A few weeks ago Paul Wilkinson published a terrific post on Hernando de Soto’s WSJ op-ed Toxic Assets Were Hidden Assets. To oversimplify his multifaceted blog, Paul argues that XBRL is part of the solution to the current inadequacies in rerding, tracking, and analyzing toxic asset data that de Soto describes in his piece.

The Peruvian enomist’s thinking had also figured prominently in a post I wrote a year ago on XBRL and microfinance institutions, which provide microloans to the poor in developing nations. In his masterwork The Mystery of Capital, de Soto described how, ntrary to received opinion, the poor entrepreneurs in these untries possess real assets (in the form of land), business acumen, and the same "animal spirits" as small business people in advanced enomies; what they lack is a system for legal ownership of their property, making it impossible for them to borrow. Microfinance institutions provide the capital they need, and their repayment rates have been excellent. The XBRL data standard has been adopted by the Microfinance Information Exchange (MIX) for the detailed financial and social performance information generated by leading microfinance institutions.

Paul’s post made me wonder what it is about de Soto’s arguments that they simultaneously speak so powerfully about two asset classes that uldn’t be further apart on the enomic hierarchy, namely, (1) the unregistered land holdings of the poor in untries like Peru, Haiti, and Indonesia, and (2) the quant-driven derivatives traded by the 21st century Masters of the Universe (well, until recently) in New York and London.  Why do de Soto’s writings, which so far as I know never mention interactive data, inspire calls for XBRL-based solutions?

The question demanded I read The Mystery of Capital. Reviewing the front and back matter first, I noted in the acknowledgments that the book’s title was suggested by Bob Litan of the left-of-center Brookings Institution, while the text was worked by David Frum, a noted right-leaning pundit. Moreover, the book had received kind words from both liberal ans like the New York Review of Books and nservative journals like mentary. Clearly we weren’t in the balkanized states of Olbermann and Hannity anymore.

Read against the ntext of TARP bailouts and a bankrupt financial sector, de Soto provides a startling reminder of how parts of our enomy have descended into Third World status. Here’s the introduction to the chapter entitled The Mystery of Missing Information:

Imagine a untry where nobody can identify who owns what, addresses cannot be easily verified, people cannot be made to pay their debts, resources cannot be nveniently turned into money, ownership cannot be divided into shares, descriptions of assets are not standardized and cannot be easily mpared….You have just put yourself into the life of a developing untry.

How distressingly similar that is to the toxic-asset sector described in de Soto’s WSJ article:

These derivatives are the root of the credit crunch. Why? Unlike all other property paper, derivatives are not required by law to be rerded, ntinually tracked and tied to the assets they represent. Nobody knows precisely how many there are, where they are, and who is finally acuntable for them. Thus, there is widespread fear that potential borrowers and recipients of capital with too many nonperforming derivatives will be unable to repay their loans.

Whether it’s land in the poor neighborhoods of Port-au-Prince or securities oked up by the Best and the Brightest on Wall Street, assets’ value is crucially tied to the efficiency and efficacy of their rerdkeeping systems. From de Soto’s WSJ article:

Property is much more than a body of norms. It is also a huge information system that processes raw data until it is transformed into facts that can be tested for truth, and thereby destroys the main catalysts of recessions and panics — ambiguity and opacity.

De Soto spends a good part of his book describing how the legal system for real property we take for granted today developed over many decades in the United States. In the beginning:

Every farm or settlement rerded its assets and the rules erning them in rudimentary ledgers, symbols, or oral testimony. But the information was atomized, dispersed, and not available to any one agent at any given moment. As we know too well today, an abundance of facts is not necessarily an abundance of knowledge. For knowledge to be functional, advanced nations have to integrate into one mprehensive system all their loose and isolated data about property.

Unlike the rerding of securities based on real property, rerdkeeping for U.S. real property itself is excellent. But it is the end result of a mplex historical process extending 200 years. In his book, de Soto pays particular attention to the abundance of squatters who attempted to establish ownership through extralegal bodies like claim associations and miners anizations. Only after decades-long battles about title in the 18th and 19th centuries were extralegal and legal systems of property mbined and these nflicts ultimately resolved. The enomic suess the U.S. subsequently enjoyed depended vitally on that resolution. 

In ntrast, rerdkeeping for mortgage-backed securities (MBS) is a throwback to the chaos of earlier times. In a sense, it is a betrayal of our enomic heritage. Here’s how Philip Moyer of EDGAR Online describes MBS reporting in his January 2009 whitepaper Bringing Transparency to the Mortgage-backed Securities Market:

As a loan moves through the many participants in the MBS supply chain, each member of the supply chain — originators, retail banks, wholesale banks, issuers, servicers and ratings agencies — decides what to report publicly and when to report it. Additionally, all players use different report formats, different data labels, different ways of tracking the status of the llateral and even different models for tracking the identity of the individual loans. As a result, a loan can receive as many as five unique IDs between its origination and when it is bundled into an MBS. There is no centralized regulator that validates or llects all of this data. There is no central repository that can be queried… Therefore, it is difficult to track the status of a single loan in an MBS — even if it is in default — because every participant has mpletely different reporting models. The industry is awash in a sea of disnnected and inmparable data.

How can XBRL help? On pages 17-18 of his paper, Moyer describes eight benefits of using XBRL in a centralized MBS reporting system instead of current document/spreadsheet formats:

Data Quality   nsistent labels and ntent, a structure for anizing data, and, most important, "a model to validate that the structure and the ntent of a report adheres to appropriate standards."

Security and Privacy   Traceability and detailed ntrol of the information reported.

Historical parability   Versioning and an enduring structure allow mparisons regardless of changes in reporting requirements over time.

Platform patibility   XBRL is platform agnostic.

Multicurrency and Multilingual   Investors can view data in their own language and multiple currencies.

Rced Reporting sts   Sunk sts for existing regulatory and banking XBRL reporting can be leveraged.

Rced Data Processing sts   Receiving better data from upstream business partners offsets the sts incurred by each member of the supply chain.

International Industry Standard   Leveraging the existing body of knowledge for XBRL saves resources that would otherwise go to resolving technical and financial reporting problems.

XBRL is not a cure-all, of urse. To the extent that the data ntinues to be plagued by inmpleteness and both intentional and unintentional error, MBS reporting still will have significant problems.

Nevertheless, introducing XBRL into the process will go a long way to providing the nsistent, mparable, and aessible information that de Soto regnizes as an essential element in asset value, no matter what the asset class.