Reply #45: Sometimes "lack of transparency" means "I don't understand" [View All]

[HamdenRice]

First of all, while I have said repeatedly and firmly that you are wrong and are posting false information, thereby misleading readers about the nature of the problem, I'm sure you will recognize the difference in tone between our posts, and recognize that although I have pointed out that you are wrong, I have not used any insults toward you nor called you a shill, etc.

You still have not explained what financial information, in addition to the information in the SEC documents I've given you links for, you think these entities need to disclose.

No matter, I will continue to respond in this thread, because other people are reading this and becoming more informed, and hopefully not being misled by your rhetoric.

So why are mbs considered opaque, when each series must file so much detailed information with the SEC that is available to the public and purchasers of mbs with the click of a mouse?

Why are they opaque despite massive disclosure?

The following paragraphs taken from an mbs prospectus filed with the SEC describe the "cash waterfall" in a complex mbs; the "cash waterfall" is the system by which available money is paid first to the senior certificates, then to the next certificates, and so on, down to the most junior or subordinated certificates:

http://www.secinfo.com/d1zj61.ue8.htm#41ww

For each distribution date on or after the Stepdown Date, so long as a
Trigger Event is not in effect, from the Principal Distribution Amount
for such distribution date:

1. To the Class I-A-1 Certificates and the Class I-A-2 Certificates, on a pro rata basis in accordance with their respective Certificate Principal Balances, an amount equal to the Class I-A Principal
Distribution Amount until the Certificate Principal Balances of each
such class thereof are reduced to zero;

2. To the Class I-M-1 Certificates, from any remaining Principal Distribution Amount, the Class I-M-1 Principal Distribution Amount, until the Certificate Principal Balance thereof is reduced to zero;

3. To the Class I-M-2 Certificates, from any remaining Principal Distribution Amount, the Class I-M-2 Principal Distribution Amount, until the Certificate Principal Balance thereof is reduced to zero;

4. To the Class I-B-1 Certificates, from any remaining Principal Distribution Amount, the Class I-B-1 Principal Distribution Amount, until the Certificate Principal Balance thereof is reduced to zero;

<end quote>

It goes on and on from there.

In other words, all the information about the underlying mortgages has been disclosed; the system of payments is disclosed; the superordination/subordination is disclosed; etc.

But it's a complex, specialized field and most people would read this and not understand. It makes perfect sense to me because I used to draft this stuff. Other's would say it's not transparent; what they mean is they don't understand it.

An analogy would be if your doctor diagnosed you with a complex illness and tried to explain it in scientific medical terminology. He could be perfectly forthcoming, but most lay patients wouldn't understand.

The SEC and the securities industry has been discussing this for decades -- how to make disclosure comprehensible to investors. The problem is that securities are complex and require complex language to explain them. Every attempt at "plain language" disclosure has inevitably ended up creating language just as complicated. If you try to disclose in simple language, then you end up not disclosing what's happening and you get sued eventually for non-disclosure.

The other reason it doesn't appear to be transparent is that to understand how these securities perform, one needs both data and the economic models that show what will happen to them under various economic scenarios. They try to describe this also in the disclosure documents, but to fully describe this, they would have to distribute basically a computer program.