Transparency in structured finance has gone mainstream media.
In today's NY Times article, Pools That Need Some Sun, Gretchen Morgenson discusses a newly filed lawsuit by the Federal Home Loan Bank of San Francisco against several Wall Street firms that sold structured finance securities to the bank.
The allegations were summed up by the plaintiff's attorney quite succinctly. Referring to the quality of disclosure as to the securities sold, David Grais said, "Did they or did they not correspond with the real world at the time of the sale of these securities? That is the question."
Morgenson then reaches the first of two very important conclusions:
[T]he accusations illustrate a significant unsolved problem with securitization: a lack of transparency regarding the loans that are bundled into mortgage securities. Until sunlight shines on these loan pools, the securitization market, a hugely important financing mechanism that augments bank lending, will remain frozen and unworkable.
Score one for mainstream media.
The solution? The article continues:
It goes without saying that after swallowing billions in losses in such securities, investors no longer trust what sellers say is inside them. Investors need detailed information about these loans, and that data needs to be publicly available and updated regularly.
Score two for mainstream media.
Why hasn't the solution been implemented? Morgenson writes:
“The goose that lays the golden eggs for Wall Street is in the information gaps created by financial innovation,” said Richard Field, managing director at TYI, which develops transparency, trading and risk management information systems. “Naturally, Wall Street opposes closing these gaps.”
But the elimination of such information gaps is necessary, Mr. Field said, if investors are to return to the securitization market and if global regulators can be expected to prevent future crises.
Mr. Field is no stranger to the articles I've written about transparency and securitization. Indeed, up to now, he has been known mostly in the narrow confines of regulatory circles here and abroad as an expert in the area and within the securitization industry, where for the reason stated above, his solution has been considered the one that will kill the golden goose.
Is that a good enough reason for Wall Street to continue to oppose a needed and necessary financial reform, one that will help end the credit crisis and alleviate the enduring human misery this crisis has produced?
Morgenson has laid bare the real truth about the credit crisis in a way that few journalists have been able to understand and explain in the more than two years since the crisis began. It is up to mainstream media now to pick up the themes and develop them to their logical conclusions and for MSM to discharge its duty as the fourth estate and inform the public as financial reform winds its way through Congress.
By acknowledging that the Bank of England is moving well past the more limited approach of the American Securitization Forum (ASF) on the issue of transparency and stating that its purpose is to protect the BoE as it accepts structured finance securities in "providing liquidity to the banking system," Morgenson indirectly takes aim at the Federal Reserve and essentially asks what the Fed is doing to protect U.S. taxpayers.
Of course, the real reform may well occur overseas first. While that would be somewhat of an embarrassment for the regulatory and legislative apparatus in the United States, the Europeans and U.K. appear more able to withstand financial services lobbying pressures. Those who are interested in this topic would do well to keep a close watch on developments across the pond.
Disclosure: No positions in companies mentioned