Tuesday, July 16, 2013

Commerzbank loan sale highlights need for transparency

As Bloomberg's Jonathan Weil pointed out in his article, Commerzbank loan sale hides as much as it reveals.  Specifically, it raises the question of what the bank's loan portfolio looked like before the sale and what it now looks like?

Is the riskiness of the loan portfolio unchanged as a result of the sale?  Did it decline?  Did it increase?

Without the bank disclosing on an ongoing basis its current exposure details, market participants have no way to assess any change in the bank's risk profile.

This is why banks must be required to provide ultra transparency and disclose their current global asset, liability and off-balance sheet exposure details.

Commerzbank AG, Germany's second-largest bank, today said it is selling 5 billion euros ($6.5 billion) of loans to Wells Fargo & Co. and the private-equity firm Lone Star Funds at a 3.5 percent discount to book value.... 
Commerzbank's balance sheet still has little credibility with investors.... the market continues to believe that most of the bank's book value is illusory. The stock is down 33 percent since the end of last year. 
Sure, it's nice to see that a couple of outsiders were willing to pay something close to book value for a block of the bank's loans.....
Because the transparency of Commerzbank's financial statements is so poor, investors can't see if Commerzbank might have sold its best loans and kept the worst ones stashed on its books at inflated historical values. During the 1980s U.S. savings and loan crisis, this practice was known as "gains trading," although the term doesn't fit this situation, given that Commerzbank is recording a loss. 
To be fair, the lack of transparency at Commerzbank isn't unique. It's a problem at most large banks, especially in Europe.

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