Transpaency and Disclosure

Aprapos of our conversations Saturday and several of our blog posts over the last few weeks, the discussion over how, if at all, the market melt-down will change the way America does business or our government regulates industries continues. Many people are calling for increased transparency and disclosure in the way derivative instruments are traded, but as this NY Times piece points out, the financial sector is resistant to such efforts. They are mounting large lobbying efforts to ward off regulation.

http://www.nytimes.com/2009/06/01/business/01lobby.html?_r=1&th&emc=th

A few quotes from the article:

“The debate about where derivatives will trade speaks to core concerns about the products: transparency and disclosure.” Or lack thereof as things currently stand…

“There are two distinct camps in this argument. One camp, which includes legislative leaders, is pushing for trading on an open exchange — much like stocks — where value and structure are visible and easily determined. Another camp, led by the banks, prefers that some of the products be traded in privately managed clearinghouses, with less disclosure.” The issue over open market trading comes down to transparency – how can anyone be sure (even the firms themselves) they have correctly valued their holdings if the market is a shadow market? Such a market is open to manipulation and also simple wishful thinking. There is a real incentive to over value one’s holdings.

Economist Jeff Madrick laid out his prescription for reform in a NY Review of Books article a few weeks ago

http://www.nybooks.com/articles/22280

“One principle should dominate future regulation—the shadow banking system should be brought under the same regulatory oversight as commercial banking. In sum, these firms must maintain minimum capital requirements against the loans they make and mortgage-backed obligations and other CDOs they buy, just as commercial banks do. The structured investment vehicles commercial banks use to avoid such capital and other requirements should be disallowed. A federal agency, most desirably the Federal Reserve, should have the authority and obligation to examine the books of investment banks, hedge funds, and other participants in the shadow banking system to determine the quality of their investments and to set the standards by which capital is deemed adequate. Derivatives should be required to be listed on an exchange, where information about them and their prices is openly visible to market participants and federal authorities.”
Seems reasonable to me.

Carol Starmack