Why Data is Important: Investors Grumble Over Flawed Remittance Reports

Asset-Backed Alert ran an interesting article highlighting the current problems with the remittance reports being generated for outstanding structured finance securities, the importance of accurate remittance reports for valuing structured finance securities and the implication for the structured finance market of investors walking away because they do not have good data.

The importance of timely loan performance information has been discussed extensively on this blog (see the Brown Paper Bag Challenge posts - here, here and here ) and on the TYI, LLC website.

Mortgage-bond buyers are losing faith in the accuracy of remittance reports, and some say the apprehension could soon factor into their investment strategies. 

Remittance reports, distributed monthly by securitization trustees, are supposed to provide routine snapshots of the cashflow-collection and distribution activities of servicers. 

However, investors say there has been a rash of recent instances in which the reported data differed considerably from what actually happened - making it impossible to determine values for their holdings. 

Frustrated with what they consider insufficient efforts by servicers to address the discrepancies, certain buysiders ... are suggesting that flawed remittance reports already have emerged as an obstacle to the mortgage-bond sector. "It's a real mess. I wouldn't be surprised if some investors start moving into other sectors altogether. I know I've been thinking about it," one buyer said. "It's just become impossible to rely on these reports." 

In Europe, investors, including commercial and investment banks, are required to know what they own under Article 122a of the European Capital Requirements Directive.  Clearly, flawed remittance reports would make Article 122a impossible to comply with.

If flawed remittance reports are as pervasive as the article suggests, European investors covered by Article 122a should be be sellers of structured finance securities and shifting their resources to other sectors altogether.

Servicers for private-label mortgage securitizations have always released remittance reports, typically on the 25th of each month. But the documents only began to receive widespread attention as the real estate market unraveled in 2007 and investors sought more details of their deals' underlying loans.  

Now, buysiders rely on the information to calculate their own cashflow expectations, much as holders of agency mortgage paper do with pass-through reports. 

Many Wall Street Banks also have used remittance data to help set their trading strategies. 

Prior to and during the credit crisis, many Wall Street banks owned the firms that were doing the daily billing and collecting of the underlying collateral.  As a result, their trading areas had access to current loan performance information while investors had to wait until the 25th of each month and the release of the servicer remittance report for loan performance information.

This access to loan performance information gave Wall Street a significant, profitable advantage.  An advantage that would disappear under the FDR Framework, where asset-level data is updated on an observable event (like a payment, delinquency or default) basis.

Why have the once-reliable reports been wrong? Investors point in part to increasing use this year of mortgage-modification programs that government agencies and lenders have implemented to aid troubled borrowers. They claim some servicers fail to verify when the changes take effect, resulting in mismatches between when a given loan's cashflows actually shift and when those adjustments are reported. 

Servicers argue the volume of recent modifications has become overwhelming in comparison to their staffing levels. They also have faced ongoing struggles in figuring out how to treat loans that are in the trial phases of modification programs. "It has made it nearly impossible for us to appropriately account for changes," one servicing professional said. 

Buysiders call that a red herring, saying servicers are equipped to account for modifications as they occur. "The servicers simply don't pay enough attention to what's happening to the underlying loans," one source said.

By definition the underlying loan systems are capable of tracking modifications.  That is what these databases are designed to do.

Any Report on the Failure of RBS Will Confirm Need For Current Asset-Level Disclosure

Like the Financial Crisis Inquiry Commission Report, the report put together on the RBS failure will show the need for current asset-level disclosure.

As discussed in a column in the Telegraph, the FSA report on the RBS failure should raise

... a number of central questions to which we as a country must start formulating answers.

The answers to many of these questions can be found in the FDR Framework.  Specifically, insuring that market participants have access to all the useful, relevant information in an appropriate, timely manner.

[Alistair Darling] says that there were “no particular warning lights” about RBS in early 2008. 

The question is, why not?

He also points out that neither the FSA, nor the Bank of England nor the banks themselves could produce what he describes as a “health check” – a document which highlights the risks faced by financial institutions. 

Again, why not? 

The answer to both 'why not' questions is because financial institutions are not required to disclose their current asset-level data to all market participants.  Without this data, it is impossible for market participants, including competitors, to do a 'health check' and flash a warning where appropriate.

“People tend to ask questions when things go wrong, correctly, but they should also ask questions when things go right,” he said. 

“If someone is making a lot of money somewhere it is always worth asking the question why. 

It could be it isn’t the skills or the flair that you have; it could be that something [is] going terribly wrong.” 

The market participants with the best ability to make the distinction between skills and luck are competitors.  That is why it is important to insure that they have access to the current asset-level data.  By analyzing this data, the competitors can determine if it is skill or luck and adjust their exposure and the pricing of this exposure accordingly.

... One intriguing fact that has come out this weekend is that Sir Fred Goodwin, the former chief executive of RBS, had no official internal email address – or certainly not one his senior team were aware of. The most prominent directors at the bank have told us they could not contact him directly and had to send messages to his secretary. Some wonder whether this was a way of Sir Fred avoiding information he did not want to see and maintaining a “clean-skin” approach to what was going on around him. 

A little detail, perhaps, but one possible revealing of a culture of “hear no evil, see no evil” at the bank. 

This culture could not have existed if there had been disclosure of current asset-level data as market participants, like credit and equity market analysts, would have seen the risks that RBS was running.  These participants would have been vocal about the risks and how RBS intended to manage them.

Alistair Darling Makes the Case for Current Asset-Level Disclosure

In an article in the Telegraph discussing the lessons learned from the collapse of RBS,  former chancellor Alistair Darling makes the case for why globally, financial institutions should be required to disclose current asset-level data.

As regular readers of this blog know, disclosure of current asset-level data is the only way for both regulators and market participants to know how healthy a bank is.

... The FSA did not have "proper processes", according to one former senior Treasury adviser interviewed by the Telegraph, who also criticised Bank of England Governor Mervyn King for a lack of knowledge of the banking sector. 

"One of the things that was a real problem was that neither the FSA nor the Bank nor any of their American or European counterparts could pull out a file and say "here's a health check on such-and-such a bank",' Mr Darling said. 

"It did surprise me. But looking back now three years later what is equally surprising is that there wasn't a sheet that could be pulled out by RBS. 

A major problem at RBS was the lack of internal integration of reporting systems and former managers said that it was often difficult to get a handle on the risk the bank was taking. An internal ABN report in February 2008 revealed major problems with RBS's rushed integration plans. 

Mr Darling said: "The answer to the question can and should the regulators have known more then the answer has to be yes. 

"How can it be otherwise? One of the things that does worry me is our capacity to know and understand a very large global bank and what it is doing. Not just here but everywhere else."

HSBC Plans to Leave London, Maybe

According to an article in the Telegraph, HSBC plans to leave London and move its headquarters to Hong Kong.

The stated reasons for moving its headquarters include:  they will be able to use more leverage as Hong Kong has a lower capital requirement, they will pay less in taxes and they will have a lower cost of compliance with new bank regulation.

One of the key benefits of the FDR Framework is that it is not amenable to regulatory arbitrage.  It is implemented the same way globally.  The need for and definition of disclosure of current asset-level data is the same in New York City as it is in London or Hong Kong.

Another key benefit is that the cost of compliance is very low.  In fact, studies done to support the creation of the Office of Financial Research under the Dodd-Frank Act strongly suggest that the benefits the global financial institutions receives from data standardization are greater than the cost of compliance.

Britain's biggest bank, which has been headquartered in the capital for 19 years, warned key investors that last week's disappointing full-year results have made arguments for shifting HSBC's domicile to Hong Kong "overwhelming". 

... "you can't argue with the numbers. Moving to Hong Kong could deliver a 30pc premium [to the share price] overnight." 

... Iain Mackay, finance director of HSBC, blamed the bonus tax in Britain and France and the large swathes of new bank regulations for the higher costs. Senior figures at the bank have also pointed out that the Government's banking levy, recently increased by the Chancellor, means that the bank will ultimately pay out as much to cover the tax as it gains in profit from its UK businesses. 

Last week the bank said that the return on equity target of 15pc to 19pc was no longer viable. Mr Mackay said higher capital requirements demanded by UK regulators and the lower prospective returns had led to the target being abandoned. 

Britain's capital requirements for the UK's leading banks are now the toughest in the world and, with the introduction of the Basel III regulations, the bar is expected to go even higher.
HSBC explained to shareholders that the more relaxed capital requirements in Hong Kong would cost less and generate more profit by allowing it to make greater use of its balance sheet. 

One source close to the situation said: "Investors were very disappointed with the spiralling costs revealed in the results. The bank's reply was that the swift solution is to fast forward the review." 

... Last month Douglas Flint, the bank's former finance director who is now chairman, told the House of Commons Treasury Select Committee that HSBC was "not trying to leave London". But he warned that the banks faced regular questions from investors about the "costs and benefits" of being based in the UK. Mr Flint described the Government's bank levy as a "tax on being headquartered in London". 

Mike Geoghegan, HSBC's former chief executive, issued similar warnings last year. In November he said that the bank levy amounted to a "tax on emerging market growth". 

An HSBC spokesman said: "London is ideally positioned as an international financial centre and we have been clear that it is our preference to remain headquartered here. However, we are routinely asked by institutional investors about the costs of being headquartered in the UK and it's clear that the City's competitive position needs protection."

Mervyn King Interview Highlights the Problems With a Banking Sector Not Operating Under the FDR Framework

Over the last week, the Telegraph has run four interesting articles featuring Mervyn King's observations about the current state of the UK banking system and the financial crisis.  Regular readers of this blog will immediately see how adoption of the FDR Framework would address his concerns (for new readers, please click on the 'FDR Framework' under 'about this blog' and then come back and read this post).

The first article featured only quotes:

"The balance sheets of too many banks were an accident waiting to happen. For all the clever innovation in the financial system, its Achilles heel was, and remains, simply the extraordinary - indeed absurd - levels of leverage represented by a heavy reliance on short-term debt."

(King on the risks taken by banks before the financial crash)

"The biggest moral hazard in history."

(King on how the bail-out has encouraged future risk-taking by banks)

The second article reports on an interview with him,

... In the interview, the Bank Governor says: “We allowed a [banking] system to build up which contained the seeds of its own destruction. 

“We’ve not yet solved the 'too big to fail’ or, as I prefer to call it, the 'too important to fail’ problem. 

“The concept of being too important to fail should have no place in a market economy.” 

When asked whether there could be a repeat of the financial crisis, Mr King says: “Yes. The problem is still there. The search for yield goes on. Imbalances are beginning to grow again.” 

The third article offers rebuttals to the points that he made during his interview,

... But leading economists, including a former Tory advisor and the chief executive of the British Bankers' Association, have criticised his comments. 

Tim Congdon, who served on the Treasury Panel of Independent Forecasters (the so-called "wise men") under the last Conservative government, called the remarks "unjustified". 

... "If you criticise the banks you reduce their credibility and then people worry about them. The important thing for the Governor of the Bank of England is to help them." 

Angela Knight, chief executive, British Bankers' Association, said:  

..."The changes from top to bottom within the industry have ensured the risks are well controlled, and all banks have put recovery and resolution plans in place to answer the too-big-to-fail question and so safeguard customers and the taxpayer against the remote consequences of any future failure."

And finally, a column supporting Mervyn King and the issues he raises:

... Mervyn King, has been conveying to our great bankers a profound criticism of how they behave and the system which permits them. They do not seem to care. Bob Diamond, of Barclays, even thinks that the "time for remorse is over". 

... [According to Mervyn King] banks ... decided that it was all right to "bet with other people's money", and to exploit the "gullible". They created all sorts of instruments just for playing the casino (he uses that word) with one another, and ended up with trust breaking down. So the system collapsed. 

But then came the "too big to fail" problem. We couldn't let the banks collapse because they would bring us all down. In 2008-9, we performed an appalling, but necessary rescue. And now it could very well happen all over again! 

Banks which we, the taxpayers, rescued are doing the same business once more, and paying themselves the same piles of money, because they still have no "downside" risk. 

Mr King wants the independent banking commission to solve this: "The concept of being too important to fail should have no place in a market economy." 

Is the Governor right? Central bankers, as well as big bankers, did not cover themselves with glory. 

... Too many current attacks on bank bonuses miss the point. There is no "right" amount of money. 

... So we still have a fragile financial system. 

Worse, the basis on which we accept our economic arrangements is undermined. ... the credit crunch came and "surprise, surprise, the institutions bailed out were those at the heart of the crisis". Greed and foolishness were rewarded and prudence was punished. Eventually, people will not accept this. 

Why are those in power finding this so hard to handle? Partly, it is for good reasons. We want to maintain a banking system. Many bankers are conscientious and able people. We do not want a panic. 

But there are worse reasons.  

... our "zombie" banks, which are kept alive only by the taxpayer, ... power lies not in the good they can do, but in the havoc they could wreak. 

... It is objected that Britain must be a "global player", and that we must not let our banking talent disappear. But the trouble is, as Mervyn King has said elsewhere, that great international banks are "global in life, but national in death". 

These huge, smelly, sick dinosaurs are now squashing ordinary British citizens. I find it hard to believe that many other countries are longing to take the weight of this risk upon themselves. 

In some ways, our banking problem is even worse than our trade union one 30 years ago, because of the lure of money. Most powerful people in the country – especially in London – have a strong motive to suck up to the big banks. ... I'm glad someone is speaking up against a world where morality has simply turned upside down.

The Shape of Radical Reform for the UK Financial Sector: Updated

It is entirely possible that the UK's Independent Commission on Banking will come back with a radical reform proposal.

To date, the speculation has centered on the idea of ring-fencing the retail banking business from the investment banking business.  One goal of ring-fencing the two business is to insure that if either business fails, it does not take down the other.  Another goal is to insure that the investment bank cannot use the funding subsidy enjoyed by the retail bank to support its casino-like activities.

The head of the Commission has also suggested that emphasis will be placed on higher capital requirements.

Taken together, neither of these reforms is particularly radical nor would they have prevented the credit crisis that began in August 2007.  For this reason, the Independent Commission on Banking might want to adopt a radical reform that would have prevented the credit crisis.

This radical reform is to fully embrace the FDR Framework and its call for current asset-level disclosure by retail and investment banks, in addition to higher capital requirements.

A banking system that could handle all of the payments and credit needs of the UK, or any other country for that matter, does not require financial institutions to take on any positions that could not be publicly disclosed.

As a result, requiring disclosure of current asset-level data has the virtue of driving risk out of both the retail and investment banks as the banks have an incentive to close out any positions that they would not like disclosed.

This is why Bob Diamond, Peter Sands and Jamie Dimon want it.  Not only does providing this data give banks an incentive to reduce risk, but with this data, banks can limit and properly price their exposure to financial institutions that carry too much risk.

Of course the UK banks will protest.  They will go to great lengths to explain why this disclosure will put them at a competitive disadvantage to all of their global peers who do not have to make similar disclosures.

They are highly likely to threaten to leave London.  The proper response is "go and make sure to take your excess risk with you!"

In reality, the desire to leave is a strong signal to the market that the financial institution has something to hide.  The financial institution can expect its cost of funds to increase as the market concludes the financial institution must have more risk than previously believed.

It also sends a strong signal to a potential host country that might greatly complicate the financial institution's ability to relocate.  Does the financial institution's management really believe that any country would want to be in the position of potentially having to bailout a financial institution that was unwilling to disclose its risks?

This radical reform also puts pressure on other countries to adopt current asset-level disclosure.  The question that these countries have to ask is "given that it reduces the risk of our financial system and leaves us with a system that can handle all our payment and credit needs, why shouldn't our financial institutions provide current asset-level disclosure?"

Gary Gorton Meets The FDR Framework

Frequently, this blog looks at the latest ideas on how to fix the financial system coming out of the academic world.

For the most part, these ideas are very positive, but implemented by themselves not as effective a solution as implementing the FDR Framework by itself.  If implemented in the real world without the FDR Framework, the potential downside of these ideas would be a lot like taking chicken soup when your are sick, they could not hurt.

If implemented with the FDR Framework, these ideas would be really powerful.

Examples of positive ideas discussed on this blog include Anat Admati's push for higher bank capital requirements, Simon Johnson's pursuit of breaking up the Too Big to Fail and Laurence Kotlikoff's prescribing limited purpose banking.

Sometimes, however, an idea for fixing the financial system comes out that if implemented in the real world would have the potential for devastating consequences for the global economy.  The poster child for this is Gary Gorton's informationally-insensitive debt.

What is informationally-insensitive debt?

In a May 9, 2009 paper for the Atlanta Fed, Gorton defines it as

Intuitively, information insensitive debt is debt that no one needs to devote a lot of resources to investigating.  It is exactly designed to avoid that.  

He has two examples of information-insensitive debt:

• Demand deposits; and 
• The senior tranches of securitized debt.  

He notes that the senior tranches of securitized debt are

informationally-insensitive, though not riskless like demand deposits.

Why would regulators care about informationally-insensitive debt?

According to Gorton,

A 'systemic shock' to the financial system is an event that causes such debt to become informationally-sensitive, that is, subject to adverse selection because the shock creates sufficient uncertainty as to make speculation profitable.  

Regular readers of this blog know that the concept of information-insensitive debt is incompatible with the FDR Framework.

Why is the concept of information-insensitive debt incompatible with the FDR Framework?

Because debt, like all investments, is informationally-sensitive!  What differs between investments is how much effort it takes to analyze the information.

Under the FDR Framework, investors are suppose to have access to all useful, relevant information about the debt in an appropriate, timely manner when they make an investment decision.

When depositing money with a FDIC insured bank, the investor is told that their money is insured up to $250,000 per account.  This is information.  With the information about the government guarantee, investors do not need to devote a lot more resources to investigating the financial solvency of the bank to know how much of their investment will be returned.

Contrast depositing money in a bank with investing in the senior tranches of structured finance securities.

All the useful, relevant information for making an investment in a senior tranche of a structured finance security includes the current asset-level performance of the underlying collateral as well as the terms of the deal.  The investor then uses this information in the analytical and valuation models of their choice to determine if the cash flow on the underlying collateral will be adequate to return their investment.

Clearly, an investor who does his homework is going to use dramatically more investigative resources before investing in the senior tranches of a structured finance security than before investing in demand deposits.

Only the FDR Framework explains what triggered the credit crisis

Finally, it might be useful to test the informationally-insensitive model against the FDR Framework to see how they describe the events of August 2007 and therefore how the entire subsequent financial crisis should be interpreted.

According to  the November 9, 2010 version of Gorton and Metrick's Securitized Banking and Run on the Repo paper,

The banking system has changed, with “securitized banking” playing an increasing role alongside traditional banking. One large area of securitized banking – the securitization of subprime home mortgages – began to weaken in early 2007, and continued to decline throughout 2007 and 2008. But, the weakening of subprime per se was not the shock that caused systemic problems. The first systemic event occurs in August 2007, with a shock to the repo market that we demonstrate using the “LIB-OIS,” the spread between the LIBOR and the OIS, as a proxy. The reason that this shock occurred in August 2007 – as opposed to any other month of 2007 – is perhaps unknowable. We hypothesize that the market slowly became aware of the risks associated with the subprime market, which then led to doubts about repo collateral and bank solvency. At some point – August 2007 in this telling – a critical mass of such fears led to the first run on repo, with lenders no longer willing to provide short-term finance at historical spreads and haircuts.

Under the informationally-insensitive model, what happened in August 2007 is an unknowable mystery that resulted in the first repo run.

According to an article by Larry Elliott, the Economics Editor for The Guardian,

On the face of it, there was nothing especially memorable about August 9 2007.  

... It was, however, the day the world changed. As far as the financial markets are concerned, August 9 2007 has all the resonance of August 4 1914. It marks the cut-off point between "an Edwardian summer" of prosperity and tranquillity and the trench warfare of the credit crunch - the failed banks, the petrified markets, the property markets blown to pieces by a shortage of credit. 

On that day, the European Central Bank and the US Federal Reserve injected $90bn (£45bn) into jittery financial markets.

What happened on August 9, 2007?

According to a report by BBC News,

Investment bank BNP Paribas tells investors they will not be able to take money out of two of its funds because it cannot value the assets in them.

Specifically, it could not value the subprime mortgage backed securities in these funds.

Why could it not value these securities?

As was disclosed by the rating agencies in their testimony before the US Congress a month later, these securities could not be valued because there was no access to the data needed to monitor them and to make timely rating changes.

As all market participants know, ratings are just a form of valuing a security.

Under the FDR Framework, what happened in August 2007 is not a mystery.  It was the month in which BNP Paribas announced that all the useful, relevant information about the subprime mortgage backed securities was not available in an appropriate, timely manner and therefore the securities could not be valued.

Once this announcement had been made, both the cause (the lack of data) and how to stop the global credit crisis (provide the data) were easy to identify under the FDR Framework.

Even the Financial Stability Oversight Council Understands the Importance of Asset-Level Disclosure

Bloomberg ran an article that confirms that regulators have a sense that the only way to determine if a financial institution is systemically important is to look at its asset-level exposures.  Naturally, since asset-level exposures change over time, so too does the list of systemically important firms.

As regular readers of this blog know, what is important is that the asset-level exposures for all financial institutions are disclosed to all market participants.  Not that regulators label a market participant systemically important.  With this disclosure, market participants can then properly price their exposure to other market participants based on the riskiness of that market participant.

The largest danger that the global economy faces is that the Financial Stability Oversight Council will conclude that they are the only market participants who should see the asset-level exposures.  This conclusion would deprive market participants of the information they need to properly price risk and to take steps to protect themselves from contagion triggered by the failure of a firm.

Hedge funds, broker-dealers and mortgage companies may face unprecedented demands for data on everything from risk exposure to trading partners as U.S. regulators seek to identify firms that pose a potential threat to the financial system, a confidential government report says. 

The staff of the Financial Stability Oversight Council identified dozens of “potential metrics” to decide which non- bank financial firms should be designated “systemically important” and subject to Federal Reserve supervision, according to an 80-page study obtained by Bloomberg News. 

... “The FSOC will be after a lot of information,” Amy Friend, managing director of Promontory Financial Group in Washington, said at a Feb. 25 seminar at the U.S. Chamber of Commerce. 

.... “Firms that are concentrated in particular assets or sources of funding and revenues are susceptible to shocks from those assets or sources,” the study said in its list of possible data requests. “Large exposure to particular counterparties increases the likelihood that shocks to those counterparties will affect a firm.” 

... Financial companies don’t have any incentive to disclose more information than they do now, said Thomas Cooley, an economics professor at New York University’s Stern School of Business. 

“Opacity has been the friend of Wall Street firms,” said Cooley, who studies issues related to financial stability. “At least they see it that way. They probably make more money when people don’t know exactly what they are doing.” 

Data can be used as a “starting point” that can be supplemented by a more detailed analysis of each financial firm, he said. 

The data collection and analysis may be more important than the designations, said John Douglas, a partner in the financial institutions group of Davis Polk & Wardwell LLP in Washington. 

“A gentle information-gathering process from large, interconnected institutions is more useful and valuable than trying to make some artificial determination at this point as to which ones are systemically important,” Douglas said. “Knowledge and information will be extremely valuable, not some list.” 

... Agencies, including the Securities and Exchange Commission, are also proposing to step up demands for information from firms such as hedge funds, which SEC Chairman Mary Schapiro in November said have been “out of sight and were unknown to financial regulators and the public.” 

... Data is “so critical to regulators to get an aggregate picture,” the CFTC’s chairman, Gary Gensler, said in a Feb. 17 banking committee hearing. 

Too Big to Fail Meets Too Big to Save

The critical assumption underlying Too Big to Fail is the idea that governments will always bail out these firms if they run into trouble.

This assumption is critically flawed.  The flaw is that it assumes that governments are able to bail out these firms.

In the aftermath of the most recent credit crisis, this is no longer the case.  There is no government, including the US, that could bail out its largest financial institutions again and remain solvent.

This has important practical implications.

As Jamie Dimon said at Davos, he wanted to know who his dumbest competitor was.  Why?  So he could reduce JP Morgan's exposure to this financial institution.  This position was supported by Peter Sands and Bob Diamond.

So long as the large financial institutions realize they are now all too big to save, they all need current asset-level disclosure by their competitors so that they can manage their risk of contagion from the dumbest competitor.

The large financial institutions manage their risk of contagion by reducing their exposure to the riskiest competitor and by charging more for the exposure that they have.  Both of these put pressure on management of the 'dumbest competitor' to reduce the risk profile of the institution.

Providing current asset-level disclosure sets off a virtuous cycle.   Each time through the cycle, the riskiest large financial institution has to reduce its risk profile.

The FDR Framework Revisited

At Boston University's State of Financial Reform conference, your humble blogger was asked why must governments implement the FDR Framework.

As regular readers of this blog know, the FDR Framework specifies how a government should and should not interact with the financial markets.

• It should insure that all useful, relevant information is made available in an appropriate, timely manner to market participants; and

• It should not endorse a specific investment.

But, why is this important?

Because it puts the responsibility on the investors to do their homework prior to making an investment and while the investors hold the investment.

Please re-read the above sentence on the investors' responsibility to do their homework as it is very important.

Investors are responsible for doing their own homework.  This applies whether they are investing in AAA-rated securities or highly speculative junk.  The combination of having access to all the useful, relevant data in an appropriate, timely manner and doing their homework allows investors to know what they own!

Investors are not required to do their own homework.

The role of the government is to insure that the investors who want to do their own homework, either directly or through a third party, can access all the useful, relevant information in an appropriate, timely manner so the investors can make a fully informed investment decision.

Even with access to all the useful, relevant information in an appropriate, timely manner, the investor who does their homework might still lose money on an investment.

Investors accept this risk because there are no guarantees in investing.

Since they accept this risk, when they have access to all of the useful, relevant information in an appropriate, timely manner, investors do not look to be bailed-out of their losses.

This is very important.  Because they are able to know what they own, investors are willing to accept losses.

When investors do not have access to all the useful, relevant information in an appropriate, timely manner, investors look to be bailed-out of their losses or at least protected from future losses.

This is the important corollary to be willing to accept losses without complaint when there is an ability to know what they own.   There is no reason to believe that investors would not want to be protected from losses if they cannot know what they are being asked to invest in and are being asked to blindly bet on.

This is why investors in senior bank debt are unwilling to accept losses.  Investors do not have access to all the useful, relevant current asset-level information in an appropriate, timely manner.  Without this data, how can they do their homework, evaluate the riskiness of the bank and properly price this risk?