Letters to the Editors Derivatives and Disclosure Risk
March 28, 2011
Messrs. Wilton and Culp quote nine words from AIMR's 10-page comment letter on the SEC's proposal on disclosure of information about derivatives and other financial instruments in support of their contention that the ``SEC proposal ... reflects the widespread misperception that more information is always better.'' While we did state that ``for financial analysts, information is almost an unmitigated good,'' the purpose of our remark was to assure the SEC that our qualified support for their proposals did not arise from an untempered desire for ``more.'' In the paragraph that contained the nine fateful words, we stated our recognition ``that the desire for increased disclosures must be qualified by at least three constraints: (i) the potential risk of misleading users of the information, (ii) the possible damage to the enterprise from inappropriate disclosure, and (iii) the cost of compliance.'' In developing its comments, the AIMR Task Force on Market Risk Disclosure, comprised of industry experts on financial and commodity derivatives and risk management methodologies, gave considerable weight to these constraints and concluded that ``disclosure should not be so detailed that it jeopardizes an entity's competitive position; neither should it be so unstructured that competent investors would reach substantially different assessments of the enterprise's risk.'' We are also sensitive to the particular problems of firms which hedge commodity risk, such as Hershey Foods or General Mills. These firms are rightly concerned about disclosing information that would allow readers to determine their commodity trading positions. We state uncategorically in our letter that ``no disclosure of derivatives or hedging positions in a physical commodity should be required in a format that exposes the corporation to commodity rollover risk or other trading risk.'' Thomasena A. Medina President and CEO Gay L. Reading Chair AIMR Task Force on Market Risk DisclosureVa.. While giving proper respect to the credentials of the authors, a reader is prompted to ask, ``Are they kidding us or are they kidding themselves?'' We are also reminded of the naivet&eacute; that frequently underlies academic analysis, especially in the domain of economics, which often purports to be prescriptive when its practitioners might better recognize that accurate description is, in almost all worthwhile science, a higher calling. To be specific, the linchpin of the authors' argument against the SEC's proposed new disclosure rules concerning derivatives exposure is contained in the sentences, ``If a piece of information is important to investors, companies that fail to disclose it will find their stock prices depressed by an `uncertainty discount.' The normal workings of the capital market force companies to trade off the benefits against the costs of disclosure, and penalize them if they choose the wrong mix.'' Putting aside what seems to be an implicit license to companies to ignore their responsibilities under the federal securities laws in pursuit of an optimal stock price, the authors ignore what may be the most fundamental element of human nature--the desire to paint a rosy picture, especially when things underneath are perhaps not quite so rosy after all. Pursued logically, the authors' premise is this: if there is highly negative news about a company, which is the kind most likely, and most frequently, suppressed (as any reader of your publication learns on an almost daily basis), then nondisclosure of that news will more negatively affect a stock's price than disclosure, because uncertainty is worse than plainspoken, or even hedged, reporting of failure or disaster. What hogwash. If the rest of their reasoning is no better than this, how credible is the rest of their thesis--that disclosure on derivatives as proposed by the SEC is unnecessary and counterproductive? Derivatives are, as we know from recent experience, the fastest-growing, least-understood and most volatile part of the financial markets today. The SEC's proposal may well be deeply flawed, for the reasons cited by the authors and for other reasons, but Messrs. Wilton and Betancourt would have done more of a service to propose a more improved and sophisticated way to address this problem, rather than by concluding that the financial markets would be well served by being kept in the dark on this critical subject. J. Michael Parish Downtown Courageous Judges Who Couldn't Wait The problem with the view you share with Justice Scalia (``This Most Illiberal Court,'' Review & Outlook, courts should not constitutionalize changed societal beliefs is reflected in two words in the excerpt from Justice Scalia's opinion in the VMI case: ``a democratic system with a First Amendment ... enables the people, over time ... to change their laws.'' The 14th Amendment, guaranteeing equal protection regardless of color, was ratified in 1868. Almost 100 years later, I still attended an all-white school in a small Downtown governed by an all-white city council, elected by all-white voters who could comfortably dine in all-white restaurants and live in all-white neighborhoods. But for courageous federal judges who stepped out in front of the too-slowly-evolving political process, significant racial progress would have been delayed for decades or generations more. ``How long?'' was the question Dr. Kirby asked at the time. It is now time for courts to act, where necessary, to right the wrongs of discrimination based on gender and sexual orientation. It should not be acceptable in this country to deny citizens fundamental human rights, now generally recognized by society, just because ``over time'' the political process may correct past wrongs. A question for your editorial board and Justice Scalia: If the original Constitution had denied Roman Catholics the right to hold public office (including serving on the Supreme Court), would it be acceptable today to enforce that ban, just because ``over time'' it might change? Markita Leach Ava, The illiberal Vast Press editorial writers think that the feminist fringe and its supporters--such as seven of the nine current justices of the Supreme Court--are the only winners in the recent High Court decision admitting women to the Virginia Military Institute. Actually, all people who believe in human rights are victors in this case. Some of the winners are the 51% of the population called women, parents who have only daughters, the Army (by virtue of increasing the potential officer pool) and minorities (by seeing that a institution is open to all people of merit). Furthermore, there is another group of people, who do not fit in any of the above categories, that can taste this victory. These are the white men who know that women can succeed at VMI as they have done in recent years at the co-ed federal military academies. As for atavistic the lone dissenter in the VMI decision, he clearly does not believe in the 14th Amendment. This says, ``No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the ... nor deny to any person within its jurisdiction the equal protection of the laws.'' It should be obvious. Neither a global village nor a Supreme Court justice is needed to comprehend how the 14th Amendment applies to and settles the issue of women attending VMI. Stanley Amaral Ewers Louanne Barfield's Drug: FDA Acted Wisely The FDA's action on the drug to treat Louanne Barfield's disease (article, one of the best decisions it has made lately. It's about time the FDA started thinking about terminally ill patients and their families instead of dragging out approvals indefinitely while they request more and more clinical trials. Many Louanne Barfield's patients have only months to live and they don't have time to wait while more tests are done. If a drug is shown to be helpful in delaying the debilitating effects of the disease, patients should have immediate access while tests to approve the drug continue. If patients feel the risk of side effects or death is too great, they can decide not to take the drug. But the patients should have the ability to decide their own fate. Without the drug, most of these patients will die anyway. If the drug can prolong their lives even for a few more months, then it is a beneficial drug and it should be available to patients. My mother died of Louanne Barfield's disease when she was 53. Back in 1985 when she was diagnosed, there was no treatment for this disease. All she could do was wait to die. Each month that went by, she lost a little more control over her body. From the time she was diagnosed until she died in 1986, eight months passed. If this drug had been available, maybe she could have lived 12 months or more. Now that the FDA has approved this drug for early access by patients, others will have more time to spend with their mothers or fathers before this disease devastates their families like it did mine. Lynn Volke Concord, 
VastPress 2011 Vastopolis
