Regular readers know that it is impossible for a bank to hide trading losses if it is required to provide ultra transparency and disclose on an ongoing basis its current global asset, liability and off-balance sheet exposure details.
With this level of disclosure, market participants can see and track every position so banks cannot hide behind the veil of opacity provided by current disclosure requirements.
With this level of disclosure, market participants can exert discipline on the banks so that they do not exceed their own risk limits or manipulate risk models or hide losses.
A Senate subcommittee report on Thursday charged J.P. Morgan Chase & Co. with ignoring its own limits on risk taking, manipulating risk models to avoid detection and ignoring warnings from traders as the bank’s CEO, Jamie Dimon, intentionally withheld investment bank profit and loss data from federal regulators.This does not effect just federal regulators.
Under the current disclosure rules where banks are "black boxes", market participants are dependent on the bank regulators to properly assess and communicate the risk of each bank.
If bank regulators communicate that the risk is lower than it really is (this is the result of JP Morgan hiding its losses), market participants do not raise the bank's cost of funds to reflect this risk (i.e., market participants give JP Morgan too much funding at too low a price). This is a complete breakdown of market discipline.
The report was commissioned to examine a $6.2 billion credit derivatives trading loss last year at J.P. Morgan’s (NYSE:JPM) London investment office. The loss was partly attributed to a trader, Bruno Michel Iksil, dubbed the “London whale” for his large positions in credit derivatives.
The report notes that the current status of the losses is unclear because J.P. Morgan dismantled the portfolio late last year, moving some funds to its investment banking unit....The current status of the losses is unclear because JP Morgan is actively hiding it.
This action alone should compel Congress and the bank regulators to push through the requirement that banks provide ultra transparency.
Without ultra transparency, as shown by JP Morgan shuffling its losses neither the regulators nor the market know what the true level of risk is at the banks.
The panel, headed by Sen. Carl Levin, Democrat from Michigan, examined 90,000 documents, conducted over 50 interviews and reviewed over 200 taped telephone conversations and instant messages before issuing the bipartisan 300-page report.
It includes dozens of examples in which trader warnings were ignored while risk managers at the institution appeared unaware of losses. It adds that the bank’s chief government regulator appeared oblivious in many instances or was denied critical information.Denial of critical information...
That is the lesson about opacity from the current financial crisis and the JP Morgan trade.
However, the report does have one example showing that Dimon intentionally sought to cut off regulators from critical daily profit and loss trading data at the investment bank....
According to the report, in late January, 2012, as losses in the CIO office were increasing, the Office of the Comptroller of the Currency, the bank’s chief regulator, said Dimon ordered the bank to stop providing a daily investment bank profit and loss report to the agency, because he believed it was too much information to provide to the OCC.
However, Douglas Braunstein, J.P. Morgan Chase’s chief financial officer at the time, restored the daily report soon afterward at the OCC’s request.
But, according to the OCC bank examiner, Scott Waterhouse, “Dimon reportedly raised his voice in anger” at Braunstein and disclosed that he had ordered the halt to the reports. Dimon said the OCC didn't need daily profit and loss figures for the investment bank, according to the examiner....As always, bankers want opacity to hide what is going on.
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