Davos: Paul Singer and Jamie Dimon clash over transparency

In the equivalent of a heavy-weight title fight, Paul Singer of Elliott Management representing investors and Jamie Dimon of JP Morgan representing banks squared off on the issue of transparency and bank disclosure.

Mr. Elliott said that banks don't provide enough disclosure.  Mr. Dimon insisted that they do and, even if that were not the case, that hedge fund investors should have to provide more transparency themselves.

Regular readers know that Mr. Elliott is right and that Mr. Dimon is wrong.

The global financial system is based on the FDR Framework that combines the philosophy of disclosure and the principle of caveat emptor (buyer beware).

Under this framework, governments are responsible for ensuring that market participants have all the useful, relevant information in an appropriate, timely manner so they can independently assess this information and make a fully informed decision.

Under this framework, market participants have an incentive to make this independent assessment because under the principle of caveat emptor they are responsible for any losses that are incurred on their exposures.

Please note that under the FDR Framework it is not the firm that is making the disclosure that gets to determine what is adequate disclosure.  Rather, it is the investors who get to determine what they consider adequate disclosure.

The FDR Framework recognizes that Jamie Dimon, his firm and other banks would rather provide less disclosure.  Hence, it says that his and their opinion is of no consequence.

It is solely the opinion of the investors who are taking on the risk of loss that matters.  If they don't think there is adequate disclosure, then there is not adequate disclosure.  End of discussion.

The government is responsible for making sure that the disclosure meets or exceeds the investors' definition of adequate and the government knows to ignore what Mr. Dimon and the rest of the bankers say.

Also, under the FDR Framework, there is no burden on the investor to be transparent.  It is an irrelevant red herring whether the investor is providing transparency (they are not the one who is the subject of the question of 'are they providing adequate disclosure?').

As reported by the Financial Times,

Unbowed after a year in which severe problems of risk management at JPMorgan were revealed, Mr Dimon rebuffed criticism from Paul Singer, head of Elliott Capital Management, that banks made “completely opaque” disclosures. 

Mr Singer said the unfathomable nature of banks’ public accounts made it impossible to know which were “actually risky or sound”.

For banks, the necessary information to assess risk and solvency is each bank's current global asset, liability and off-balance sheet exposure details.

Without disclosing this information, bank disclosure leaves them resembling, as the Bank of England's Andrew Haldane says, 'black boxes'.

Mr Dimon said JPMorgan’s accounts were clear, adding: “With all due respect hedge funds are pretty opaque too.” 

Opacity of hedge funds is a red herring as the issue is what is the right amount of disclosure for banks.  The answer to that question is ultra transparency under which all exposure details are disclosed.

However, Mr Singer’s points have become a common criticism among both hedge fund and institutional investors and they add to pressure on banks to disclose better quality information about their balance sheets.

Mr Singer noted that derivatives positions, in particular, were difficult for outside investors to parse and worried that banks did not always collateralise their positions. 

Mr Dimon said the bank did for all “major” clients. Mr Singer retorted: “Well, we’re a minor client then.” 

Whether banks are “investable” or not is a regulatory as well as due diligence issue, according to Tidjane Thiam, chief executive of Prudential, the UK insurer. He said new Solvency II regulations on the insurance industry effectively prohibited insurers from investing in banks. 

“Who’s going to provide capital to banks?” Mr Thiam asked, blaming a “lack of joined-up thinking” among regulators.

From a due diligence perspective, banks are not "investable".  The reason is simple.  The lack of disclosure means that buying their securities is gambling on the contents of a black box.

Gambling and investing are not the same thing.

The investment cycle starts with the market participant independently assessing the risk of and valuing the potential investment.  Then, the market participant looks at the price Wall Street is showing.  Finally, the market participant makes an investment decision to buy, hold or sell based on the price.

If there is not adequate disclosure to independently assess the risk and value a bank, then the investment cycle cannot function.  As a result, buying or selling bank securities is gambling on the contents of a black box.

Hopefully, the regulators understand that they do not want insurers to be blindly betting and therefore have set standards that insist the insurance firms know what they are buying and know what they own after buying it (this also applies to opaque structured finance securities).

During the panel Mr Dimon returned to familiar territory by also discussing regulation, his assertiveness apparently undiminished only seven months after JPMorgan was found to have racked up multibillion-dollar losses on complex credit derivatives trades. 

He noted that “in the United States we’ve created more regulators, not less” and argued they were trying “to do too much, too fast”. 

He complained that this led to increased bureaucracy: “In the United States five years [after the crisis] we don’t have mortgage rules yet.” 

Regulations mandated by the 2010 Dodd-Frank Act, which overhauled US financial rules, are yet to be finalised by regulators....

Mr. Dimon is complaining about an Act written by and for the banking industry by its lobbyists.  It is all political theatre.

Mr. Dimon knows that Mr. Singer is right and cannot understand why, unlike financial regulators and politicians, Mr. Singer doesn't concede in the face of Mr. Dimon's assertive behavior.

But with Mr Dimon among the panellists urging restraint from regulators, Zhu Min, deputy head of the International Monetary Fund, said it would be a “huge mistake” to row back on reforms such as the Basel III regulations on higher capital and liquidity standards. 

“Financial markets structures haven’t changed much,” Mr Zhu added. “We’re not safer yet.”

I am sure that Mr. Singer would agree that we are not safe yet and add that until banks are required to provide ultra transparency we will not be safe.