Friday, March 15, 2013

Fed says less to JP Morgan's fortress balance sheet than meets the eye

In the defining moment for requiring banks to provide ultra transparency, the Federal Reserve questioned the capital plans for both JP Morgan and Goldman Sachs.

By doing so, the Fed told all market participants that there is decidedly less to JP Morgan's fortress balance sheet than meets the eye through current disclosure practices.

Your humble blogger cannot re-emphasize this enough, the Fed, with its access to all the useful, relevant information in an appropriate, timely manner on JP Morgan, has said that JP Morgan's claim to having a fortress balance sheet is simply untrue.

What is the true condition of JP Morgan's (and Goldman's) balance sheet?

There is only one way for the market to find out.

The way to find out is to have these firms provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.  It is only with this information that market participants can assess the true condition of JP Morgan (and Goldman).


Anonymous said...

One thing I don't understand is this:

If the Fed is really just a cartel operating in favor of the banking establishment, which is point made by numerous bloggers, then why would the Fed take this position? Is there a deeper con being run here? What's the story?

Richard Field said...

Based on my experience working at the Fed, while it tends to favor the banking establishment, it is not a cartel operating solely for the benefit of the banks.

The Fed really is staffed by individuals who believe in their responsibility to ensure the safety and soundness of the financial system.

The Fed's questioning JP Morgan's fortress balance sheet is one of those times where it is trying to communicate to the market something about just how much risk the banks have.

The Fed felt empowered to take this stand because it had just said that JP Morgan passed its stress test.

Therefore, it saw the fallout from communicating risk as minimal (remember, there is a huge internal constraint that the Fed places on itself due to worries about safety and soundness; they fear saying a bank has problems and triggering a bank run).

Since the beginning of the financial crisis, I have been saying that the Fed would be a far more effective regulator if banks were required to provide ultra transparency. It would unshackle the Fed to actually do its job and not worry about market perception.

This isn't a deeper con, but rather the Fed staff trying to express what the true level of risk at JP Morgan/Goldman through the muzzle of safety and soundness.