We asked investors whether the current standards for disclosure of loan level data, for example via the European DataWarehouse, Project RESTART, EDGAR or the BoE and ECB templates, will provide sufficient data to adequately perform due diligence on ABS/MBS/CDO investments....
59% remain unsure as to whether the new market standards will be sufficient. This is a general finding across all asset classes...Please re-read the highlighted text and as you are doing so ask yourself what percentage of portfolio managers would say that IBM's disclosures are sufficient to adequately perform due diligence (your humble blogger would expect 90+% as no one refers to IBM as a 'black box').
Regular readers are not surprised by this survey result. It confirms what your humble blogger has been saying about the sell-side and its lobbyists like ASF, AFME (formerly ESF) derailing efforts to bring greater transparency to structured finance securities.
Regular readers know that there are two aspects to disclosure: what is disclosed and when it is disclosed.
To date, the sell-side has managed to prevent adequate loan level disclosure standards by focusing the discussion on what is disclosed in the specific data fields in the templates proposed by ESF, Project Restart, EDGAR, the BoE and the ECB.
While very time consuming, this whole discussion of specific data fields to include in the templates ignores a simple relevant fact: the data fields that should be disclosed are all the data fields tracked by the loan originator and servicer that are not borrower privacy protected.
The originator and servicer are experts and as such every field that they track is a field that they feel is important for monitoring and valuing the individual loan. These experts wouldn't track a data field they didn't think was important because it costs them money.
However, even if the disclosure templates were thrown away and all the data fields tracked by the originators and servicers were provided to investors, this would not be a big enough change in disclosure to get remotely close to 90+% thinking the disclosure was sufficient to adequately perform due diligence.
The simple fact is that investors recognize that 'when' data is disclose is a critical factor in determining if the disclosure is adequate for performing due diligence.
Structured finance securities are created by setting aside specific assets for the benefit of the investors. The physical equivalent of this would be to put these assets in a bag.
'When' addresses the question of is the bag paper or plastic.
It is a brown paper bag if 'when' is the same reporting frequency as exists for opaque subprime mortgage-backed securities. This is the frequency that has been adopted by the sell-side and shows up in the European Data Warehouse and Project Restart.
The bag is plastic if 'when' is observable event based reporting under which all activities like a payment or delinquency involving the underlying assets are reported to market participants before the beginning of the next business day.
It is only be adopting observable event based reporting with all the non-borrow privacy protected data fields tracked by the originators and servicers that 90+% of structured finance investors will think the disclosure was sufficient to adequately perform due diligence.
Other Interesting Observations
1) The investors have confessed that when it comes to buying ABS/MBS/CDO securities they are blindly gambling on the contents of a brown paper bag.
59% of investors are saying that the proposed standards are not sufficient to adequately perform due diligence. If the proposed standards are not sufficient, what does that say about existing disclosure standards?
2) The proposed disclosure standards are unlikely to encourage former or new investors to buy ABS/MBS/CDO securities.
If 59% of existing investors see themselves as blindly gambling on the contents of a brown paper bag because of disclosure is not sufficient to adequately perform due diligence, why would former or new investors want to gamble too?
No comments:
Post a Comment