Thursday, January 27, 2011

Jamie Dimon, Gary Cohen, Peter Sands Need and Want Current Asset-Level Data

The leaders of some of the largest financial institutions in the world have spoken at Davos.
  • They have expressed their concerns about the blizzard of regulations that have been or are being created as a result of the financial crisis.  
  • They have requested regulation that will minimize contagion (where the failure of one large financial institution brings about the failure of several other large financial institutions).
The Telegraph reported that Peter Sands, the chief executive of Standard Charter observed about regulation: [emphasis added]
... [T]hat much of the new regulation could "stifle growth" and was contradicting governments' fiscal and monetary policies that are attempting to support countries coming out of the recession.
He said that new regulation was important but there was a major risk of over-engineering the solution.
... One bank chief executive said regulation risked killing competition and innovation in the sector. Another leading finance sector figure said no “single human being” could understand all the different regulations around the world and that regulatory arbitrage was an increasing risk.
A third banking leader said the West was in danger of “regulating growth out of existence”. Pointedly, Mr Sands said that China understood the need for well-run and regulated banks to support economic growth.
...On regulation, Mr Sands said: “A lot of it has been irrelevant, much wildly complicated, some harmful.”
He added that increased costs of capital could “stifle growth”.
Companies would find it harder to access capital, he argued.
... Mr Sands said that banks had been singled out when there were other significant players in the financial crisis.
“A flawed diagnosis drives flawed conclusions,” he said.
On the break-up of the universal banking model, being considered by the Independent Commission on Banking (ICB), he said that in a technology age it was impossible to have “frozen boundaries” around banking structures.
 The Financial Times reported that Gary Cohen, president of Goldman Sachs, observed about regulation: [emphasis added]
[T]hat the drive to impose more regulation on banks could cause the next crisis by pushing risky activities towards hedge funds and other lightly supervised entities.
At the annual meeting of the World Economic Forum in Davos, Mr Cohn, Goldman’s president, criticised regulators’ focus on traditional institutions and urged them to look at the effects of new rules on the whole financial system.
“In the next few years, the unregulated sector will grow at an exponential rate,” he said. “Risk is risk. My concern is that ... risk will move from the regulated, more transparent banking sector to a less regulated, more opaque sector.”
People close to the situation said Goldman executives were concerned about the build-up of risk not just among hedge funds but also entities such as the clearing houses set to take over some of the derivatives’ business from banks.
The New York Times reported that Jamie Dimon, the chief executive of JPMorgan Chase, observed: [emphasis added]
[T]hat he was sick of “this constant refrain — bankers, bankers, bankers.”
“We try to do the best we can every day,” Mr. Dimon said at the World Economic Forum.
But Mr. Dimon broke with some others in the banking industry when he called for rules to make it easier to dissolve sick banks. Mr. Dimon invented an acronym: M.D.B.B.D.B. That stands for “minimally damaging bankruptcy for big dumb banks.”
The big unfinished job in bank regulation is to develop procedures to prevent big, interconnected banks from sowing distress throughout the financial system. But some in the industry have expressed opposition to rules that would identify systemically important banks and subject them to even tougher rules.
“It’s a little bit complicated, but it can be done,” Mr. Dimon said of winding down a failed institution.
Mr. Dimon insisted that he was not against banking regulation, just irrational regulation. He also said it was unfair to criticize banks for trying to block new rules they did not like.
“To say we’re supposed to bend down and take it, that’s wrong,” Mr. Dimon said.
Finally, the Financial Times article quoted Peter Sands: [emphasis added]
... “It is not clear why some regulators who were there before the crisis should believe they now have all the right solutions,” he said in Davos. “The current regulatory debate is a bit like discussing having better seat belts on planes. It’s hard to argue against, but when the plane crashes, it’s all a bit marginal ... the real focus of regulation should be on making the air traffic control system safe.”
The bottom line to all of these comments is that all of the regulatory efforts since the beginning of the credit crisis do not address what these bankers know to be the real problem that caused the recent financial crisis and, if not addressed, the real problem that will cause the next financial crisis.

The problem that caused the financial crisis was opacity.

First, there was opacity in the structured finance securities that made these securities impossible to value. Second, there was opacity in the current assets on financial institutions balance sheets.  This made it impossible to tell which financial institutions were solvent and which were not.

What Jamie Dimon, Gary Cohen and Peter Sands want is to have visibility so they and their organizations can see and get out of the way of big dumb banks and other lightly supervised entities before these banks and entities fail.

As readers of this blog [and Jamie Dimon, Peter Sands and Gary Cohen] know, this can be achieved with a simple regulation that requires all financial institutions and structured finance securities disclose useful, relevant information in an appropriate, timely manner.  For financial institutions and structured finance securities this information would be current asset-level data for all assets on the balance sheet on an observable event basis through an independent third party.

This simple regulation ends opacity.

This simple regulation brings about the 21st century regulatory structure that President Obama asked for.

This simple regulation modernizes the financial system created in 1933 and embodied in the FDR Framework describing the appropriate involvement of governments in financial markets.

With this disclosure, all market participants can perform their own analysis and valuation of the financial institutions and structured finance securities.  With this disclosure, all lenders and investors can know what they own.  With this disclosure, credit and equity market analysts and rating services can exert market discipline by linking the value of a bank's securities to its risk.  With this disclosure, regulators can piggyback off of market participants in identifying risks that need to be addressed across the global financial system.

Your humble blogger is thrilled to have the support of Jamie Dimon, Peter Sands and Gary Cohen.  Without talking to your humble blogger first, they have carried your humble blogger's message to Davos this year on the need for regulation that will end opacity in the global financial system.

Your humble blogger is expecting an invitation to Davos next year as a featured speaker.

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