My Fortune.com Piece: California Sunshine for Shadow Banking

New Fortune.com managing editor (and ’95 Medill grad) Daniel Roth (@danroth) gave me a chance the other day to write a guest column on transparency and financial recovery and XBRL. It’s now here.

Thanks to another Fortune.com editor, I’m reminded of a lesson I learned myself at Medill (’86) about the value of good editing. My original draft was distracted with details about California’s financial crisis and tortured by metaphor mania. Now it gets to the point. Hope you enjoy it.

By the way, Fortune embedded a video of SEC Risk Director Henry Hu in the piece, explaining credit default swaps in plain English. He compares “empty CDS” to short selling. Requiring sellers to have “skin in the game” — the solution implied by the video — is a perfectly legitimate way to discourage both empty CDS and short selling. The downside, however, is that doing so restricts market flexibility. Then again, so do better disclosure requirements, like GAAP for public companies and XBRL for ABS.

In opaque markets, substantive “skin in the game” regulations may be essential. The advantages of information to make markets transparent are more market scrutiny and lower barriers to finding prices that are closer to the ideal of equilibrium. By all means, don’t sell insurance to potential arsonists! Better yet, create building codes that protect structures from arson and accidental fire alike.

By the way, if you’re curious about the California point in my piece before it was wisely edited for length, it was this: Despite the state budget crisis, good teachers and good financial building codes could yet combine to restore our status as the Golden State.

Things looked pretty bleak after the 1906 quake, too, but this photo — which data tagging technology automatically inserted into WordPress for me — is a nice reminder that many forms of progress are always possible.