Market

Assurance –
Early Warning
System (MAEWS)
A s s u r i n g M a r k e t I n t e g r i t y
& T r u s t w o r t h i n e s s
t h r o u g h D e t e r r e n c e o f
Q u e s t i o n a b l e & F r a u d u l e n t
F i n a n c i a l R e p o r t i n g

Ly l e B r e c h t
C a p i t a l M a r k e t s R e s e a r c h
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 Vision Statement

It is technically feasible to build a system that automatically

assesses the probabilistic risk of a public enterprise (including
banks, any financial industry firm or any enterprise that is
regulated and that must produce periodic statements of financial
condition) overstating its economic results

System would work even if the firm was deliberately releasing

false financial statements overstating earnings

System would serve as a screening tool for SEC and other

regulatory agencies (Federal & State) and enforcement
personnel to focus on specific firm’s riskiness

(c) Lyle Brecht 30-Sept-04, 2009

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Goal and Objectives

Goal is for regulators to discover enterprises that are misleading

investors or in a risky financial situation BEFORE such
companies go bankrupt or their shares loose significant value
when the truth becomes known to the wider market

Objectives include: annual 98% reduction in surprise

bankruptcies; annual 90% reduction in accounting fraud; US
public markets viewed by global investors as the most honest
and fair market in which to invest capital

(c) Lyle Brecht 30-Sept-04, 2009

3
 Today’s Situation

ENRON, WorldCom, Global Crossing, Computer

Associates, Adelphia Communications, Tyco, Quest,
etc. financial reporting problems were largely
unanticipated by regulators

Problems that caused collapse of CDO market in

2008 were brewing for many years beforehand

After-the-fact enforcement is expensive and lengthy

process. Collapse of Wall Street CDO market
required taxpayers to provide reserves of $17,500
billion

Lyle Brecht 30-Sept-04, 2009

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 Big Picture

Need to flag public companies and regulated

enterprises not providing an accurate reporting of the
firm’s economic condition

Need to identify specific individuals affiliated with

public companies engaging in self-enrichment to the
detriment of shareholders and the taxpayers

The market expects the regulator to proactively

identify problems with financial markets before the
situation becomes catastrophic

(c) Lyle Brecht 30-Sept-04, 2009

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Available Options to
Restore Confidence
Additional regulations – without a much increased
enforcement budget will not be effective

Additional money for enforcement of existing

regulations – alone will not be effective: largely after-
the-fact and means to evade continually more
sophisticated

Efficiently identify potential problem firms –

implement a market assurance early warning system

(c) Lyle Brecht 30-Sept-04, 2009

6
 Analogues

Similar to systems already employed in the credit

card industry to identify credit card fraud

Similar to systems already employed in the banking

industry used to approve loans based on credit risk

Similar to systems already employed in the U.S.

Intelligence Community (IC) to identify potential
“individuals of interest” who may have ties to
terrorism

(c) Lyle Brecht 30-Sept-04, 2009

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System Development Costs

Proof-of-Concept ~ $800,000 (7mo)

Technical Specifications & Prototype ~ $3M

(9mo)

Pilot Test ~ $22M (14mo)

System Build and Rollout ~ $105M (over time,

based on performance metrics and type of firms
analyzed)
(c) Lyle Brecht 30-Sept-04, 2009

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Sources of Funding

Regulators fund development of this facility

within existing budget, or

Regulators enter into a long term, performance-

based contract with 3rd party to provide system
services

This long-term contract is used to secure private

debt funding from the capital markets

(c) Lyle Brecht 30-Sept-04, 2009

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 Sources of Funding if
Regulatory Agency
Funds Not Used

Proof-of-Concept – Angels

Technical Specifications – Foundations, Vendors

Pilot Test – Pension Funds; Venture Investors;

Industry Consortium

System Build and Rollout – Sell 10-15 yr. bonds;

Industry Consortium

(c) Lyle Brecht 30-Sept-04, 2009

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Organizational Structure for
Market Assurance Early
Warning System Development
System is developed as a financial markets assurance Utility

Available for a fixed annual subscription fee to regulators

Utility services also available by subscription to institutional

investors: pension funds, mutual funds, banks.

Utility is organized as a Non-Governmental Organization

(NGO).

Utility is run as a not-for-profit entity

Chartered by regulatory agency of the federal government

(c) Lyle Brecht 30-Sept-04, 2009

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 Rationale for
Structure
Myth of rational markets – broad base of usage acts
as deterrent, before-the-fact

Wide usage enables AI system to learn and evolve as

fast as companies develop new ways to beat the
system

Broad coverage can identify systemic risk that is not

being managed (e.g. CDO derivatives market)

Additional fees can be re-directed to continually

improve system’s capabilities
(c) Lyle Brecht 30-Sept-04, 2009, 2009

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 Next Steps
Letter of Intent from regulator’s commissioners

Use this letter to obtain proof-of-concept funding

Interested regulatory agerncies will establish internal

team to discuss system requirements

Concurrently, develop project plan and staffing

recommendations for utility development

As part of development process implement NGO

structure
(c) Lyle Brecht 30-Sept-04, 2009

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 Lyle Brecht
410.963.8680
lbrecht@gmail.com

Business development executive and consultant

Raised a total of approximately one billion dollars for projects.

Producer for two AI systems

Degree in business from Harvard Business School and a graduate degree in

Applied Ecology (Systems Theory) from the University of Minnesota.

(c) Lyle Brecht 30-Sept-04

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