Is Disclosure Really That Hard?
Investment risk disclosure continues to take center stage. In "Clearing the Financial Fog - Emily Barrett ponders the virtues of transparency" (Wall Street Journal, MarketBeat Blog, September 14, 2007, posted by Tim Annett), the point is made that full disclosure is fraught with problems.
"The trouble with transparency is, there’s just something terribly obscure about it."
"In some ways, banks are already engaged in the clarification process, as more are forced to take back on their books funds previously buried out of regulators’ reach. This includes loans lying around in banks’ warehouses waiting to be chopped up and sold to raise money for private-equity takeovers. A number of bank sponsors of hedge funds have also been forced either to cut credit lines, or, as in the case of Bear Stearns Asset Management, to commit financing to shore them up. But there are limits to how clear banks can be. The complexity of structured finance, which deals in layered bundles of debt, doesn’t lend itself to easy analysis."
“The problem is exposures get buried in different structures,” said Jim Caron, rates strategist at Morgan Stanley. “I don’t think it’s a lack of willingness to get things out to regulators, there’s just a natural lack of transparency in these structures.”
Click here to read the aforementioned post in full.
To be sure, deciding on what and how to provide information is not an easy task. Nevertheless, access to sufficient and meaninful information is vital to good decision-making on the part of institutional investors such as pension funds. Here is the comment I posted.
<< As I’ve written many times (www.pensionriskmatters.com), pension fiduciaries have an obligation to make informed investing decisions. Whether pensions are counterparties to a derivative-related trade (mostly with banks on the other side) or they invest in funds (mutual/hedge/etc) that invest in derivatives, the information they currently get from their trading partners is limited at best. A plan sponsor must understand enough about risk controls and risk drivers for a particular investment/counterparty/asset manager so the investment committee can answer a fundamental question - Are we likely assuming too much risk for the expected payout if we transact with this bank/asset manager? In my view, financial institutions have a golden opportunity to disclose meaningful information about their risk exposures with institutional investor clients, going beyond mandatory requirements. Besides building goodwill, they may be able to attract (and retain) additional assets to manage by fully acknowledging the pension plan’s pain points (need for solid risk information). This does not necessarily translate into providing more information but rather providing “better” information that directly addresses economic risk-taking, and related controls. A joint interview with the portfolio manager and risk manager is one option. Providing the pension plan investor with the bank or asset manager’s risk management policy or statement of risk-taking is another positive gesture. Working with an independent third party to vet risk management process on behalf of the pension plan investor is another possibility. Comment by Susan M. Mangiero - September 18, 2007 at 1:10 pm >>
