Sunday, October 14, 2012

Sheila Bair's Rx for fixing the financial system includes disclosure

While most of the attention is focused on her skewering Tim Geithner and bank bailouts, Sheila Bair put forth 13 simple fixes for the financial system.

The two I would like to call readers attention to are her suggestions to 1) close Fannie Mae and Freddie Mac and 2) improve disclosure for structured finance securities.

Regular readers know these two suggestions are linked.

In fact, the FHFA knows these two are linked.  That is why the FHFA proposed to oversee the construction and ongoing operation of a data warehouse to provide the disclosure needed to support the issuance of mortgage-backed securities from covered bonds through hybrid bonds to private label securities.

Regular readers and the FHFA know that without observable event based reporting, investors will not buy mortgage-backed securities without a government guarantee.

It is only observable event based reporting under which all activities like a payment or default involving the underlying collateral are reported before the beginning of the next business day that provides investors with the current information they need to monitor and value mortgage-backed securities.

It is only with observable event based reporting that investors know what they own.

It is only observable event based reporting that allows the Fannie Mae and Freddie Mac to be closed without a significant disruption to the mortgage finance market.

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