Sometimes, when faced with the unholy mess that is financial regulation, the best idea is to keep it simple, and that’s what Frank Partnoy and Jesse Eisinger do in this fabulous story on financial disclosure, or, more accurately, non-disclosure.
They simply sit down and try to read, in good faith, the annual report of a mega-bank, in this case, Wells Fargo. This document, also known as form 10-K , is filed with the Securities and Exchange Commission and available online for anyone to see. (Weirdly, I can’t find it on the SEC’s Edgar site; if anyone can let me know, and I’ll change the link. Update: Thanks to Matt below, here it is.)
The trouble is its hundreds of pages of fine print obscure more than they reveal, and do so by design. This is important for about trillion reasons, but one of the main ones, as the piece makes clear, is that the system rests on the ability of the market—that is, the wisdom of a crowd of trained and incentivized professionals —to scrub such things and assess the risks. But if the disclosure contains gaping holes, the system’s entire rationale falls apart, and the broader society must ultimately absorb whatever negative externalities will result. This we learned at great cost during the financial crisis.
What I love about this story (and not everyone did) is that it’s written for a mass audience about a subject that, while highly technical, is one of those that, like global warming or nuclear safety, potentially involves everyone. And like those subjects, it is also eminently understandable when properly explained. This is true even of rocket science, by the way. Journalism like this gives the curious non-specialist—that is to say, most of us— a chance to take part in a discussion that should absolutely not be left to the cognoscenti—another big lesson of the crisis. What’s more, even among those who read financial statements for a living, how many have slogged through a mega-bank’s 10-K to figure out what it exactly does and doesn’t say? Most people, I suspect, look them over, then drop it after realizing they’re not learning much. But that’s the point.
The story is about 9,500 words. A commenter on Felix Salmon’s blog (also linked above) called it “indulgent,” but it’s really not and reads well.