With this information monopoly comes the responsibility to both assess this information and to convey to the market the risk of each bank.
Please re-read the previous sentence as it is important to understand that regulators have an obligation not to hide information from but to share information with the market.
Call it the Volcker legacy, but his preference for handling troubled institutions behind closed doors set the precedent for regulators endorsing banks materially misrepresenting their financial condition to market participants.
I understand that the justification for handling troubled institutions behind closed doors was the fear of a bank run, but this fear was never supported by the facts.
Quite simply, so long as depositors and other creditors believed there was a 100% implied guarantee of their exposure by the government, they were never going to stage a run on the bank to withdraw their funds. Factual confirmation of this comes from the savings and loans who operated for years even though they were clearly insolvent.
In the aftermath of the financial crisis, this secrecy about the true condition of the banks has taken on new proportions.
For example, regulators refused to publish in real time exactly how much any bank was borrowing from the central bank under all of the central bank programs. In fact, it took a lawsuit by Mark Pittman and Bloomberg to force disclosure on some of these programs in the US.
Banks took their cues from the regulators and also refused to tell market participants about what they were doing. They did this despite SEC regulations that required the banks to disclose this information.
The elephant that in the room that is finally stirring is the lawsuits caused by intentional misrepresentation by bank management of the bank's financial condition.
The first stirring was by the SEC and its suit against Fannie and Freddie over their sub-prime mortgage disclosure practices.
The next suit is against the management of Dexia, a recently nationalized bank in Europe, that insisted from the time of its 2008 bailout that everything was ok.
As reported on Business Insider,
The ultimate costs to Belgian taxpayers will be huge and long-term, given how small the country is. Yet there have been no legal consequences for those responsible. Until now....
Lynx Capital, a Belgian investment firm, has sued Dexia SA and former CEO Pierre Mariani for "spreading false and misleading information" and “market manipulation.”
The amount in the case is small—and irrelevant. Lynx purchased 5,350 shares on September 5, 2011, for €1.46 per share and lost 82% of its investment over the next few months. But in a potentially significant development for Belgium, where class-action law doesn’t exist, Bernard Delhez, CEO of Lynx, is now trying to encourage other shareholders to join the cause.
The complaint alleges that Mariani and Jean-Luc Dehaene, Dexia’s former president, issued reassuring statements about the financial condition of the bank from the time they took over, following its bailout in 2008, until September 2011.
Because the bank was in a precarious situation throughout and engaged in high-risk activities, the information in those reassuring statements was false and misleading and was intended to artificially inflate Dexia’s share price.
Hence, Dexia and Mariani engaged in market manipulation.
Moreover, Mariani must have known that the information was false and misleading. For example, Mariani confided in Dehaene in 2008 that Dexia was "not a bank but a hedge fund" (L’Expansion). Dehaene spilled the beans on this conversation last October during the presentation of the breakup plan.
Among the others reasons why Mariani must have known about the true condition of Dexia was a note that Luc Coene, Governor of the National Bank of Belgium, had sent to Dexia last August, in which he recommended that Dexia be dismantled.
For Robert Witterwulghe, Lynx’s lawyer, the facts demonstrate that Mariani knew as early as October, 2008, that Dexia was in a precarious situation, and that the reassuring communications since then were willfully false and misleading.
The court action is based on the law of August 2, 2002, concerning insider trading and market manipulation. But: "Why impose a system for everyone when it is not applied in certain cases?" Delhez said (L’Echo), perhaps to justify in part why he is pushing the case though his investment is small and his legal expenses will pile up quickly.
When a bank collapses, the lies behind its financial statements come out of the woodwork—and Dexia is no exception: a report surfaced with the damning results of an earlier investigation by French regulators. And what happened then? Nothing.... Regulators Knew of Dexia's Problems But Were Silenced.