Thursday, April 5, 2012

Jamie Dimon explains why requiring ultra transparency would be best global financial reform

In his 2012 annual letter to shareholders, JP Morgan's Jamie Dimon commented on global financial reform.
The result of financial reform has not been intelligent design - simplicity, clarity and speed would be better for the [financial] system and better for the economy.  A robust financial system needs coordinated and consistent regulation that is strong, simple and transparent.... Complexity and confusion should have been alleviated, not compounded....
The United States needs more conversation, collaboration, coordination and confidence. 
More collaboration would be a good thing. Why should anyone be surprised that financial reform, which is so important to our country, is being rethought and refought (through the courts and otherwise) – since it was passed in a partisan way without sufficient collaboration and without adequate input from experts in the field? 
Even with many of the rules and reforms that we support, the details (which are critical) are far from perfect. We’re left with hundreds of rules and thousands of pages, that even the regulators are now struggling to make sense of. These are very complex systems that need to be carefully thought through and analyzed, particularly by people who know the subjects best – both academics and practitioners. 
These issues are not Democratic or Republican, and the solution is not political.
Please re-read Mr. Dimon's statement again for if ever there was a statement for why it is critical to drop the Dodd-Frank Act, Basel Capital and Liquidity Requirements andUK ring-fencing and replacing these reforms with ultra transparency in every opaque corner of the global financial system this is the statement.

Readers know that unlike all the other global financial reform efforts, ultra transparency is the foundation for an intelligently designed financial system.

  • Academic economists like Joseph Stiglitz would explain that ultra transparency is a necessary condition for the invisibile hand of the market to operate properly.

  • Investment professionals would explain that ultra transparency is necessary if they are to assess the risk and value a security and that without ultra transparency they are blindly betting.  Ultra transparency is what separates investing from gambling.
Mr. Dimon calls for strong, simple and transparent regulation that alleviates complexity and confusion.

There isn't a stronger, simpler or more transparent regulation that is better at alleviating complexity and confusion than ultra transparency.

Not one regulation.

Imagine how much easier it would be to value a structured finance security if ultra transparency was required.  With ultra transparency, market participants would have access to all the useful, relevant information in an appropriate, timely manner.  Specifically, they would have current information on the underlying collateral that is updated on the business day following an observable event (like a payment) involving the underlying collateral.

Imagine how the confidence to make loans in interbank lending market would increase if banks could examine their competitors' current asset, liability and off-balance sheet exposure details and determine who is solvent and who is insolvent.

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