The data is mightier than the sword, Mr. President

The data is mightier than the sword, Mr. President
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Forty individuals were notified on Aug. 8 that they would be fired from the Office of Financial Research (OFR), a small agency of financial number crunchers that the vast majority of Americans has never heard of.

Even those who have heard of the OFR, which was created under The Wall Street Reform and Consumer Protection Act (Dodd-Frank) to collect and analyze data, which might tell us where there is a financial crisis brewing, will struggle to feel sorry for the highly educated professionals who were fired.

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With any luck, they will find work within the Financial Stability Oversight Council (FSOC) the nation’s financial systemic regulator, of which the OFR is part of, or the U.S. Treasury, where FSOC resides.

 

Given the incredibly low level of unemployment presently, they could even find jobs in the more remunerative private sector.

The real problem is that firing these professionals from the OFR and cutting back this agency’s budget by 25 percent is emblematic of the Trump administration’s innumeracy and disregard for facts to inform policymaking.

Given this administration’s disdain for the media, we should not be surprised that there should be even less respect for people who use data to tell the story of where our financial system stands and where it is headed.

The smaller and more neglected the OFR gets, the more and more American taxpayers are at risk of being blindsided by an unexpected financial crisis, as many were in 2008.

Even before this layoff was announced, the administration nominated Dino Falaschetti to head the OFR. Together, with the head of the House’s Financial Services Committee (FSC), Rep. Jeb HensarlingThomas (Jeb) Jeb HensarlingKavanaugh hires attorney amid sexual assault allegations: report Did Congress just settle for less than best plan to reform housing finance? The White House can — and should — bypass Congress to kill Obama-era spending MORE (R-Texas), Falaschetti, the chief economist for the FSC, tried to eliminate the OFR, which he now heads.

It is very important to note that none of the 15 federal financial regulators or 50 state bank and insurance regulatory agencies have the mandate, nor the resources, to collect data on our enormous and diverse financial sector.

Under Dodd-Frank’s Title I, only the OFR has the mandate to collect high-quality financial data, standards and analysis for FSOC and the public.

No one knows where the next financial crisis is coming from, so we need a centralized group that collects data and facts from thousands of banks, mortgage companies, auto finance entities, hedge funds, private-equity funds and insurance companies across the United States.

One of the biggest problems in the run up to the 2008 financial crisis was that no one agency had data on all of these firms and the type of financial products that they create or trade. Every existing regulator, then and now, can only legally collect data from those institutions it regulates.

To this day, many hedge funds, private-equity and specialty real estate funds, and payday lenders are lightly regulated, if at all, making it practically impossible to get data about their risks.

It is often said that the pen is mightier than the sword. Yet, I believe that it is spreadsheets and a calculator that are far mightier, because there are only a small minority of people who have the skills to use those instruments well in comparison to those who can use a pen.

The OFR not only collects data, the still-employed professionals have to do the best they can to insure that the data that they get is high-quality, relevant, complete and timely for the risks that they are charged with identifying, measuring and reporting to FSOC, Treasury, legislators and the public.

When data are in the public eye, it is then that investors, credit analysts, consultants, academics and the media can ask more probing questions and opine on what they think is happening in our financial system.

To determine where and when a financial crisis might be emanating, we need reams of historical and current data from every type of financial institution on important indicators, namely:

  • levels of consumer and corporate indebtedness,
  • financial institutions’ risk-weighted assets,
  • defaults,
  • loss severities and
  • market data on volumes, price movements and liquidity of traded securities and derivatives.

The professionals at the OFR crunch the numbers to tell us why we got into trouble the last time so that we do not repeat the same mistakes. Equally importantly, they can use the data, coupled with realistic assumptions, to figure out where the financial system may be headed next.

The OFR’s charge is incredibly challenging because thousands of financial institutions, including our largest banks, have great problems with legacy systems that do not collect or measure all risks in an accurate or timely manner.

The fact that the OFR is comprised of people from different professional backgrounds is also key; this diversity is what enables them to push back against each other’s notions and fight against the groupthink that is pervasive in so many of our public and private organizations.

That lack of diversity is in large part what in the mid-2000s made so many think that housing prices could never suffer a crippling collapse.

Continuing to shrink the OFR will come back to haunt us, and as often happens, it will be Americans with the least education or skills who will get hit the hardest the next time a financial crisis hits.

To protect those most vulnerable, I paraphrase, noted statistician W. Edwards Deming, “In God we trust, all others bring data” collectors.

Mayra Rodríguez Valladares is managing principal of MRV Associates; which provides consulting, research and training services on financial regulation and capital market issues. She has over 25 years of financial regulatory experience from her time at the Federal Reserve Bank of New York, JP Morgan, BTAlex.Brown. You can follow her on Twitter: @MRVAssoc.