Opacity: why its hard to make sense of Wall Street's trading revenue

In his NY Times Dealbook article, Peter Eavis examines how opacity makes it hard to make sense of Wall Street's trading revenues.  He sees how Wall Street reports its trading revenues as part of the broader debate on opacity.

Under the FDR Framework, there is not suppose to be a debate about opacity in which the Wall Street firms have a voice.

It is the government's responsibility under the FDR Framework to ensure that market participants have access to all the useful, relevant information in an appropriate, timely manner.

The government was given this responsibility because the firms providing the disclosure are going to want to disclose as little as possible.

This responsibility puts the burden on the government to ensure that market participants have access to all the useful, relevant information.

Please note the use of the word "all".  It is there so that government regulators error on the side of requiring disclosure of too much information rather than error on the side of too little information.

Please note the use of the words "useful, relevant information".  These words are there so the government regulators error on the side of requiring disclosure of too much information rather than error on the side of too little information.  So long as one market participant thinks that the information is useful and relevant it must be disclosed.

Traders at the top Wall Street firms racked up nearly $80 billion of revenue last year. But understanding how they produced all that money is far from simple. 

The financial crisis revealed the dangers of banks having murky balance sheets. And some investors think banks’ disclosures are still inadequate. 

One of the primary causes of the financial crisis was opacity across wide swathes of the financial system including 'black box' banks and 'brown paper bag' structured finance securities.

The fact that any investor thinks banks' disclosure is still inadequate says that the government, through the SEC, is not doing its job and fulfilling its responsibility to ensure that market participants have access to all the useful, relevant information in an appropriate, timely manner.

“The major financial institutions in the U.S. and around the globe are utterly opaque,” Paul Singer, the founder of a large hedge fund called Elliott Management, said last year.

At a conference this week, Mr. Singer clashed with Jamie Dimon, chief executive of JPMorgan Chase, over the subject of bank transparency. In the exchange, Mr. Dimon said hedge funds were hardly transparent and added that JPMorgan’s annual report was 400 pages long.

In an earlier post, I noted that Mr. Dimon observing that hedge funds were hardly transparent was a red herring irrelevant argument.  The issue is not whether an investor does or does not provide transparency.  The issue is whether the firm that is making the disclosures is transparent.

Mr. Dimon makes that assertion that because JP Morgan's annual report is 400 pages long, his firm is providing all the useful, relevant information in an appropriate, timely manner.

Clearly this is not the case as Mr. Singer observes that JP Morgan is opaque and his analyst cannot understand the risk of JP Morgan's derivative portfolio.

At the start of the financial crisis, your humble blogger defined what constitutes all the useful, relevant information in an appropriate, timely manner for banks.  This is ultra transparency under which the banks disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

If JP Morgan provided this amount of disclosure, Mr. Singer's analysts would be able to independently assess the risk of JP Morgan and he could then adjust his exposure to JP Morgan to reflect this risk and his capacity to absorb losses.

Trading results are good place to start when assessing whether banks release sufficient information...

Shareholders benefit from good disclosures because they can better assess what value to place on a bank’s business. Trading revenue is not only large – it can also be extremely volatile, bolstering profits one quarter, then hurting them the next. With the right data, investors can do a better job of identifying what drives revenue up and down....

When it comes to sales and trading, Wall Street firms have differing levels of disclosure.

All Wall Street firms should be brought to the gold standard for disclosure:  ultra transparency.