Economics Focus: Full Disclosure

Economics Focus: Full Disclosure - 2/20/2009

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News	News 2009
HEADLINES \| SETTLEMENTS AND DISMISSALS \| COURT FILINGS LINKS TO OTHER NEWS \| NEWS ARCHIVE	HEADLINES ARCHIVED SETTLEMENTS AND DISMISSALS ARCHIVED

HEADLINE NEWS:

Economics Focus: Full Disclosure, The case for transparency in financial markets is not clear-cut.
Staff Writer - The Economist

CFO.com. February 20, 2009
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EXCERPT: "Sunlight is said to be the best of disinfectants," wrote Louis Brandeis, later a Supreme Court justice, in 1913, and almost a century later his words have become a maxim. Yet transparency is amorphous; it can, frustratingly, be anything but transparent and, implemented wrongly, may harm the very interests it is supposed to serve. In financial markets, the word is nearly always equated with information disclosure. The trouble is that the information is often incomplete, irrelevant or outright incomprehensible. Subprime-mortgage-backed securities are a case in point. These instruments-whose value remains shrouded in mystery-can have prospectuses of about 500-600 pages, most of which are devoted to intricate legalese. Yet, inexplicably, they do not contain the information about individual loans that is needed to detect default risk. Nor is transparency free. The Sarbanes-Oxley act, which partly restored confidence after the scandals of Enron, WorldCom and others, came at a cost-not only in terms of the burden of compliance it imposed on companies. In order to shield small firms, those with a stockmarket value of less than $75m were initially exempted. This created a peculiar incentive: at least one study suggests that firms just below the threshold began disbursing unusual amounts of cash to shareholders and making fewer investments. The act has also been accused of stifling risk-taking and increasing directors' pay. …The good news is that transparency can work. When information is relevant, standardised and public, it fosters intelligent decision-making. Lenders, for instance, are required to quote interest rates as annual percentage rates, making loans easy to compare. Some behavioural economists call this "simplified transparency", and think similar requirements should be imposed on complex financial products. Information must also be accurate as the credit-rating debacle shows: an AAA rating is harmful rather than helpful if it describes a CCC asset.

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