Saturday, May 26, 2012

Felix Salmon joins the bandwagon supporting ultra transparency

In his post on Why JP Morgan's gamblers need to be spun off, Felix Salmon puts forth the principle that the Too Big to Fail should not have any trading desk that needs to operate in secrecy to succeed.

Regular readers know that this is simply a restatement of requiring the banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.  Ultra transparency effectively puts an end to these trading desks.

There’s a much deeper issue here as well — which is whether big commercial banks should have hotshot trading desks staffed by the likes of Achilles Macris and Bruno Iksil at all. 
Both Peter Eavis and Jonathan Weil have new columns decrying the opacity of JP Morgan’s public disclosures: the bank seems to make it as difficult as possible for its owners to find out just how much risk it’s taking and where. 
And not just its owners, either: the owners’ representatives on the board, JP Morgan’s risk committee, is deliberately staffed by muppets
There’s a good reason for that, of course: hedge funds need to operate in secrecy, because if the market can work out what their positions are, it will move sharply against them. 
Please re-read the highlighted text as it nicely summarizes what your humble blogger has been saying since the beginning of the financial crisis.
JP Morgan’s CIO is a hedge fund in all respects except the fees it charges, and clearly the CIO (and the CEO) want its activities to be effectively unsupervised. That’s almost certainly the reason that the CIO is effectively based in London: it’s largely outside the scope of US regulators, there, while UK regulators tend not to care too much about the actions of foreign banks, when those actions don’t present a big risk to the UK economy.
As long as regulators have an information monopoly, it will always be possible for the banks to hide the risk of their positions.

This is a result of the simple fact that regulators do not approve or disapprove of individual positions.  Rather, they try to guess if the bank is adequately capitalized to absorb any potential losses from a given position.
So here’s another principle, which might be helpful alongside the Volcker Rule, in any principles-based regulatory regime: if you’re a too-big-to-fail commercial bank, you shouldn’t have any desk which needs to operate in secrecy in order to do its job effectively.
Agreed.  Thanks for the support of ultra transparency as it ends the secrecy needed to by these desk to operate effectively.

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