Transparency, Investors and XBRL (part 1)

The Financial Crisis Inquiry Commission has been meeting to look into the recent financial crisis. The Financial Crisis Inquiry Commission (the “Commission”) website says: “In the wake of the most significant financial crisis since the Great Depression, the President signed into law on May 20, 2009, the Fraud Enforcement and Recovery Act of 2009, creating the Financial Crisis Inquiry Commission. The Commission was established to examine the causes, domestic and global, of the current financial and economic crisis in the United States.”

It is clear that our markets and the risks associated with them are enormously complex. Individual investments of various types can be understood, but when investment banks pool assets, especially sub-prime assets, then package them into investment grade vehicles through strategies like over-collateralization, senior and subordinated holders or insurance vehicles, the investments and underlying risks become more complex. To make matters worse, these pooled assets are then exploded apart, packaged with various derivative products, and sold to investors.

Perhaps the most important way to protect investors is to give them visibility into the risks of the investments they choose. When an investor understands the risks, he can take action to mitigate it. The transparency of investment vehicles and the underlying risk factors is an extremely important component of a robust investor protection approach and a healthy securities market.