The future of finance: Total transparency?

The financial crisis hit Iceland full force last Monday. One of our banks was pretty much nationalized, followed by a large investment company filing the equivalent of Chapter 11. This led to significant losses by a large “risk free” money market fund, that stored a part or all of the personal savings of some 12 thousand people in it – yours truly included. You can read more about the macro of this all in the international press. And don’t worry about me – my personal loss is manageable.

The whole incident – however – reinforced ideas I’ve been contemplating the last few months about the future of global finance, once the current economic hurricane subsides. I’ve been coming to the conclusion that the only thing that can restore the confidence in the financial markets is total transparency.

The reinforcement came as I spoke with my contact at the bank after learning about my loss. He said that what the bank was doing to gain confidence in the money market fund (and the bank in general) was to open the books completely. Meaning – as I understood it – that they’d publish the composition of the fund in detail online and update it “live” if and when there were any changes in that composition. Something that they’ve ’till now only done once a year in an annual report.

To me, this sounded like a small-scale version of my vision for the future of finance. Total transparency, where anybody can at any time dig through any details on his or her investments.

First, some history… When financial markets – as we know them now – were forming, one of the fundamental ideas was that all players in the market should have equal access to the best possible information on any bond, security and share available. For that reason, strict rules were put in place about how and when companies filed their data. Remember that this is about a century ago – in a very different age in terms of technology and communication. Quarterly filings were pretty much “real time” and very demanding on the companies’ financial operations.

Today we live in a very different world. Real time communication and crunching of terabytes of data is within the reach of pretty much anybody. “Quarterly”, let alone “annually” is not something we settle for when it comes to news, communication or even entertainment. “On-demand” and “real time” is the name of the game. Why should we settle for anything less in our investments?

My prediction is that we’ll see the rise of exchanges were real time access to EVERYTHING is going to be a prerequisite for listing. That investors will be able to dig through the portfolio of the funds they’ve invested in, into the fundamentals of the portfolio companies, all the way down to the smallest details of their financials; their current cash flow situation, bank account balances, write-offs and salary costs – to name a few examples.

Obviously, no single person would dig through all this data, but the very possibility and the combined power of the crowd, would put all actions under scrutiny making stupendous bonuses, hiding of Bermuda straw huts as mortgage in supposedly A-rated securities funds and golden parachute executive agreements visible to the famous “hand of the market”.

Quarterly filings of creatively accounted fundamentals is soooo “twentieth century”. Total real-time transparency is the way of the future.

5 comments

  1. I had been thinking about this too, but more from an openess/secrecy perspective. Ideally companies would be allowed to keep secret the things that keeps their competitors from copying their success, but open up the things that are of interest to their investors. Of course there is no real distinction between the two, so who’ll make the call as to what is what? The company seems like a poor choice. Auditors or suing after the fact all seem like suboptimal solutions too.

  2. Secrecy issues are in essence no different in this world view than they are today with the quarterly filings (only deeper info and more frequent updates). Companies would obviously still be able to keep new products, strategy etc. secret as they please. This is only the financial part of the equation.

    Also, this is a trade-off between secrecy and access to funding. Companies can still choose not to have any registered shares or bonds. The transparency is just a prerequisite for filing. Many companies (in fact many companies that are coming out strong in the fallout) are privately held and “conservatively” operated. This will also be far more common in the future of finance.

  3. One third of the world’s production is hidden in tax paradises, according to this article: http://tinyurl.com/5k4hof (in Norwegian). Enron is said to have hidden 900 companies with huge dept this way. If this information were forced to be transparent as well, we would get a very different world.

    I don’t know much about finance, but I would assume that such hidden transactions would leave traces in “your” real-time, transparent finance data. And as you say, through the power of collaboration, this hidden information might be dug up and brought into the light. Eva Joly would get a team of several million corruption detectives to help her.

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