I had a mini-revelation about the financial services industry and its ongoing melodrama over transparency and data standards during a panel discussion at the19th ISITC Annual Industry Forum and Vendor Show in Boston this week. Essentially, is this industry doomed to never getting transparency right?
My train of thought was sparked by economist Allan Mendelowitz, a panelist for the “Global Dependency: What Can We Expect from Our Leaders?” discussion. Mendelowitz was making the point that Henry “Hank” Paulson, Jr., former U.S. Secretary of the Treasury, did not have the correct analytics in 2008 when Lehman Brothers had its horrific meltdown. The lack of correct analysis was attributable to either bad or nonexistent data. Paulson and others overseeing the gathering storm did not have critical information about Lehman Brothers’ counterparties, which was necessary to fully understand the situation, Mendelowitz argued.
As we know, the feds decided not to help Lehmans and its spectacular collapse helped kicked off the Great Recession from which we are still reeling. After the collapse, of course, Paulson and others did have a much clearer view of how horrible the situation was for Lehmans.
But, while Mendelowitz is correct that better analytics would have helped Paulson, it’s also true that the tragedy of Lehman Brothers may have been a fait accompli because this entire industry has a visceral, deep-in-the-bones fear of transparency. I have seen it consistently over the past 16 years as a journalist and I’m sure others have witnessed it for much longer than me. The culture of secrecy is so ingrained that it will take years to undo.
And, yes, there is a great need to keep financial information secret—there are laws, rules, regulations, guidelines and best practices that make clear the information that must be kept under wraps for the safety of the investors. That is not what I am talking about and I have no argument against that. I am referring to the ridiculous secrecy such as shrouding the identity of counterparties—as Lehman Brothers and others did—which was made more difficult by competing vendors and their coding. The only upside is that the clean-up after Lehmans led to a successful push to have standardized Legal Entity Identifiers (LEIs)—after prior, pre-Lehmans efforts failed.
In addition, it’s an open secret that firms have internal business units that have separate manual and IT systems with extremely important data that is held close to the vest and rarely shared with other business units. These so called data silos are a manifestation from another era when secrecy was king and power went to those with the best bottom lines, no questions asked.
But the industry will have to move quickly to make data silos a thing of the past via FATCA compliance, automated reconciliation, the new regime for collateral management and margining driven by the over-the-counter (OTC) derivatives reforms, a long list of regulatory reporting requirements, the push for shorter settlement cycles, renewed calls for straight through processing (STP), and a more assertive investor base that wants greater transparency.
Yet despite these trends I am not convinced that the industry can break its addiction to secrecy.
On the ISITC panel, Mendelowitz said the financial services industry’s data standards were comparable to that of manufacturing in the 19th Century. While I agree that the industry has to evolve its data standards, it has to change its behavior first and embrace transparency wholeheartedly when it makes sense. Otherwise this overpowering dynamic of secrecy will undercut all reforms.
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