I’m not so sure that all this disclosure is really going to be beneficial. The problem with CDS is that right now, there is no market for these things. And as Yves has indicated, even the BIS’s best attempts to value the market in the aggregate are guesstimates. As the saying goes, garbage in, garbage out. While I’m glad the FASB is requiring this information, I don’t know if firms really have this type of information. Thus, they’ll merely provide guesstimates of their own (which unsurprisingly will be favorable to their own balance sheets). Heck, most firms can’t even give a proper accounting of their mortgate-backed securities, and those are supposed to have iron-clad paper trails from the day the homeowner signs on the dotted line through all the slicings and dicings they undergo on Wall St.

The real reform in this area isn’t to force more disclosure (not that I’m against that), but to push all these transactions onto a regulated exchange, with standardized terms, and designated market makers.

There have been widespread claims that credit derivatives like credit default swaps (CDS) have lowered the cost of debt financing to firms by creating new hedging opportunities and information for investors. However, these instruments also give banks an opaque means through which to sever links to their borrowers, reducing lender incentives to screen and monitor. In this paper, we evaluate the impact that the onset of CDS trading has on the spreads that underlying firms pay at issue in order to raise funding in the corporate bond and syndicated loan markets. Employing matched-sample methods, we fail to find any evidence that the onset of CDS trading affects the cost of debt financing for the average borrower. However, we do uncover economically significant adverse effects on risky and informationally-opaque firms. It appears that the onset of CDS trading reduces the usefulness of the lead bank’s retained share in resolving any asymmetric information problems that exist between a lead bank and non-lead participants in a loan syndicate.

– It’s past time for Congress to revisit CFMA, which removed OTC derivatives from the purview of the CFTC (and SEC).