Sunday, November 6, 2011

WSJ's David Reilly confirms need for full detailed disclosure

In a Wall Street Journal Heard on the Street column, David Reilly discussed the need for full detailed disclosure by not only Jefferies, but the big 5 US banks too.

Regular readers know that the full detailed disclosure called for by your humber blogger is needed for market participants to assess the risk of a financial institution.  It is only when market participants can independently assess the risk of a financial institution that confidence is restored.

Mr. Reilly makes several important points including:
  • There is no halfway point in disclosure between what banks are currently offering and the full disclosure that market participants want;
  • Banks are reluctant to provide full disclosure; and
  • Market participants have finally begun to assert themselves and simply say give us the data or we will subject you to a 'run on the bank'.
Is any amount of disclosure enough when it comes to a financial firm's exposure to Europe?...

What Jefferies should have reported is its detailed long and short positions.

These details for the assets include, but are not limited to:  What it bought - they covered this with the CUSIP release;  How much it bought; and  When it bought it.

These details for the hedges include, but are not limited to:  who and how much exposure to is the counter-party.

It is only with this level of detailed disclosure that market participants can truly assess Jefferies' risk.
Late last week, Jefferies saw its stock fall 20% in about an hour due to worries about European sovereign debt. The shares rebounded after the investment bank gave more details about its exposures, then seesawed again the following day.
The shares rebounded after Jefferies issued a statement indicating that it was going to fully disclose its exposure to Eurozone sovereign debt.  Market participants thought they were going to receive much more data than was disclosed after the close of business Friday.
This ... was also emblematic of a bigger issue for banks: how far to go in disclosing European risks and whether investors will believe even very detailed numbers put out there....
Market participants will believe very detailed numbers if banks fully disclose everything.  What causes mistrust is when disclosure is intentionally incomplete.

How exactly are investors suppose to analyze the counter-parties that Jefferies is hedging its sovereign debt exposure with if the counter-parties and the terms of the hedges are not identified?
Of particular note for bigger banks—namely J.P. MorganBank of AmericaCitigroupGoldman Sachs and Morgan Stanley—was the positive market reaction to a Jefferies statement Thursday that it wasn't using credit-default swaps to hedge its European exposure. 
This underscores that investor faith in hedges is being tested. So they are questioning the way in which banks transform large gross exposures into far smaller net ones. 
This is partly because investors are worried about who is on the other side of those hedges, or counterparty risk. It is also because investors are questioning the efficacy of sovereign CDS given that Greece's 50% write-down plan may not trigger a payout on the contracts.
This is even more reason that Jefferies needed to make full disclosure regarding its hedges.
As long as the doubts persist, ...
A possible antidote is better disclosure about counterparty concentrations. 
Big banks aren't likely to do this on their own for fear peers won't follow suit. 
Regular readers will recall that your humble blogger has suggested to Barclay's Bob Diamond, Citigroup's Vikram Pandit, Bank of America's Brian Moynihan, and JP Morgan's Jamie Dimon that they should show some leadership and provide better disclosure.

I specifically challenged them to provide utter transparency.  Utter transparency is disclosure of the details of their current asset, liability and off-balance sheet exposures.
So it's time the Securities and Exchange Commission stepped in, calling for disclosures on counterparty concentrations and standardized information about country risks.
Actually, the Fed would be more effective at calling for disclosure because the Fed could make it a requirement to be a primary dealer.
The big five banks mostly gave extra disclosure on their European exposures in third-quarter earnings. But each took a differing approach. The firms, aside from Goldman, did show how much CDS they had purchased against exposures to Piigs countries—about $20 billion in total. Lacking, though, was any detail about counterparties, other than vague assurances like it was purchased from "predominantly investment-grade global banks." Without more information, the protection is suspect. 
Granted, banks would likely balk at providing detail on even high-level counterparty exposure. For one, they may fear this additional information could highlight how much risk rests in a small group of about a dozen or so big, global banks. And they will be quick to point out that the additional information they've so far provided has hardly helped reassure investors. 
Like the additional disclosure provided by Jefferies, there has been more data, but it has been singularly lacking in useful informational content.
But in this case, ... Better for big banks and the SEC to get ahead of the issue. Otherwise, like Jefferies, they risk being strip-searched at gunpoint by markets.
Which is the only way that Wall Street's Opacity Protection Team will let market participants have access to all the useful, relevant information in an appropriate, timely manner.

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