JP Morgan report on trading losses offers illusion of transparency

In his Bloomberg column, Jonathan Weil examines many of the ways that the JP Morgan report on it CDS trading losses overs the illusion of transparency while firmly protecting the veil of opacity that surrounds the bank.

For example,

Another example: During an April 13 call with analysts, about a month before JPMorgan began acknowledging the magnitude of its losses, Douglas Braunstein, JPMorgan’s since-demoted chief financial officer, said “those positions are fully transparent to the regulators” and that the bank’s regulators “get the information on those positions on a regular and recurring basis as part of our normalized reporting.” ...

True, the positions are fully transparent to the regulators and to no one else in the market.

However, it is not the regulators' job to value the positions or to approve JP Morgan's valuation of the positions.

It is the role of JP Morgan's accounting firm to agree or disagree with how JP Morgan values its positions as this valuation directly effects the question of "does JP Morgan's financial statements provide an accurate picture of its financial condition".

The report also included this bizarre disclaimer: “This report sets out the facts that the task force believes are most relevant to understanding the causes of the losses. It reflects the task force’s view of the facts. Others (including regulators conducting their own investigations) may have a different view of the facts, or may focus on facts not described in this report, and may also draw different conclusions regarding the facts and issues.” In other words, we haven’t been told the whole story. 

You have to like Mr. Weil's summary of JP Morgan's disclaimer about exactly what is in the report.

Sure, there were colorful anecdotes, like this: “April 10 was the first trading day in London after the ‘London Whale’ articles were published. When U.S. markets opened (i.e., towards the middle of the London trading day), one of the traders informed another that he was estimating a loss of approximately $700 million for the day. The latter reported this information to a more senior team member, who became angry and accused the third trader of undermining his credibility at JPMorgan. 

“At 7:02 p.m. GMT on April 10, the trader with responsibility for the P&L Predict circulated a P&L Predict indicating a $5 million loss for the day; according to one of the traders, the trader who circulated this P&L Predict did so at the direction of another trader. 

After a confrontation between the other two traders, the same trader sent an updated P&L Predict at 8:30 p.m. GMT the same day, this time showing an estimated loss of approximately $400 million. He explained to one of the other traders that the market had improved and that the $400 million figure was an accurate reflection.” 

Who were those masked traders? How could JPMorgan employees be so willing to manipulate their numbers to achieve an outcome at odds with the facts? And how does a day’s loss go from $5 million to $400 million? Nothing is very clear, which seems to have been by design.

Mr. Weil has just highlighted why banks must be required to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

Among its many benefits, ultra transparency ends banks manipulating their valuation numbers.

Update
In its usual concise style, ZeroHedge nails how the JP Morgan report highlights the problem with opaque banks as the loss at JP Morgan goes from $5 million to $700 million and back to $400 million.

And this is the opacity that one gets when a firm sets off to expose what should otherwise be perfectly public information in the first place. 

One does start to wonder: if America's banks go to such great lengths to mask how ugly the behind the scenes truth really is, is thetrue undercapitalization of the US banking sector in the trillions... Or tens of trillions?

France loses AAA-rating at same time UK bank risk managers reduce worries about high impact EU event

From the you cannot make this stuff up file:

As reported by the Guardian:

Threat to the financial system from sovereign risk was the biggest concern of 94% of those asked by the Bank of England – but fears over a 'high impact event' have fallen.

The eurozone crisis will not go away. More than nine out of 10 risk managers at financial firms asked about the greatest threat to the financial system cite sovereign risk. In the second half of 2012, it was the biggest concern of 94% of those asked by the Bank of England, while 77% were most worried about the risk of the economic downturn. 

"Sovereign risk is now cited by a greater proportion of respondents than previously recorded for any risk," the bank's systemic risk survey found. 

Yet, while the prospect of a eurozone meltdown is uppermost in bankers' minds, the overall concern about a "high impact" event is falling dramatically. 

Some 20% still feel the probability of such an event is high or very high but this is a 16 percentage point fall in the last six months while 34% now believe such an event is a low probability, a rise of 11 percentage points. 

Meanwhile, Bloomberg reports that Moody's has downgraded France (is this a high impact event?)

France lost its top credit rating with Moody’s Investors Service, dealing a blow to President Francois Hollande’s efforts to show budget credibility in the face of a stalled economy. 

France was cut to Aa1 from Aaa, the rating company said today. 

The Moody’s downgrade follows one by Standard & Poor’s in January and increases pressure on Hollande to find ways to bolster growth in Europe’s second-largest economy in the midst of the region’s three year-old debt crisis. 

“The timing of this sort of announcement is awkward,” said Nicolas Veron, a visiting fellow at the Peterson Institute for International Economics in Washington. “This downgrade comes a few days after announcements of structural reforms that are probably the strongest for a long time in France but it also signals that while they are ambitious the recent announcement of reforms is not enough to reassure investors that France is on the right track.” 

Moody’s said its decision to downgrade the rating and maintain the negative outlook reflects France’s long-term economic growth outlook is negatively affected by multiple structural challenges and the fiscal outlook is uncertain as a result of its deteriorating economic prospects.

A simpler way to end Too Big to Fail

The Bloomberg editors joined in the chorus calling for a cap on bank liabilities as the way to end Too Big to Fail.

While the idea definitely has merit, the Bloomberg editors pointed out its biggest weakness:  where to set the cap given the existence of banks like JP Morgan.

Regular readers know that your humble blogger has suggested a much simpler solution:  require the banks to provide ultra transparency and disclose on an on-going basis their current global asset, liability and off-balance sheet exposure details.

With this disclosure, market discipline will be applied to shrink the banks.

First to go will be proprietary bets.  Every trader knows that if their positions are fully disclosed to the market the other market participants will engage in activities that minimize the profitability of these proprietary positions.

Second to go will be the 14,000+ subsidiaries that exist not to support the real economy but to arbitrage either capital requirements or taxes.

Simply eliminating gambling and subsidiaries for gaming the system dramatically reduces the risk profile of the banks.

However, that is unlikely to be where market discipline stops.

Third to go will be the risk of contagion.  Investors will use the information to assess the risk of each bank and adjust their exposure to each bank to what they can afford to lose given the risk of the bank.

With this adjustment, banks no longer are Too Big to Fail as it is assumed that they can fail and the investor will lose money if this happens.

Limiting banks’ size is a rare example of agreement among prominent Democrats and Republicans, who complain equally that U.S. banks have grown too big, too complex and too risky. 

They also agree that big banks benefit unfairly from an implicit government guarantee despite the authority Congress gave regulators in the Dodd-Frank Act to dismantle troubled banks. (Does anyone really believe Washington would let JPMorgan Chase & Co. (JPM) fail?) 

Agreement tends to end there, however.... 

So we read with interest about a new idea that has entered the mainstream, one that wouldn’t break up the big banks, which we’ve argued against, and instead would cap the size of their non-deposit liabilities. Such liabilities consist of borrowings from the Federal Reserve (FDFD), commercial paper and -- perhaps riskiest of all -- overnight repurchase agreements, or repos, in which banks pledge their securities as collateral for overnight loans.

Put simply, insured banks would have to limit such borrowings to a specific percentage of U.S. gross domestic product.  

A cap would force banks to shrink without government bureaucrats arbitrarily taking them apart.

One of the benefits of requiring the banks to provide ultra transparency.

It would also curb banks’ continued reliance on the overnight loans that leave them vulnerable to runs, which is what helped bring down Bear Stearns Cos. and Lehman Brothers Holdings Inc. 

Ohio Democratic Senator Sherrod Brown is proposing to limit non-deposit liabilities to 2 percent of GDP. Such a level would force the nation’s top five banks to shrink significantly -- possibly too much. 

A 2 percent cap would seriously crimp former investment banks such as Goldman Sachs Group Inc. and Morgan Stanley, which became commercial banks during the financial crisis and continue to rely almost entirely on non-deposit funding. 

A fee, instead of a cap, would be a more market- friendly alternative: Banks could be assessed a levy based on the size of their non-deposit liabilities.... 

Yet determining an appropriate cap could prove nettlesome. Why not 1 percent or 3 percent?

A fee would be better. Banks would be less likely to overborrow if they knew they would be charged a fee for every dollar of non-deposit liability. Such a levy would also bring money into the federal government at a time of fiscal strain. (A similar fee proposed by the Barack Obamaadministration as a way to recoup bailout costs was estimated to bring in about $90 billion over 10 years.) As with a cap, lawmakers would have to decide which liabilities to include and which deposits to exclude. 

Valid worries persist about the risks large firms pose to the financial system. The incentives must shift so banks are penalized, not rewarded, for bigness.

Actually, the incentives must shift so banks are penalized, not rewarded, for risk!  

The issue of concern is the risk the banks take and limiting the risk.  Formally breaking up the big banks (which isn't going to happen) or putting a cap on their size are complex, one-off solutions to address risk at the banks.

The simple, direct approach to reducing risk at the banks is to require them to provide ultra transparency.

Led by JP Morgan, banks take on Fed's credit limit plan

Led by JP Morgan, banks are lobbying against the Fed's plan to impose a credit limit that would restrict their exposure to any single bank, company or sovereign to 10% of their total counter-party exposure.

The reason for limiting this exposure is to reduce contagion in the financial system during a financial crisis.

Regular readers know that mechanical credit limits like this are a poor substitute for ultra transparency.

By requiring the banks to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details, each counter-party can assess the risk of the other counter-party.  As a result, they adjust both the price and amount of their exposure to the counter-party to reflect this risk.

Each bank knows to do this because it knows that it is responsible for all gains and losses on its exposures.  As a result, each bank will manage it exposures so that any losses that arise from these exposures do not exceed its capacity to absorb the losses.

Since investors also have the information disclosed under ultra transparency, they will provide the market discipline necessary to insure that banks manage their exposures within their capacity to absorb any losses.  Investors have the incentive to do this because it is their investment that will be wiped out.

According to a Bloomberg article,

JPMorgan Chase & Co. (JPM) said a Federal Reserve proposal to cut risk by capping a bank’s dealings with any one lender, corporation or foreign government fails to strike the “correct balance” and may harm financial markets. 

The plan “could destabilize markets,” Barry Zubrow, executive vice president of corporate and regulatory affairs for JPMorgan, said yesterday in a comment letter to the central bank. 

The Fed is reaching “well beyond” the Dodd-Frank reform legislation with “disruptive” standards that duplicate or conflict with other rules and directives, he wrote.... 

Fed Governor Daniel Tarullo will meet tomorrow with chief executive officers of the biggest banks including JPMorgan’s Jamie Dimon to discuss the limits... 

The proposal to limit credit exposure is designed to contain the damage if a large company, foreign government or bank should fail and threaten to take down other institutions with it. 

Under the rule, a firm deemed systemically important couldn’t have more than 10 percent of its counterparty risk tied to one entity. The 2010 Dodd-Frank Act proposed a 25 percent cap while giving the Fed authority to tighten the standard to ensure stability in financial markets....

Bankers including Zubrow say the Fed’s model for counterparty exposure inflates rather than decreases their risk.  The rule also would restrict the ability to execute certain risk-management or hedging transactions, he said. 

Zubrow foresees “additional pressure to unwind largely offsetting trades in a potentially disruptive manner -- trades that an accurate measurement methodology would not show as producing meaningful risk,” he wrote. “These methodologies produce very large misstatements -- and, in most cases, overstatements -- of the true counterparty exposure.”...

One of the problems with mechanical credit limits is that they are subject to bank lobbying.

In this case, the goal of the lobbying is to redefine the credit limits in such a way that they are not a binding constraint on the banks' day to day operation.

The Fed, in proposing the rule, said the financial crisis revealed a failure of regulators to spot concentrations in credit risk and the interconnectedness of financial firms “that contributed to a rapid escalation of the crisis.”

Bottom line: by adopting ultra transparency, the Fed could enlist the market to help deal with the issues of spotting concentrations in credit risk and reducing the interconnectedness of financial firms. 

Group of 30: Bank Investors 'too removed from action' to effect 'safety and soundness' of bank directly

The Group of 30, composed of former central bankers, regulators and bank bosses, issued a new report on governance of financial institutions.

According to a Telegraph article,

The world's biggest banks must do more to reduce the threat of another financial crisis by improving their corporate governance.

Why the emphasis on improving corporate governance?

While encouraging shareholders to ask difficult questions of a bank's management, the report is sceptical that investors can ultimately provide the sort of scrutiny that is required. 

"They are simply too removed from the action," the study finds of investors. "They are therefore not likely to make a real difference to the safety and soundness of the institution directly."

In short, without ultra transparency, shareholders cannot enforce their version of market discipline on the financial institutions that they have an ownership stake.

As your humble blogger has pointed out repeatedly, requiring the banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details is necessary if market participants are going to independently assess the risk of each bank and adjust the amount and price of their exposures based on this assessment.

Without this data being disclosed, market discipline is non-existent because it is impossible to assess risk.  As a result, market participants rely on regulators and Boards of Directors.

The problem with relying on regulators is they have to both accurately assess the risk of each bank and communicate this risk to the market.  In a time of regulatory forbearance, clearly risk is not being communicated.

The problem with the Board of Directors is they don't have the resources to independently assess the data that the market does.  As a result, they are dependent on management's assessment of the risk.  The Group of 30 tried to propose a rule to lessen directors' reliance on management

If a risk is too complicated for a well-composed board to understand, it is too complicated to accept.

Your humble blogger prefers a related, but different rule:  if management would not be willing to disclose the risk to market participants, then the risk should not be accepted.

The result of this rule is ultra transparency.  After all, if management is willing to disclose the risks, there is no reason not to disclose all the exposure details.

Corzine's rebuff of internal warnings on risk shows why ultra transparency is needed

A Wall Street Journal article documented how Jon Corzine rebuffed MF Global's chief risk officer and his concerns over the Eurozone debt trade.

Mr. Corzine's ability to rebuff the chief risk officer and the board of directors shows why ultra transparency should be required of all financial institutions.

If market participants had access on an on-going basis to MF Global's asset, liability and off-balance sheet exposure details, they could have assessed the risk of the Eurozone trade.  As the risk of the trade to the firm increased, they could have exerted market discipline by requiring higher returns on their investments.

Seeing his cost of funds increase would have acted as a break on increasing the Eurozone debt trade.

MF Global Holdings Ltd.'s executive in charge of controlling risks raised serious concerns several times last year to directors at the securities firm about the growing bet on European bonds by his boss, Jon S. Corzine, people familiar with the matter said. 

The board allowed the company's exposure to troubled European sovereign debt to swell from about $1.5 billion in late 2010 to $6.3 billion shortly before MF Global tumbled into bankruptcy Oct. 31, these people said. The executive who challenged Mr. Corzine resigned in March. 

The disagreement shows that concerns about the big bet grew inside the company months before the trade rattled regulators, investors and customers. 

Inside the company, they had access to the information on the trade.  Outside of the company, the information on the trade was limited.

The executive, Michael Roseman, whose title was chief risk officer, also expressed concerns directly to Mr. Corzine in meetings of just the two men and with other people present, people familiar with the situation said. 

Mr. Roseman contended MF Global didn't have enough spare cash to withstand the risks of its position in bonds of Italy, Spain, Portugal, Ireland and Belgium. He also presented gloomy hypothetical scenarios of what could happen if MF Global's credit rating was downgraded because of the exposure. 

Mr. Corzine, who started betting on the bonds shortly after arriving as chief executive in March 2010, responded to Mr. Roseman's concerns that some of the scenarios were too extreme and likely impossible, people familiar with the matter said. The former New Jersey governor and Goldman Sachs Group Inc. chairman said MF Global's exposure was limited, adding that the likely profit was worth the risks, these people said. 

Boardroom disagreements in which the CEO's decisions are questioned by a lieutenant are rare. The situation at MF Global is even more unusual because it came just six months after directors hired Mr. Corzine to turn around the struggling brokerage firm.

MF Global highlights need for disclosing asset, liability and off-balance sheet exposure details

A Bloomberg article discusses the role played by the Board of Directors and complicated disclosure in MF Global's demise.

Regular readers know that market participants need financial firms to disclose on an on-going basis their current asset, liability and off-balance sheet exposures if the market participants are going to be able to assess the risk of the financial firm.

Rather than offer ultra transparency, the article describes how MF Global's disclosure failed to lift any of the opacity surrounding the trades.

MF Global’s regulatory filings don’t give dollar amounts for the gross purchases of European sovereign debt or for the hedges. Instead, the investments are shown as percentages of a bigger base of assets, leaving investors to calculate the numbers themselves. Those assets are reported on a market-value basis. 

The firm in filings and an October investor presentation disclosed the net amount at risk from its European bonds after hedges. Neither the presentation nor regulatory filings explained that the hedges matured before the bonds and thus would have to periodically be renewed....

MF Global disclosed in a May 20 filing that its net holdings among the five European countries consisted of $6.3 billion in debt at the end of March that had an average maturity of April 2012. 

The company said in the Aug. 3 filing that its European sovereign portfolio had risen to $6.4 billion of debt with an average maturity of October 2012. 

In both instances, MF Global said the figures were “net of hedging transactions the company has undertaken to mitigate issuer risk.” 

While reporting its net holdings had increased 2 percent, MF Global had expanded its bets to $11.5 billion as of June 30 from $7.64 billion as of March 31, according to data contained in the SEC filings. The firm didn’t quantify its holdings at the end of 2010. 

The firm’s hedges, known as reverse repurchase agreements, jumped to $4.93 billion at June 30 from $1.08 billion as of March 31, the data show. 

Revenue from the European sovereign trades was about $47 million during the fiscal fourth quarter ended March 31, or 16 percent of net revenue, and $38 million, or 12 percent, in the following quarter, according to an October investor presentation.

This lack of useful disclosure meant that MF Global's management was not constrained by market discipline -- market discipline would have taken the form of investors reducing their exposure to the firm and increasing the cost of funds to the firm as MF Global increased its risk.

Instead, MF Global was dependent on its Board of Directors.

Although the trades didn’t require pre-approval by the board, directors (MF) later questioned Corzine’s investment, according to a person familiar with the discussions. 

After challenging the size of the bets and the concentration on a small number of countries, the board set dollar limits on the amount of sovereign debt its chairman could buy. 

Corzine came back to the board at least once to get the ceiling raised. 

At multiple meetings, Corzine reassured directors that the trades would work out, said the person, who asked not to be identified because the discussions were private. 

Corzine said the European countries he selected wouldn’t default before the bonds matured, and that the market was mis-pricing the debt, according to the person. Underpinning Corzine’s view was the euro zone’s European Financial Stability Facility, which could backstop government short-term debt through June 30, 2013. 

Some risk managers and traders at MF Global shared the directors’ concerns, according to a former employee with knowledge of the matter. The risk-management department began asking for daily prices of credit-default swaps on sovereign debt to keep track of how the market viewed the underlying bonds, a second person said. 

The demise of MF Global, which was spun off from fund manager Man Group Plc in 2007, shows how Corzine’s stature made it hard for the board or underlings to oppose him, even as the crisis in Europe deepened. 

Directors believed that rejecting the trades would have been an affront to the veteran trader and would have been tantamount to firing him, said the person familiar with the board’s deliberations. 

The trades could have been rejected had there been market discipline.  Investors selling the stock as MF Global's risk increased would have been the equivalent of firing Corzine.

“This was a board that could not possibly have been more expert in exposure to risk, a board with at least as much, if not more, expertise than the CEO,” said Jeffrey Sonnenfeld, senior associate dean at the Yale University School of Management in New Haven, Connecticut, and founder of a nonprofit educational and research institute focused on CEO leadership and corporate governance. “This was an example of people not having the courage to stand up to the CEO.”

The failure to stand up to the CEO would not have been a problem if there had been ultra transparency as that would have permitted the market to exert market discipline on the CEO.

What is the contribution of the financial sector?

The Bank of England's Andy Haldane and Vasileios Madouros published an interesting column on VoxEU in which they asked "what is the contribution of the financial sector?"

Specifically, they focus on the distinction between risk-taking and risk management.

They observe that if risk-taking were a value-added activity,

Russian roulette players would contribute disproportionately to global welfare.

Risk-management, on the other hand, is a value-added activity.

The financial system provides a number of services to the wider economy, including payment and transaction services to depositors and borrowers; intermediation services by transforming deposits into funding for households, companies or governments; and risk transfer and insurance services. 

In doing so, financial intermediaries take on risk. For example, when they finance long-term loans to companies using short-term deposits from households, banks assume liquidity risk. And when they extend mortgages to households, they take on credit risk. 

But bearing risk is not, by itself, a productive activity. The act of investing capital in a risky asset is a fundamental feature of capital markets. For example, a retail investor that purchases bonds issued by a company is bearing risk, but not contributing so much as a cent to measured economic activity. Similarly, a household that decides to use all of its liquid deposits to purchase a house, instead of borrowing some money from the bank and keeping some of its deposits with the bank, is bearing liquidity risk....

What is a demonstrably productive economic activity is the management of risk. Banks use labour and capital to screen borrowers, assess their creditworthiness and monitor them. And they spend resources to assess their vulnerability to liquidity shocks arising from the maturity mismatches on their balance sheets. Customers, in turn, remunerate banks for these productive services.

Risk management is not solely the province of banks.  All market participants are suppose to manage their risks.

The key to managing risk is access to all the useful, relevant information in an appropriate, timely manner.

Without this data, there is no way to assess the risk of a given exposure.

Regular readers know that the current level of opacity engulfing structured finance securities and banks is similar to not seeing the bullet chambers while playing Russian Roulette.  Buying these securities is not investing, but rather blindly taking risk.

Risk management is like playing Russian Roulette, but being able to see if there is a bullet in the chamber and stopping before the trigger is pulled.

UK financial institutions grow fearful of 'high impact event' on financial system

As the run from Eurozone sovereign debt and banks continues, a Guardian article reports a decline in confidence at UK financial institutions.

Specifically, these institutions see a much higher probability of a 'high impact event' in the UK financial system.

Leading the way is sovereign risk -- which would explain another source of selling pressure on Eurozone sovereign debt.

It is perhaps not surprising that big City firms surveyed by the Bank of England are worried about the impact of the eurozone crisis and a sudden economic downturn might have on the financial system. 

But when set out in black and white in the Bank's latest systemic risk survey, the findings might seen slightly alarming. 

Asked about their confidence in the UK financial system over the next three years, and how their confidence levels had changed over the past six months, the responses show that confidence has fallen sharply. 

A net balance of 59% respondents reported decreased confidence, which was conducted between 20 September and 21 October 2011 of 68 major firms, such as banks, building societies, hedge funds and insurers. 

The perceived probability of a "future high-impact event" in the UK financial system increased sharply in the second half of 2011, compared with the first half of the year, and was reported to be at the highest level since the survey began in July 2008. 

The five risks reported most frequently by respondents to have the greatest impact on the UK financial system if they were to materialise were: 

• sovereign risk (cited by 76% of respondents)
• the risk of an economic downturn (76%)
• funding risk (57%)
• risks around regulation/taxes (38%)
• the risk of financial institution failure/distress (26%).

Asset managers reduce reliance on rating agencies

As predicted under the FDR Framework, a Reuters article describes how asset managers are using disclosure to reduce their reliance on rating agencies.

Regular readers know that this blog has recommended that disclosure is the key ingredient for replacing rating agencies in financial regulations.  If there is disclosure, market participants can do their own homework and not rely on the rating agencies.

Some of the world's largest asset managers are cutting ties to credit rating agencies, potentially signalling the beginning of the end of their grip on global financial markets. 

Managers responsible for billions of euros of fixed income investments are reviewing relationships with the likes of Fitch Ratings, Standard & Poor's and Moody's Investors Service, whose calls on Portugal, Ireland and the United States have roiled central banks desperate to avert a collapse of the Euro zone. 

Fund firms contacted by Reuters said rating agency research tended to be backward-looking and superficial, and often encouraged the kind of speculation that has recently dragged down Italy, one of the world's largest government bond issuers. 

"We have cancelled our subscriptions to two of them and they haven't left us alone since. It has been very irritating," the head of sovereign debt investment at one large European bond investor told Reuters on condition of anonymity. 

"It would be naive to blame the agencies for everything that went wrong during the financial crisis but anyone who relies on a third party to form their investment opinions is headed for trouble ... clients pay us to make those decisions, it would be completely wrong of us to abdicate that responsibility." 

Investors say they have steadily reduced reliance on external research providers ever since rating agencies slapped high ratings on complex structured financial investment products such as collateralised debt obligations (CDOs) which later turned out to be far riskier than initially assessed. 

A broad push for development of proprietary research teams shows credit ratings agencies have never fully regained the trust of some of their most important buy-side clients, some of whom are still counting the costs of belated warnings of a change in the risk profile of debt issuers...

"Ultimately, we believe that the research which we produce 'in-house' is more detailed, more forward looking and timelier than that of the agencies," Garrett Walsh, head of credit research, Europe and Asia at Pioneer Investments told Reuters. 

Pre-crisis, Pimco, the world's largest bond investor, used to limit its own internal ratings to private corporations. In 2008 it extended this to Western sovereign credits and now runs its own internal ratings system for all issuers of debt. 

"We will compare our rating to the external ratings but we try to make our decision independent of what the major rating agencies are saying and that has certainly accelerated," Andrew Bosomworth, head of portfolio management in Germany at Pimco, told Reuters. 

"We know what's inside what we rate," he added. 

Daniel Noonan, a New York-based spokesman at Fitch said his company advised investors to use its ratings and commentary alongside a range of inputs when making investment decisions. 

"We think over-reliance on any single input, including a credit rating, is unwise. We continue to see strong demand for our opinions and products, and as a result our business is growing," he said. 

"Investors are undoubtedly doing more of their own research, which we think is appropriate. However, they still need benchmarks to support their research efforts," added Michael Privitera, a member of S&P's Valuation and Risk Strategies team. 

While credit rating agencies may be losing influence on the investment decisions of the world's largest asset managers, sudden ratings calls can still trigger massive sell-offs from passively-managed funds which track an index whose composition is shaped by the ratings given by the credit agencies. 

When a country's debt is downgraded below investment grade it is pushed out of an index, forcing passive investors to sell their holdings and crystallize hefty losses that could shrink when the immediate rush for the exit subsides.... 

Some investors say credit default swap prices -- the cost of insuring debt against default -- are a much better measure of risk than credit ratings....

"Our approach seems to have quite a high correlation to 5-year CDS index which is a decent measure of value in bond markets and a much greater correlation than rating agencies have. In general markets tend to move ahead of rating agencies," BlackRock's Ewen Cameron Watt said.

Standard Chartered confirms that lack of disclosure by banks is a direct contributor to bank runs

In case you missed it, a Telegraph article reported that Standard Chartered is practicing the modern day equivalent of a run on the Eurozone banks.  Their action publicly acknowledge the legitimacy of using the FDR Framework as a tool for risk management.

Bank runs occur when depositors and other investors no longer believe that the asset value of the bank exceeds its liabilities.

Please note, bank runs are based on the "fear" about the value of the bank's assets. If there was asset-level disclosure, the assets could be valued and banks, like Standard Chartered, could adjust their exposure based on facts.

Standard Chartered, the UK’s third-largest bank by market value, has made clear its fears of the likely fallout from the eurozone debt crisis by cutting back its lending to other European banks. 

Discussing the bank's first half performance, Richard Meddings, Standard Chartered's finance director, said lending to eurozone banks had been cut substantially due to concerns at the potential for contagion to the wider European banking system from the sovereign debt crisis. 

"We have been withdrawing liquidity from eurozone financial institutions and recycling it back into Asia," said Mr Meddings. 

Standard Chartered has no direct exposure to the sovereign debt of peripheral eurozone countries like Greece and Portugal, but Mr Meddings warned that the "dislocation" caused by a worsening in the crisis would hit all banks. 

Mr Meddings said there were likely to be "second order consequences" and that even banks with no holdings of the indebted countries' bonds could be hurt, though he added that Standard Chartered remained a net provider of funding to the interbank lending market.