Who Will Sponsor Transparency for Troubled Assets?

The previously blogged ideas — broadening the SEC’s XBRL requirement and using an industry standard computer language to create a more efficient 21st century version of the RTC — would require a sponsor to implement. A smart post from Chris Whalen helps explain why major holders of troubled assets aren’t falling out of the woodwork to volunteer.

Chris studied the numbers and concluded, “we cannot see how the creditors of the parent holding companies will avoid a haircut.” If math forces creditors to take a haircut, that can’t be good news for equity holders. Chris elaborated at an American Enterprise Institute meeting on Jan. 28, noting the good news that only the shares of a handful of large banks are fully at risk.

My hypotheses has been that it would be relatively easy to use an industry standard computer language to make troubled assets transparent enough to price in the market. As one experienced fixed income trader explained it to me, it’s “only a plumbing problem.”

But whether to call the plumber depends on whether the benefits of the work exceed the cost. So it’s no surprise, reading the IRA numbers, that Roto-Rooter isn’t on asset holders’ speed dials. Asset holders whose equity holders would get wiped out by transparency have plenty of reason to tolerate the status quo.

If the problem of wiping out shareholders is overcome — alas a political problem now — the question then becomes what effect would asset transparency have on creditors. If troubled assets holders can force taxpayers to pay inflated prices for assets, transparency hurts holders. But if Congress rules out subsidies — or at least mandates transparency and finds a way to force compliance — then there’s a way out of the crisis.

At a minimum, having the assets data tagged with an industry standard computer language would make bankruptcy trustee jobs easier. And while transparency might initially create more jobs in the bankruptcy industry, it would also help get the securitization industry back on its feet sooner — this time without the opacity and with attributes to support efficient markets.

Will Congress step up? More good news: Transparency is up for debate. Let’s hope it wins.