Regular readers know that your humble blogger has been calling for banks to provide on-going disclosure of their asset, liability and off-balance sheet exposure details.
It is nice to see Dallas Fed President Richard Fisher joining in the call for 'ultra-transparency'.
He realizes that without this data, market participants cannot assess the risk of each bank.
JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), among the world’s biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally.
Just don’t ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS.
As concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default. Firms including Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains in such a scenario, giving only net numbers or excluding some derivatives altogether.
Please re-read Mr. Lindsey's comments.
“If you don’t have to, generally people don’t see the advantage to doing it,” said Richard Lindsey, a former director of market regulation at the U.S. Securities and Exchange Commission who worked at Bear Stearns Cos. from 1999 through 2006. “On the other hand, if there were a run on Goldman Sachs tomorrow because the rumor was that they had exposure to Greece, you’d see them produce those numbers.”
First, he says that Wall Street thinks that it makes money from opacity -- otherwise, they would disclose the information.
Second, he says that even Goldman knows that the way to restore investor confidence is by disclosing the detailed exposure data.
A case in point: Jefferies Group Inc. (JEF), the New York-based securities firm, disclosed every long and short position it held on European debt earlier this month after its shares plunged more than 20 percent. ...
By contrast, ... JPMorgan said in its third-quarter SEC filing that more than 98 percent of the credit-default swaps the New York-based bank has written on GIIPS debt is balanced by CDS contracts purchased on the same bonds. The bank said its net exposure was no more than $1.5 billion, with a portion coming from debt and equity securities. The company didn’t disclose gross numbers or how much of the $1.5 billion came from swaps, leaving investors wondering whether the notional value of CDS sold could be as high as $150 billion or as low as zero.
“Their position is you don’t need to know the risks, which is why they’re giving you net numbers,” said Nomi Prins, a managing director at New York-based Goldman Sachs until she left in 2002 to become a writer. “Net is only as good as the counterparties on each side of the net -- that’s why it’s misleading in a fluid, dynamic market.”
Investors should want to know how much defaulted debt the banks could be forced to repay because of credit derivatives and how much they’d be in line to receive from other counterparties, Prins said. In addition, they should seek to find out who those counterparties are, she said....In short, investors should want current detailed disclosure.
Banks exchange collateral, usually cash or liquid securities such as U.S. government debt, with trading partners as the value of their credit-default swaps fluctuates and their perception of one another’s ability to repay changes.
If the value of Italian bonds drops, as it did last week, a U.S. firm that sold a credit-default swap on that debt to a French bank would have to provide more collateral. The same U.S. company might be collecting collateral from a British bank because it bought a swap from that firm.
As long as all three banks can make good on their promises, the trade doesn’t have much risk. It could all unravel if the British firm runs into trouble because it’s waiting for a payment from an Italian company that defaults. The collapse of Lehman Brothers Holdings Inc. in 2008 demonstrated some of the ripple effects that one failure can have in the market.
“We learned from Lehman that all of these firms are tied together with bungee cords -- you can’t just lift one out without it affecting everyone else in the group,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York who previously worked at Lehman Brothers and Morgan Stanley. More disclosure “may push the stock prices down when it becomes clear how big the bungee cords are. But it certainly would be a welcome addition for an analyst.”...Current detailed disclosure would let all market participants assess the risk of each bank and adjust both the amount and price of their exposure based on the results of the analysis.
The Financial Accounting Standards Board in 2008 started requiring companies to disclose the worldwide gross notional credit protection they’ve written and bought ... Neither FASB nor the SEC requires banks to disclose how many of those derivatives are written by country or region. That’s something Richard Fisher, president of the Federal Reserve Bank of Dallas, would like to see changed.
“We should have ultra-transparency on those institutions,” Fisher said of the biggest financial firms in a Nov. 14 interview at Bloomberg headquarters in New York. “They should report both their gross and their net CDS exposure, and they should do it country-by-country. After all, they need to inform their shareholders.”
Banks are reluctant to provide the figures in part because doing so would reveal too much information about their positions and operations, said Jon Fisher, a portfolio manager at Fifth Third Asset Management in Minneapolis, which manages more than $16 billion....Revealing information about each bank's positions and operations is a feature and not a bug of ultra-transparency.
“I think the biggest fear is the numbers are so large that even though they offset, it would maybe shock people,” said Ralph Cole, a senior vice president in research at Ferguson Wellman Inc. in Portland, Oregon, which manages $2.8 billion including JPMorgan stock.
“Maybe they don’t think that disclosure will be treated fairly or understood well.”Wall Street's Opacity Protection Team has frequently argued that market participants will not be able to understand the data and as a result the disclosure will not be treated fairly.
Still, “they need to give us a good reason why we shouldn’t see that,” he said. “More disclosure is better, and you can see that in their valuations right now.”...
This happens to be insulting to JP Morgan if the disclosing party is Goldman Sachs or to Goldman Sachs if the disclosing party is JP Morgan. Both of these firms should easily be able to understand all the data disclosed under ultra-transparency by their competitors.
If these firms cannot understand a competitor's data, it is a sure sign that the firm releasing the data must be shrunk. The inability to analyze disclosure data acts as a diagnostic tool and identifies firms that are simply too complex.
Lloyd C. Blankfein, 57, Goldman Sachs’s chairman and chief executive officer, said in an interview with the Financial Crisis Inquiry Commission staff last year that the amount of the firm’s derivatives trades shouldn’t be a cause for alarm.Because it is all systems and technology, it is easy to provide ultra-transparency. What it involves is the creation of the Mother of All Financial Databases.
“We either have netting agreements, or they foot, or they cancel each other out, or they’re longs and shorts on the same instrument,” he said, answering a question about how the firm manages so many contracts in a crisis. “The only way you can run a business like that is to have these systems work so they can aggregate stuff, so you can run the business on a macro basis, and also so you can get the details quickly if you need them. And that’s all systems and technology.”
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