NEW YORK, June 11 /CNW/ - Restoring confidence to worried financial
markets will require more than just the infusion of new capital such as that
sought earlier this week by Lehman Brothers Holdings Inc., says Don Tapscott,
influential business strategist and co-author of the best-selling business
book Wikinomics. While new money and updated regulations are necessary, said
Tapscott, they are not sufficient to restore timely trust to the marketplace.
Time heals all wounds, but in a competitive world, to restore confidence in
the marketplace the US will quickly need to establish unprecedented levels of
transparency amongst marketplace buyers and sellers.
Former President Ronald Reagan was known for his expression to 'trust but
verify,'" said Tapscott, in a speech Wednesday morning to a Securities
Industry and Financial Markets Association conference in New York. "Reagan was
right. In today's context, we need to use new technologies so that buyers of
complex financial instruments such as collateralized debt obligations know
exactly what they are purchasing."
"For example, investors should be able to "fly over" and "drill down"
into a CDO's underlying assets. With full data, they could readily graph the
payment history, and correlate information such as employment histories,
recent appreciation (or depreciation), location, neighborhood pricings,
delinquency patterns, and recent neighborhood offer and sales activities. Now
that AAA ratings have proved worthless, currently investors don't have a
glimmer of what they are being asked to buy. And they won't start buying until
they fully understand what they are purchasing, and that the price is fair.
"A similar approach could apply all the way up the CDO chain. To improve
the efficacy of "mark to model" methodologies (which are often the only
alternative for thinly traded CDOs), banks and institutional investors could
create wiki-based open-source pricing algorithms. These would complement true
market pricing as trades occur, and would also form a more robust basis,
especially in combination with richer "drill-down" data, for marketing
structured products in the first place. As participants develop experience and
trust around these collaborative models, key investors such as hedge funds
could even share their detailed holdings into "double-blind" value-at-risk
databases. No one participant would be able to see the detailed holdings of
others (hence, double-blind), but all would have access to aggregate data.
This would help everyone (including regulators and the Fed) to assess
systematic risk. For instance, this kind of database would have highlighted
much earlier that many forms of Credit Default Swap were triple-underwritten,
meaning banks had sold $3 of coverage for every $1 of underlying asset (as if
2 other people had bought insurance on your house, in addition to you).
"Inevitably, once the deep issues underlying this credit crisis are
exposed, there will be calls for more stringent regulation - just as in the
1930s the SEC was created, and "unit trusts" (now mutual funds) were forced to
disclose their holdings. In the age of Wikinomics - or true mass collaboration
as an economic force - we don't need another round of onerous Sarbanes-Oxley
style provisions. Rather, new avenues for transparent collaboration between
market participants would be far more robust than hiring more oversight
bureaucrats. For over a century, we've understood the value of transparency in
pricing for market goods. As securities become more complex, we can bring that
same market approach (transparency and collaborative evaluation) to underlying
information as well."
Many senior bankers in the US say that the worst is over, said Tapscott,
but as the Lehman announcement illustrates, without the ability to accurately
value, for example, the subprime assets on the bank's books, no one really
knows. Investors have been burnt badly, and without fundamental changes in the
industry, many investors will never fully trust Wall Street for many years,
possibly a generation. After Japan's bank implosion in 1990, it took close to
two decades to recover.
Tapscott is Chair of the innovation network arm of nGenera Corporation,
an Austin, Tx-based technology company serving Global 2000 customers. nGenera
Corporation is an on-demand platform for business innovation that provides a
suite of subscription-based offerings to enable the Next Generation
Enterprise. Powered by software and people, nGenera's on-demand offerings give
organizations sustainable, breakthrough capabilities in leadership
performance, talent management and development, and customer experience.
Customers that subscribe to the company's on-demand solutions include a
marquee list of Global 2000 companies in a range of industries.
The theme of this year's SIFMA conference is "Managing IT in Financial
Services During the Credit Crisis." SIFMA's 28th Annual Technology Management
Conference & Exhibit is the industry's leading event with over 300 vendors and
7,000 attendees. The conference will address the rapidly-changing world of
technology and how the financial industry is using technology to drive
productivity, comply with regulatory requirements, and adapt to converging
markets, products and investors.
For further information:
For further information: Bill Gillies, (905) 829-4683, firstname.lastname@example.org