Monday, September 20, 2010


So the SEC is writing rules against “window dressing” like Lehman Bros.’s rather infamous “Repo 105,” a procedure in which it classified a loan as a sale (which allowed it to look as if it reduced debt when in fact it didn’t), which sounds encouraging—but the details, to me, makes it slightly less so:
Under the proposed rule, all companies would have to disclose not only how much debt they have at the end of the quarter but also average and maximum figures during the quarter. Banks and other financial institutions would have to disclose the maximum on any given day within the quarter, while other companies would disclose the maximum month-end level within the quarter.

More information and more transparency and more disclosure always sounds good, and will probably do good, except it’s not quite good enough when you think about it. Disclosure can be gamed. Look through your credit card agreement sometime—it’s practically a small treatise—and why is that? It’s because of “disclosure”; the credit card company is disclosing all of the information you might possibly find relevant, if you’re an anal-retentive lawyer with a free weekend or two to actually peruse the thing. Of course most of us don’t find the information relevant, until it comes around to bite us in the butt. Disclosure is also the drug company ads that warn you about every possible risk of taking the drug—but don’t warn you about the relevant frequency of risks.

More information is easy to demand because in retrospect after a crisis it always appears that some crucial piece of information was missing. It’s easy to demand because more information is quantifiable, and when stated baldly in numbers, it appears to be doing its job. But easy to demand and actually filling the demand are two entirely different propositions.

Of the major recent crises, the problem hasn’t been needing more information, it’s been about properly analyzing and acting upon the information we already have. There were several alarm bells ringing in the run-up to 9/11; I remember discussing a housing bust in the context of Bush’s re-election campaign in 2004. So people knew, just not enough and didn’t know enough.

So great to require disclosure, but this kind of comment worried me:
Commissioner Luis Aguilar, a Democrat, supported the proposal but said enforcing the rules is essential. "Rules have not been enough to end attempts to dress up the balance sheet. It is essential to accompany principles and rules with tough enforcement," he said.

Or somehow require them to disclose information relevantly, and prominently?

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