Wednesday, January 23, 2013

Davos: Paul Singer versus the global financial regulators

One of the central themes of this blog is the always harmful substitution of the combination of complex rules and regulatory oversight for transparency and market discipline.

This theme played out in a Davos panel discussion involving Paul Singer from Elliott Management.

As reported on twitter by @Anthony_Reuben, a journalist on the BBC business desk:
Paul Singer says he sends his staff to find out about financial health of banks and they come back and shrug. Wants more disclosure. 
Mr. Singer's staff confirms the Bank of England's Andrew Haldane's observation that current bank disclosure standards leave them resembling 'black boxes'.

And why does Mr. Singer want more disclosure?  Because as an investor Mr. Singer knows that he should be responsible for all gains and losses on his exposures to banks.

Hence, he is looking for all the useful, relevant information in an appropriate, timely manner so he can independently assess this information and make a fully informed investment decision.

For banks, the useful, relevant information is their current global asset, liability and off-balance sheet exposure details.  What your humble blogger calls ultra transparency.

Why isn't this information available?
Prudential boss: global banking standards difficult because banks in countries where banking system didn't blow up are not interested.
It is not the banks that are uninterested, but it is the global financial regulators clinging to their information monopoly who are uninterested.

Here we are five years after the beginning of the financial crisis and Paul Singer's staff still cannot access all the useful, relevant information for making an investment in a bank nor is there any movement afoot to ever require banks to provide this information.

Everyone knows that ultra transparency is the "gold standard" for bank disclosure.  But it is more than that.  It is also gives banks in countries that adopt ultra transparency a competitive advantage.

The competitive advantage comes from the simple fact that ultra transparency allows market participants to independently assess the risk of each bank.  Since everything is disclosed, market participants can do a better job of assessing the risk and as a result can reward these banks with a lower cost of funds and a higher stock price.

All those banks in countries that don't require ultra transparency are at a competitive disadvantage.  Market participants know from the lack of disclosure that the banks are hiding something.  As a result, market participants punish these banks with a higher cost of funds and a lower stock price.

Ultra transparency is actually an easy global banking standard to adopt as there are no banks who would want to be at a competitive disadvantage.

So what do we have instead of ultra transparency?

We have the pursuit of the combination of complex rules and regulatory oversight.

This takes the form of legislation like the Dodd-Frank Act that was written by and for the banks (recently, I discovered that the Volcker Rule is essentially toothless as it was written so it doesn't apply to position held for more than 90 days ... proprietary bets can last months), we have financial regulators pursuing Basel III capital regulations that are too complex to enforce and we have policymakers pursuing ring-fencing.

This pursuit of the combination of complex rules and regulatory oversight shows that the first lesson of the financial crisis was not learned.  The first lesson is that the combination of complex rules and regulatory oversight failed.

The combination just didn't fail, it failed in a catastrophic manner as shown by our ongoing financial crisis.

Equally importantly, the financial crisis revealed that the combination of complex rules and regulatory oversight is prone to catastrophic failure.

Unlike Tim Geithner who believes that the combination of complex rules and regulatory oversight should be given another chance, your humble blogger does not believe in gambling with the stability of the financial system when it is your humble blogger and the other taxpayers who are going to be called on to bail out the financial system when this combination predictably fails again.

Ultra transparency restores stability to the financial system and does away with gambling financial stability on the success or failure of complex rules and regulatory oversight.

No comments: