The announcement came quietly, a briefly worded memo from the SEC in December that as of the the third fiscal quarter of 2009 (starting in June), companies over $5 billion in assets would be required to start reporting their earnings using the Extensible Business Markup Language, or XBRL. Other companies would be required to follow suit according to whether they use GAAP (which have a one year grace period) or IFRP (starting 2011).
The XBRL so provided would be data-centric rather than document-centric, and would be provided in addition to format text submissions of tax filings rather than replacing them. Additionally, each company would be required to host their XBRL enabled filings on their websites for a period of one year. The XBRL so submitted is required but currently has no liability save that associated with outright fraud, though this liability will be phased out in stages by 2014.
From the IT perspective, the formal adoption of XBRL as a mandatory requirement is likely to have a number of implications, not least of which being a suddenly high demand for XML skilled people in general, and XBRL people in particular, as well as a boon for XBRL service providers and tools vendors. As with the OOXML/ODF controversy of 2007, it is very likely that 2009 will be a banner year for XML technologies in general, as two of the key issues that are highly visible this year - financial transparency within corporations and the streamlining of health care, both involve rich XML standards - XBRL for financial reporting, HL7 v3 for electronic health records.
Additionally, it is very likely that as companies began incorporating such standards into their financial and reporting systems, this will also open up the possibility of incorporating XML into other aspects of an organization's communication channels, such as the use of HR-XML standards for handling personnel management, pay and performance tracking.
Unfortunately, it is also likely that such transparency will prove harder to achieve than simply establishing XBRL as a standard. What has become evident in the last several weeks is that there is a serious tug of war going on between the banks (who would be among the first companies to have to adopt XBRL) and the Federal government in terms of what exactly such transparency should entail.
Banks and financial institutions have always existed under a certain shroud of secrecy concerning their internal holdings, though this process has been exacerbated since the late 1990s. So long as a bank could control what was or was not on its balance sheets, it could maintain the facade that it had the resources necessary to make loans, sell financial investment vehicles, and act as brokers for mergers and acquisitions. It could also engage in investments into higher return (and riskier) investments such as hedge funds with impunity, because these processes could be carried "off the books", meaning that investors and regulatory agencies generally didn't see them. Finally, this also made it possible for such organizations to claim specific values for their collateral properties, without actually having to test these against the market.
The credit contraction that has emerged as a consequence of those policies have suddenly made knowing the actual state of such banks a much more meaningful issue for an incoming batch of (considerably younger and more eager) regulators as well as for investors who have watched their investments wiped out. The ugly (and increasingly self-evident) secret is that many of the largest financial institutions in the US (and throughout the rest of the world) are effectively insolvent - if they had to declare their assets based upon existing market values, megabanks such as Citigroup or Bank of America would not have enough capital on hand to even make a dent in their existing obligations, let alone make any new loans.
In the early 1980s, Paul Volcker, then the Chairman of the Federal Reserve, suspended the requirements for banks above a certain size to actually declare their mark their assets to current market values in the wake of the devastating stagflationary era of the late 1970s. In essence, this blind eye approach helped banks to strengthen their capital positions and bought them time as the economy recovered.
There are some indications that Tim Geithner, the current Treasury secretary and a protege of Volcker's, is trying to perform the same kind of actions with the current banks, in the hope that within a couple of years (and with the continued investment of money from the TARP program into bank balance sheets) that the current crop of banks will also be able to recover from their mistakes and be in a strong enough position to start functioning "normally" again.
In the military, it is considered almost an axiom that generals tend to fight the last war they knew, rather than the one they face now. It's pretty much inevitable, when you think about it - wars of a large enough scope tend thankfully to be rare events, and this means that in the interim you have to make assumptions (create a model - funny how that process keeps cropping up) based upon your last available inputs. The good generals are the ones who recognize this, and who are able to recognize when the last war's solutions aren't relevant to this war's problems - but this is a learning experience.
This is the situation that the government faces today. This systemic level of collapse has not occurred since the Great Depression of the 1930s, and the solutions proposed all tend to reflect the modeling of the economy based upon past crises. These are the past wars in the economy that the "generals" are now fighting, and it is almost certain that many, if not most, of the solutions being proposed now will have either a marginal or a negative effect upon the economy moving forward.
The most immediate hope is to protect the banks, stem the rapid rise in unemployment, and invest heavily in a Keynesian bout of stimulus spending, which not surprisingly includes many representatitives' favorite pet projects, in order to get money back into the hands of people. I suspect that none of these things will happen, at least not in the short term.
The "convenient fiction" that the banks actually have assets has been unravelling for a while now, to the extent that it actually costs more for a Starbucks latte than it does for a share of Bank of America. Either Citigroup or BofA will almost certainly "fail" within the next few months, and quite possibly both will. A bank is all about trust - once trust has been lost, a bank has about as much chance of regaining that trust from its customers as a man does when caught by his wife in flagrante with three prostitutes and a gerbil.
Once this happens, any pretense that things are "under control" will have been lost. This is made even worse by the pressure now being placed on banks as other businesses fail, taking with them investments, commercial property loans and causing another cascade of hedge fund aftershocks. It will also likely drag with it smaller banks that may be financially sound, but that had exposure to these banking monoliths (and relied upon investors that are increasingly tapped out).
Yet it's worth putting all of this into perspective. We're in a recession. Recessions are a normal -- and necessary -- part of the business cycle. During the growth phase of the economic cycle, investors make "bets" that a given business will succeed. Some will. Many won't. The ones that don't can often survive in good times even with a less than stellar business model because there are avenues to keep the business afloat until it either catches or fails completely.
Yet eventually, you end up with too much capacity, too many hi-def plasma screen TVs or Starbucks coffeeshops. The recessionary phase performs liquidation - it releases capital resources that were tied up in these money-losing ventures and reduces inventories until demand meets supply once again.
It is, however, a very unpleasant phase for many - investors lose money, perhaps lots of money, as their bets fail, workers lose their jobs, governments face cutbacks as tax revenues drop, banks lose money as the velocity of money slows, expectations get scaled back. This is such an unpleasant scenario that governments and banks will do their level best to avoid recessions, and increasingly have done so by trying to make recessions short and shallow.
The 2001-2003 Recession is a case in point - while extraordinarily hard on tech, it served to remove a lot of the mal-investment that had taken place in the tech sector (remember the Pets.com sock puppet?), reset expectations, and overall actually served to make the sector more sane, putting it on much firmer footing than many other industries. It would have likely spread, given the imbalances that existed then, if the Fed hadn't at the time injected an extraordinary amount of credit into the market. This last recession, if it had been left to follow its course, would have probably bottomed out a few months after it actually did, and by 2005, the economy would probably have been growing at a pretty dramatic clip without this.
In goosing the markets, however, with cheap credit, the Fed stopped a healthy (and necessary) recession before it could do its work. The malinvestment outside of the tech sector remained, and was then compounded by the movement of that credit into the mortgage and capital real-estate markets, in essence turning home owners into speculators (always a bad idea).
Recessions are systemic events - they occur because large term pressures build up in the system, and the impedence, or back pressure, builds up accordingly. Eventually, the back-pressures reach a tipping point, and the larger the pressure, the more dramatic the collapse of the system to a new point of stable equilibrium, and the less effect traditional measures have in stopping this.
This means that companies and organizations that were only marginally successful during the growth phase (or those that took on too much systemic risk, as many banks did) will fail. It means that unemployment will continue to rise over the next year, possibly to more than 10% - and as painful as it is to those put out of work, those jobs should be lost. It means that investors who were most exposed to the riskiest investments should lose their shirts, leaving them poorer but wiser.
In other words, the best action to take at this stage is to let the recession happen, let the excesses work their way out of the system, encourage people to build up savings in order to fuel the next boom and give people the incentive to start up meaningful businesses rather than let uncompetitive dinosaurs continue to lay waste to the business landscape.
For Congress (and Mr. Obama), this requires doing some politically unpalatable things. Start saying no to bailouts, especially to the banks, but perhaps to any industry that has grown to the level that its CEOs each show up on their own private jets to speak to Congress. Backstop human services, so that the most vulnerable don't bear too much of the brunt, but other than that let natural market forces do what they do best (even if the capitalists who kept protesting government intervention in the free markets in the last decade while getting progressively wealthier are now crying for protection from those very same free markets).
Let transparency become more than a convenient buzzword - if a bank doesn't have enough solvent capital to survive in this market, then it should fail. If businesses have become "too big to fail" then they have also become too dangerous to society at large and should be broken up into more competitive organizations. Yet none of this is going to happen so long as businesses, financial or otherwise, can continue to use loopholes in GAAP accounting to hide their weaknesses. None of this is going to happen so long as government continues as a series of quid pro quos done in smoke-filled rooms.
Finally, none of this is going to happen if Congress acts for the sake of getting re-elected, rather than solving very real problems. Congress has been given a golden opportunity to lay the groundwork of the next major economic revolution, and while some aspects of the status package are encouraging, the inevitable give and take of politics may also end up diluting the impact of the bill considerable, especially given the Senate version (which is much more focused on status quo parties).
It's perhaps disingenuous to call this a stimulus bill - most of the impact from the legislation will not effectively come into play until 2010 at the earliest, which is angering many on both sides of the political aisle, but in many ways this is perhaps wisest - the recession now has a momentum that's probably unstoppable at this stage and as such will continue until a new equilibrium is reached. Now is the time to be laying groundwork for these new initiatives so that the legal structures will be in place in order to build more effectively on it when the avalanche finally does stop.
Yet because of this, Congress should also not bow to pressure to skimp in certain areas (such as the defunding of many health and science programs, among other things) because they are perceived as not directly contributing to jobs. Science in particular tends to be a long term investment, one that may not necessarily provide immediate returns, but that, once in place, will eventually produce yields far beyond its initial investment.
Ultimately, this is what Congress should be considering - moving away from the opaque short-term manipulation of the market for the benefit of a few to a transparent, long-term shaping of the economy overall for the benefit of all. Such a strategy isn't always popular, especially to those who benefit most from the status quo, but the role of government should be to protect the interests of everyone, not just the rich and powerful.