Victories for Market Transparency

The SEC today published the final rule it approved last month to make interactive data disclosure in XBRL format mandatory for public companies.

Footnote 78, on p. 23, says: “The adopted interactive data requirements would not apply to asset-backed filings because issuer financial statements are generally not required or provided in filings made pursuant to Regulation AB (17 CFR 229.1100 et seq.).” References to asset backed securities in footnote 308 and in the text on p. 117 are also of interest. How much easier might it be to data tag simple asset backed securities, where a relative handful of facts are important to valuation, compared to the complex U.S. GAAP filings of thousands of public companies? (The derivative instruments would obviously be tougher, but since they’re all based on the same or similar facts, how much tougher could it be when you have an extensible computer language at your disposal?)

A second item of interest relates to the Dec. 30 SEC FMV report on Mark-to-Market Accounting, particularly the recommendation on pp. 208–209:

8. Recommendation — Address the Need to Simplify the Accounting for Investments in Financial Assets
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In this regard, the Boards should work closely with the Staff to explore the complete integration of interactive data as a tool to bridge the gap between historical cost measures and fair value. Moreover, sensitivity disclosures of fair value estimates — as well as appropriate supplemental measures that management could elect to provide, for instance HTM valuations of certain debt instruments — could position investors to make more informed decisions about capital allocation. In this regard, the Boards should work closely with the Staff to explore the complete integration of interactive data with respect to these disclosures.

With all of today’s talk about the challenge of pricing troubled assets, why not just write some business rules and let computers do the work? Barry Ritholtz caught the attention of the New York Times this morning for his reporting, which included this:

We understand that the discussion of “bad bank” versus “insurance wrap” has devolved from an all or none into an even more absurd “cut the baby in half” discussion. Sources tell us that the Federal Reserve is proposing that AFS (available for sale) assets and trading assets be sold to the bad bank while they propose that “accrual” or HTM (Held to Maturity) assets be wrapped. This approach…has the fingerprints of the NY banks all over it. Over the past several quarters these banks have moved massive amounts of troubled assets from AFS to HTM in an effort to avoid having to mark them to market, avoiding the sale of these securities to the “bad bank” would be a clear attempt to avoid a sale event and the required marking the assets. By way of background — when the GSEs were moving assets from AFS to HTM many of these same banks were screaming to the Fed and Treasury that this was inappropriate and that it shouldn’t be allowed. As important, almost all of the whole loan exposures of the banks are in the HTM accounts and those loan exposures promise to be the most rapidly deteriorating assets and the largest future losses of those institutions, circling them is not a resolution it is a delaying of the day of reckoning.

Shouldn’t a prerequisite to tax money being put at risk for either AFS or HTM assets be the transparent disclosure of what it’s being used to subsidize? Wouldn’t it be less expensive to disclose risk than to insure it? Are binary distinctions between AFS and HTM necessary if computers can give investors the data they need to estimate NPV? Ritholtz seems to describe a situation in which bank secrecy to maximize bank profits is competing with market transparency to minimize transaction costs. Bank secrecy didn’t protect investors from toxic assets. Perhaps it’s time to try market transparency.