Regular reader will immediately recognize that the only way to prevent this type of behavior in the future is to require the banks to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.
With this disclosure, market participants can verify the market value of each bank's positions.
Given that opacity and the resulting bad behavior could happen even at JP Morgan, I expect that Jamie Dimon will lead the banking industry in voluntarily providing ultra transparency. After all, it is not possible that JP Morgan has anything else to hide is it?
The restatement results from information that has recently come to the Firm's attention in connection with management's internal review of activities related to CIO's synthetic credit portfolio.
Under Firm policy, the positions in the portfolio are to be marked at fair value, based on the traders' reasonable judgment as to the prices at which transactions could occur.Like Libor interest rates, judgment rather than actual trades is used.
As an independent check on those marks, the CIO's valuation control group ("VCG"), a finance function within CIO, verifies that the traders' marks are within pre-established price testing thresholds around external "mid-market" benchmarks and, if not, adjusts trader marks outside the relevant threshold. The thresholds consider market bid/offer spreads and are intended to establish a range of reasonable fair value estimates for each relevant position.Even the checks on the trader's judgment are not actual trades, but rather indications of where a trade might or might not be possible.
At March 31, 2012, the trader marks, subject to the VCG verification process, formed the basis for preparing the Firm's reported first quarter results.
However, the recently discovered information raises questions about the integrity of the trader marks, and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses being incurred in the portfolio during the first quarter.
As a result, the Firm is no longer confident that the trader marks used to prepare the Firm's reported first quarter results (although within the established thresholds) reflect good faith estimates of fair value at quarter end.
The Firm has consequently concluded that the Firm's previously-filed interim financial statements for the first quarter of 2012 should no longer be relied upon....