Testing the Volcker Rule.

Last year, we wrote a blog describing an unusual turn of events when the Obama administration turned its back on Treasury Secretary Timothy Geithner in favor of Former Fed Chairman Paul Volcker. The event began legislation that removed the threat of Big Banks waging massive gambles with taxpayer money. Now, just over a year later, Volcker’s name is in headlines again.

Goldman Sachs has been seeing some very significant profits from the secretive investment operation known as Special Situations Group (SSG). Goldman Sachs argues that SSG is “more of a lending than a trading business,” but this hasn’t stopped regulators from questioning the legality of the group under The Volcker Rule.

According to those opposed to SSG, the problem here is in the semantics. To date, it has been very difficult to describe exactly what defines “proprietary trading.” Goldman Sachs, they say, is able to navigate through loopholes in the law, garnering huge profits with almost no risk.

For now, Goldman Sachs insists that they are doing nothing dodgy, and that their investments are not only legal, but helpful. Because SSG is primarily a lending company, such investments actually have the potential to improve the economy. According to them, SSG would only fall under the Volcker Rule if it operated through hedge or private-equity funds.

Regardless of the results of this particular case, the increased attention will likely lead to more definitive rules on this type of investment strategy. The Volcker Rule has had little opposition since its inception just over a year ago, and it is time to make sure that the law can actually function when put to the test.

XBRL & Taxonomy Changes

In our continued effort to share XBRL-related happenings from places ranging from hearing rooms to music festivals, we offer some of the latest news from the SEC on this topic.

Because the the Financial Accounting Foundation assumed responsibility for updating taxonomy in order to link better with accounting rules (taking over XBRL US), 2010 was an off year for updating taxonomy changes. This means that the 2011 document represents two years worth of changes, and in those two years, a number of tag problems have been identified.

The SEC published a summary of the changes, as did the Financial Accounting Standards Board.

As one organization stated, the SEC wants companies to use the new taxonomy to bring more consistency to the selection of tags and reduce the number of extensions. But oddly enough, the SEC is not explicitly requiring companies to use the 2011 taxonomy for their 2011 XBRL submissions.

We are heavily in favor of as much uniformity as possible when it comes to tagging in XBRL. With the requirement of all open-end mutual funds to file the Risk/Return Summary section in XBRL format as an exhibit, as well as publish the XBRL files to the fund’s website (when one exists), one of the most important endgoals has been increased transparency, which is what these changes will help accomplish. 

XBRL at SXSW

Last week, we discussed the House Oversight Committee's hearing on FY2010 Consolidated Financial Statements of the U.S. Government. Well, half a country away (and in front of a much different audience) a similar conversation took place this week.

The South by Southwest Conferences and Festivals (also known as SXSW) in Austin, Texas qualifies itself as the premier destination for discovery by "offering the unique convergence of original music, independent films, and emerging technologies." While best known for music showcases and film screenings, SXSW has proven to be an event that doesn't talk about something that is buzz-worthy; rather creates an atmosphere to share and discuss topics, therefore making them buzz-worthy. 

Amongst the panel topics this year was the following:

Power to the People: Regulating Big Business

After being witness to a multitude of massive corporate accounting scandals, the world has been forced to re-evaluate almost every area of how business is conducted. A new day is dawning in the world of information, and the people are demanding more visibility into the everyday operations of companies and governments. In order to pacify the public outcry for increased knowledge, regulatory controls such as Sarbanes-Oxley and Base III have been enacted. In addition, regulatory agencies like the SEC are rapidly embracing new approaches to providing the public with information and data through the use of eXtensible Business Reporting Language (XBRL). The SEC and other governing bodies have recognized that the democratization of corporate and government data, through the use of XBRL, will guarantee a higher level of transparency and usability.

Now like never before, transparency is allowing for a shift of power from corporations to the people. Because information is easily available for anyone to download for free, analysis and comparisons between the big guys can be done on a large assortment of public data. This information revolution will no longer allow companies to operate in secrecy and will provide people with the data they need to avoid future bailouts and economic turmoil.

Merrill has produced webinars, created tutorials and developed materials on topics like this, but our demographic is admittedly different than that of SXSW, and therefore, we applaud the organization for taking the time and risking its reputation on covering this subject. This type of information is important for younger individuals to hear, and with an audience and a following the likes of SXSW's, there is a legitimate opportunity that many walked away with knowledge they can utilize in (and for) their future.

Reviewing the Consolidated Financial Statements of the U.S. Government Hearing

This week, the House Committee on Oversight and Government Reform held a hearing entitled, “A Look at the FY2010 Consolidated Financial Statements of the U.S. Government.” Witnesses included high ranking officials such as The Honorable Gene L. Dodaro, Comptroller General of the United States (Government Accountability Office); The Honorable Richard L. Gregg, Fiscal Assistant Secretary (Department of the Treasury); and The Honorable Daniel I. Werfel Controller and Director of the Office of Federal Financial Management (Office of Management and Budget).

We mention this hearing in particular because of the role XBRL played in the testimony and questions. This comes on the heels of an interesting couple weeks in which the XBRL technology saw some critiques in articles and blogs. Fans of this blog know we have covered this topic in great detail as it relates to mutual funds and the SEC mandate.

In general, the Committee on Oversight and Government Reform has legislative jurisdiction over, among other things, the District of Columbia, the government procurement process, federal personnel systems, and the Postal Service. However, they pride themselves in overseeing "everything government does – from national security to homeland security grants, from federal workforce policies to regulatory reform and reorganization authority, from information technology procurements at individual agencies to government-wide data security standards." With this in mind, it will be interesting to see what outcomes come from the this hearing.

BOA's Two Day Glitch

Millions of Bank of America customers were unable to use their online banking services this week, forcing them to do their banking at a branch, in person, by phone or by ATM. (Luckily for BOA, it wasn't the most annoying technical problem of the week. That award goes to Gmail).

We won't comment on the technology behind the issue, but can say a word on their communications / public relations strategy. BOA blamed the online banking outage on a software update that became problematic. Tara Burke, a Bank of America spokeswoman, didn't want to release too many details, but did do an admirable job in her rapid response efforts, saying:

"We've been experiencing some intermittent service disruption throughout the day. This is not the result of any hacking or malware or anything like that. This is not an attack on Bank of America," adding that customer data had not been affected by the service disruptions.

Some could say that having to do banking the "old-fashion way" isn't a true crisis, but if BOA's competitors can prove they have a better track record when it comes to hassle-free service, it really could have a negative effect on new enrollments. A glitch lasting two days for an institution like BOA sets a dangerous precedent. In the future, they may need to consider proactively warning of software upgrades - even of the smallest kind - to avoid negative press and customer backlash.