One of the benefits of requiring banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details, is that it eliminates valuation differences.
These difference will be caught in one of two places.
First, when the positions are disclosed.
Second, as part of their independent assessment of the disclosed data, market participants are likely to catch both internal differences in valuation as well as where internal and external valuations differ.
The JPMorgan Chase & Co. (JPM) unit responsible for at least $2 billion in losses on credit derivatives was valuing some of its trades at prices that differed from those of its investment bank, according to people familiar with the matter.
The discrepancy between prices used by the chief investment office and JPMorgan’s credit-swaps dealer, the biggest in the U.S., may have obscured by hundreds of millions of dollars the magnitude of the loss before it was disclosed May 10, said one of the people, who asked not to be identified because they aren’t authorized to discuss the matter.
“I’ve never run into anything like that,” said Sanford C. Bernstein & Co.’s Brad Hintz in New York, ranked by Institutional Investor magazine as the top analyst covering brokerage firms. “That’s why you have a centralized accounting group that’s comparing marks” between different parts of the bank “to make sure you don’t have any outliers,” said the former chief financial officer of Lehman Brothers Holdings Inc....
Jennifer Zuccarelli, a spokeswoman for New York-based JPMorgan, declined to comment on whether the CIO and investment bank were using different prices.
“All components of the synthetic credit portfolio in the chief investment office were mark-to-market,” she said....
Because JPMorgan had amassed such large positions, even a small change in how the prices were marked may have generated a big difference in the value of the trades, one of the people said.The only way to truly prevent this from occurring in the future is to require ultra transparency.
“It would not be normal to book it at levels that were better than the dealer desk,” said Peter Tchir, founder of New York-based hedge fund TF Market Advisors. “That would strike me as a very big issue.”