NY Times' Peter Eavis: Part I - JP Morgan's deficient disclosure

In a NY Times Dealbook article, Peter Eavis examines what JP Morgan disclosed about its losing trade and concludes that there needs to be trade position level disclosure.

Regular readers recognize this as a call for ultra transparency under which the banks would be required to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

So many questions still dangle over JPMorgan Chase’s disastrous credit bet. Here is one more: Why is it so hard to find answers in the bank’s public financial filings?

Since JPMorgan announced more than $2 billion of losses on the trade earlier this month, the bank has largely relied on its chief executive, Jamie Dimon, to talk about the bet. 

He has not provided meaningful specifics when analysts have asked for them. And JPMorgan has neither released new filings with details about the mechanics of the trade nor used existing disclosures to help outsiders get to the bottom of what is going on.

This is par for the course on Wall Street. Bank filings rarely contain data that could give warning of a trading blowup. And when a big bet does go bad, banks usually stay tight-lipped about it.

But JPMorgan’s problems may show the need for better disclosure about trading positions....

Please re-read the highlighted text because this is Mr. Eavis' call for ultra transparency.

But beyond inadequate value-at-risk information, a lot seems missing from JPMorgan’s disclosures about its hedges — the trades the bank makes to offset risks elsewhere...

Even Jamie Dimon wanted to see these trades when he demanded to 'see the positions'.

Why does hedge disclosure matter? 

Investors might have asked questions earlier about what was going on at the chief investment office if JPMorgan had more clearly broken out its hedging activity. 

In particular, outsiders might have seen how much protection was sold as a hedge and pressed the bank for answers. 

Selling protection is effectively the same as buying more bonds; if the bonds go down in value, so will the sold protection. So how can that be a hedge, investors might have asked? And if the sold protection was a modification to an existing hedge to make it less bearish, what was going wrong with the initial hedge? ...

JPMorgan is reluctant to provide the nitty-gritty details of the broken hedge because it fears other market players will bet against the trade if they know its characteristics, making the bank’s losses even bigger.

One of the reasons that requiring ultra transparency will reduce, if not eliminate, banks betting or engaging in activities where opacity is a key element of profitability.

Still, company disclosure requirements are not intended for the convenience of management, nor are they meant to protect a company’s bottom line. Instead, public companies are required to release standardized financial statements so investors have information to make independent judgments. 

It is only with ultra transparency that investors have all the useful, relevant information in an appropriate, timely manner for making a full informed independent judgment.

In other words, when disclosure works well, company executives do not get to have full control over the flow of information — even on bad trades.