There's no market in the way we think of it. If you can't determine value, are afraid to price discover through offer, about all you can do is pour in cash like BSC did.
From an Italian bank meltdown (Italease) not reported in the US:
"These derivatives were very complex and suddenly turned against us," said Pierantonio Arrighi, the bank's spokesman.
"They started moving in a non-linear way, so the losses were rising exponentially. We were afraid that in the worst case some of our clients would not be able to pay the contracts, so we stepped in to protect them, which means we took over the risk."
Note too: this is a step FURTHER BEYOND where we are in our meltdown the way I read it - this is a loss of confidence in IR hedging swap performance to protect the underlying portfolio of sht bonds. I may be wrong on this.
From Bloomberg this AM:
"Price transparency came to the corporate bond market in 2002, when the U.S. Securities and Exchange Commission instructed the NASD to require securities firms to report every trade over a computer network called Trace.
If trades of asset-backed securities were reported on a similar system, more investors could have avoided losses, said Lawrence White, professor of economics at New York University's Stern School of Business.
``With transparency, changes in value, which will be reflected in changes in the price, will let people know sooner that their value has changed,'' White said. Holders will ``get taken by surprise less and less often and to a lesser extent.''
Wall Street Benefits
Wall Street has benefited from keeping the so-called structured finance market opaque. Securities firms collected $27.4 billion in revenue from underwriting and trading asset- backed securities last year alone, according to Kian Abouhossein, an analyst at JPMorgan Chase & Co. in London.
Investors struggle when they need to set values for subprime and lower-rated debt because the bonds trade infrequently, said Dan Shiffman, vice president at American Century Investment Management in Mountain View, California.
``If it's a bond that requires a lot of credit work and if that bond hasn't traded for some time, it's very difficult to assess,'' Shiffman said. American Century manages $5 billion in mortgage-backed and asset-backed bonds.
Increased Confidence
Reporting trades of asset-backed securities on a system similar to Trace may attract more investors, said Joseph Fichera, chief executive officer of New York-based Saber Partners LLC, which has advised governments and utilities on $8 billion of securitizations over the past five years.
``It would increase confidence and help the market grow if it became more transparent because we would expand the number of buyers and sellers,'' Fichera said. ``There would also be less fear of a major repricing, a traumatizing event.''
The SEC started tackling the lack of price transparency in the corporate bond market in 1992 because of concern that traders were using inside information to manipulate prices of high-yield, high-risk bonds. Former SEC Chairman Richard Breeden's probe into junk-bond trading led to the creation of the Fixed Income Pricing Service.
Arthur Levitt, who succeeded Breeden, wanted a database to collect the prices of trades on all registered corporate bonds after a 1998 review of the debt markets. The SEC concluded that transparency wasn't an issue for asset-backed securities and didn't include them in the Trace system. Levitt is a director of Bloomberg LP, the parent of Bloomberg News.
Trace Objections
Investment banks objected to Trace. The Bond Market Association, the trade group representing fixed-income underwriters and dealers, said traders wouldn't be compensated for buying risky bonds because investors adjust their bids and offers after prices are disseminated.
Bonds rated below Baa3 by Moody's and BBB- by S&P and Fitch are considered below investment grade.
Securities firms missed an opportunity to make the asset- backed market more transparent in 2004, when the NASD proposed changing the definition of securities that would be listed on Trace. The BMA sent a letter to the NASD expressing concerns that the language could include asset-backed bonds and other structured finance products.
The NASD said asset-backed bonds wouldn't be on Trace. The BMA merged last year to create the Securities Industry and Financial Markets Association, the leading lobbyist of Wall Street firms.
Traders in subprime and low-rated asset-backed securities may resist any move to shine a light on the trades because they benefit from having their moves kept under wraps, said American Century's Shiffman. ``They might get better execution rather than having the bonds flagged all over the market,'' he said. "
http://www.bloomberg.com/apps/news?pid=20601103&sid=aEesd87v7m8U&refer=us
