Tuesday, September 13, 2011

BNP Paribas Chairman Michel Pebereau reaches time for 'utter transparency'

In a great irony, BNP Paribas which fired the Guns of August on August 9, 2007 and signaled the beginning of the financial crisis when it announced that it could no longer value sub-prime structured finance securities now finds the market is unable to value BNP Paribas.

The WSJ ran an article by Nicolas Lecaussin citing an anonymous executive on the condition of BNP Paribas.  Naturally, BNP Paribas issued a statement claiming the executive was wrong.

Why should market participants believe BNP Paribas?  If 'utter transparency', disclosing its current asset and liability-level data would show that it is right, it ought to disclose this information.

The failure to provide 'utter transparency' and disclose its current asset and liability-level data is a public admission BNP Paribas has something to hide and its anonymous executive is right.

If BNP Paribas would like help with the mechanics of offer 'utter transparency', your humber blogger is ready to assist them.
"We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore," a bank executive for BNP Paribas, who declines to be named, told me last week. "Since we don't have access to dollars anymore, we're creating a market in euros. This is a first. . . . we hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore." 
He's not the only one worried. Société Générale has lost 22.5% of its value since the beginning of the summer. In early September, BNP released a statement—in English, which is highly unusual—explaining that it has abundant dollar liquidity and that BNP has nothing to worry about, unlike other banks. France's three biggest banks have been the subject of whisper campaigns about their solvency throughout the summer. 
On the surface at least, the concerns are hardly groundless. BNP, Société Générale and Crédit Agricole together hold nearly $57 billion in Greek sovereign and private debt, versus $34 billion held by the largest German banks and $14 billion at British banks. And then there is Spain and Italy. French banks held more than €140 billion in total Spanish debt and almost €400 billion in Italian debt as of December, according to the latest figures from the Bank for International Settlements. If either of these governments were to default on their debts, their banking systems could collapse and take the French system along with them. BNP, Société Générale and Credit Agricole all say that their finances are in order and the market worries are unfounded. 
But it's difficult for the BNP executive to hide his concern. "Look at the French banks' debt holdings versus those of U.S. banks," he continues. "The total debt of the three big U.S. banks (Bank of America, JP Morgan and Citigroup) is $5.86 trillion, or 39% of GDP, while the debts of BNP, Crédit Agricole and Société Générale come to €4.7 trillion, or 250% of French GDP."... 
Whether the market's worst fears are realized or not, French banks certainly maintain an all too close relationship to the state. This opaque system doesn't offer outsiders much visibility, save for the knowledge that indebted banks and an indebted French state intend to continue to cover each other, no matter the cost and on taxpayers' backs if they must.  If U.S. money-market managers no longer trust the French system, this is a glaring reason why. The fastest way to regain their trust would be to end this system.
This is true of the relationship between the banks, governments and regulators in the US, UK and the rest of Europe too (See the Nyberg Report on Irish Financial Crisis for confirmation of this fact).

The way to end this system would be to provide utter transparency as recommended under the FDR Framework.

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