As the global financial crisis rolls on, I have read a bunch of outstanding investigative reports from around the world:
- Perhaps the best of these is the April 2010 report of the Special Investigative Commission set up by the parliament of Iceland (the Althingi) to investigate and analyse the processes leading to the collapse of the three main banks in Iceland. The Commission consisted of a Supreme Court judge, the Parliamentary Ombudsman and an academic. Only a small part of the report – the executive summary (18 pages), Chapter 18 (65 pages) and Chapter 21 (160 pages) – is available in English. But what is available is truly impressive in terms of the detailed factual presentation, the dispassionate analysis of what went wrong and the balanced indictment of those who were responsible.
- Much narrower in scope but equally impressive in terms of factual detail is the report of the Examiner appointed by the bankruptcy court for Lehman Brothers. At 2,200 pages with 8,000 footnotes, this document is a goldmine of authentic information about what happened at that one company.
- Another report that I liked was the external evaluation of the active management of Norway’s sovereign wealth fund commissioned by the government in response to the sharp fall in its market value during 2008. This study was carried out by three academics in the US and the UK. The response of Norway’s central bank (which manages the wealth fund) is also very interesting. Of course, Norway is no newcomer to transparency. During the crisis of 2008, everybody was reading the detailed reports that Norway had published about their banking crisis of the early 1990s.
Surprisingly, apart from Lehman, there are too few high quality official investigative reports about other US financial firms that have suffered badly in the crisis. We do not really know what happened at Merrill Lynch or Citi. We know a lot more about the problems at UBS for example thanks to the shareholders report produced at the insistence of the Swiss regulators. US regulators have been acting as if everything related to the crisis is a state secret. On AIG, we know a little more due to the efforts of the Congressional Oversight Panel, but even this picture is incomplete.
The US does however have an adversarial system of congressional testimony and all this testimony is available online. Apart from the Financial Crisis Inquiry Commission there are many congressional committees that have held hearings and released valuable information during the process. The quality of the official reports that emerge at the end is not that important. Years ago while studying what happened at Enron, I had found the same thing – the testimony and trascripts of the hearings are far more useful than the reports themselves.
While the investigative reports of the Nordic countries have been exemplary, and those of the US have been very good, India has simply been unable to produce data rich investigative reports of a quality useful to a researcher. A Joint Parliamentary Committee (JPC) was set up to investigate the securities scam of 1991, but the factual details in this report were not sufficient from a researcher’s point of view. The Indian parliamentary committees tend to hold closed door meetings and treat all testimony as confidential. The regulators have also not filled the void. In early days of the scam, the Reserve Bank of India published the Janakiraman report which was rich in factual detail, but this report had a narrow remit. I do not think that we still have a comprehensive authentic data source on what happened in this scam two decades ago.
The situation is not any better in the Ketan Parikh scam that took place a decade ago in technology stocks. Again there was a JPC on this scam, but again the report was not data rich. Turning to more recent times, the Satyam fraud took place a year and a half ago and we still have no authentic information at all on what happened.
I do not believe that developing countries are incapable of producing good investigative reports. I remember being impressed with the Nukul Commission Report in Thailand in the aftermath of the Asian Crisis of 1997, but the report is not available online and I have not been able to refresh my memory. Outside of finance, the Truth and Reconciliation Commission in South Africa produced a series of reports with an enormous amount of factual detail and careful analysis.
India’s failure to produce outstanding investigative reports into financial disasters is something that needs to be remedied. As Andrew Lo has been arguing for some time now, such detailed post mortems are very important. Lo recommends that even the US should go much further than it is doing currently:
The most pressing regulatory change with respect to the financial system is to provide the public with information regarding those institutions that have “blown up”, i.e., failed in one sense or another. This could be accomplished by establishing an independent investigatory agency or department patterned after the National Transportation Safety Board, e.g., a “Capital Markets Safety Board”, in which a dedicated and experienced team of forensic accountants, lawyers, and financial engineers sift through the wreckage of every failed financial institution and produces a publicly available report documenting the details of each failure and providing recommendations for avoiding such fates in the future.