“Pirenne heard Lord Dorwin’s idea of scientific research. Lord Dorwin thought the way to be a good archaeologist was to read all the books on the subject – written by men who were dead for centuries. He thought that the way to solve archaeological puzzles was to weight the opposing authorities… Don’t you see that there’s something wrong with that?
We sit here, considering the Encyclopedia the all-in-all. We consider the greatest end of science is the classification of past data. Here in the Periphery they’ve lost nuclear power. In Gamma Andromeda, a power plant has undergone meltdown because of poor repairs, and the Chancellor of the Empire complains that nuclear technicians are scarce. And the solution? To train new ones? Never! Instead they’re to restrict nuclear power.
Don’t you see? It’s galaxy-wide. It’s a worship of the past. It’s deterioration – a stagnation!” – Isaac Asimov, Foundation
“I wanted to be a psychological engineer, but we lacked the facilities, so I did the next best thing – I went into politics. It’s practically the same thing.” – Isaac Asimov, Foundation
For anyone who is actively involved in the mad scramble that all of capital markets is currently engaged in, there is one question that, while unspoken, is definitely being thought: “Just what are they going to do with all of that data?”
The “they” in that question refers to the regulators – the variety and number of which is large, growing at an exponential rate, and reasonably considered a dyslexic alphabet soup. And, the “data” is in reference to the multitude of reporting that’s being required, for this discussion, is determined by Dodd-Frank Parts 43, 45, and 46.
So the real, and valid, question is: “Just what are all of these regulators going to do with volumes and volumes of detailed, consumable reporting that we’ve been demanded to provide?”
On the surface, there’s an easy answer to that. Choose your own adventure on this one; they’re going to:
- Model it to determine the risk present in the global “market”
- Execute scenario analysis to determine who’s playing fair – or not
- Use it to exact punitive damages and penalties on firms who fail on timeliness (because this is a sticking point on everything)
- Use it to extract qualitative decisions – further regulatory change, additional statutory limitations, and capital margins and costs – from ‘reliable and accurate’ quantitative data
Simple enough to do, yes?
No, we all know the answer to that. It’s not that simple. There are many who would like to believe that once all of the data is provided from all corners of the globe we’ll be able to find completely verifiable and unedited answers to why the 2008 global recession occurred, how to prevent it (or similar destructive economic bubbles and squeaks) from occurring again, and just what are all those financiers up to in those gilded towers.
We know this is be a total untruth, and here’s why.
Data, In of Itself, Is Valueless
Let’s contrast data versus information. To an engineer, data can be just ones and zeroes. For a physicist, it can be atoms, protons, chargers; a chemist: elements. It’s flat, in those aspects, neutral – unformed, malleable, direct, and waiting for something.
What’s information? Simply put, some(thing) that informs – it’s been giving meaning. Information is something that provides definitions, gives answers, it teaches, it reasons, it provides solutions; it is active. It’s not waiting for something – more directly, for something else – to make it something else. It is.
So, as a comparative definition, information is just data that has been:
And, therein lies the concern. The moment that those activities are performed upon data, it involves the application of models and assumptions (and the discard of some). To shift valueless data into something of value is a journey that is akin to threading a super-fine needle; a little to a left and it misses the eye, a little to the right and it splits the thread—
When it comes to the volume that is about to be provided to regulators, it’s the equivalent of threading a camel through the eye of a super-fine needle.
Past performance is not necessarily indicative of future results
For anyone who has ever read an investment prospectus, those words are very familiar. It’s a disclaimer which tells the savvy investor that despite all the wonderful numbers which may be printed on shiny, glossy paper, the game is afoot, and their purchase is nothing short of a gamble. The intent, of course, is to make money, for the fund and for the investor – but the reality is that no one can guarantee future returns.
With that in mind, it begs the question of just what regulators think can be found in the terabytes (petabytes, exabytes?) of detailed historical swaps data they’re going to receive, and be allowed to peruse, at their leisure. Is there going to be a “eureka!” moment as they sift through it? Are they going to see the pattern which allows them to say: “Ah, this! This is where the market when wrong and this is the behavior we must legislate out of existence.”
We know that to be a fanciful mockery of the understood truth that they will be no smoking guns. Of course, insights can be gained; perhaps certain indicators can be refined or discarded from future use and reliance. There is something to be learned by looking in the past. However, a certain man once said that you cannot plow a field straight if you’re looking behind you and that simple truth hasn’t changed in over 2,000 years.
“All the old knives that have rusted in my back, I drive in yours”
The Dodd-Frank Wall Street Reform and Consumer Protection Act was, and remains, a faithful recording of worthy purpose. The 2008 recession had a number of causes, and some of those were deliberate misdirection, failure of fiduciary duty and breach of trust, and outright fraud.
However, let’s not pretend that there wasn’t a fair amount of greed at play, not just from big banks and financial institutions, but also from the population they provided financial products and efficacy to. Res ipsa loquitor (“the thing speaks for itself”) while generally applied to negligence to the defendant (here, the institutions now under regulation of Dodd-Frank), is in this case is equally applicable to the plaintiff, who also has a duty to act reasonably, to not to lie or defraud for personal gain or profit, and is legally beholden to, and liable for, promises to which they have agreed – onerous, though it may be, to fulfill.
Laws and regulations, assumed rational and fair, aren’t necessarily so – they are brought into being by people, and people rarely behave rationally at all, and add in the mix of emotion, the assumption of rationality ought to fall to zero. The present market environment in which Dodd-Frank is being enacted is full of emotion; it is rife with accusation and a sense of vengeance for harm caused, real or imagined.
Therefore, the implementation by various arms and agencies, the CFTC, the SEC, the FDIC (and any other acronym you wish to add to the mix) has been less about principles and more about punishment. Is there any rational person, in any side of this argument, who believes that by forcing registration and reporting by “swaps dealers” and “major swap participants” will protect which consumer and will cause what reform? That’s quite a reach.
No, this part of the statute is about punishment, and perhaps Wall Street is getting its just desserts. However, the implementation of this has lined pockets (not trickling back down to the consumer but going to capital-captive law firms and consultancies), has added to the upfront and expected ongoing costs in financial institutions which has reduced liquidity and credit available in the global system, reduced money available to spend on product innovation, reduced money available to spend on philanthropy, and ultimately has negatively impacted the “Main Street” even more.