regulator questions.
The information you need to properly regulate banks are not in the public domain.
Take the last financial crisis for example. I don't think any publicly available financial statement or report would have told you that banks were holding onto a tremendous volume subprime mortgages classed as 'AAA'. This only emerged when huge holes appeared in balance sheets when the US economy slowed and a whole bunch of assets had to be written off.
The kind of remedy required to mitigate the chance of another crisis is a systemic overhaul of how banks are allowed to operate and how they are regulated. I'm sorry, but holding them to account with data provided by banks themselves will not yield much result.
EDIT: Sorry for being a jerk/cynic about this effort. I'm actually a big fan of OpenCorporates. But I'm still a bit disillusioned having quit in 2011.