Thursday, November 3, 2011

Bob Diamond prove that "banks will be good citizens" adopt utter transparency

Barclay's Bob Diamond published a column in the Guardian in which he claimed that banks will be good citizens and that they need to rebuild the trust that was lost with the 2007 financial crisis.

Fantastic.

It therefore time for Mr. Diamond to put up or shut up.

Putting up requires that Mr. Diamond and Barclays act with 'trust and integrity' and make one of those 'visible changes' he talks about and voluntarily adopt utter transparency.  Utter transparency involves ongoing disclosure of Barclays current detailed asset, liability and off balance sheet exposures at the end of each day.

In the old days, utter transparency was the mark of a bank that could stand on its own two feet.  Because of this, bankers provided all the accounts that were fit to print voluntarily and not because they were required to by regulators.  Utter transparency was a statement that the bank could be trusted because it had nothing to hide.

Please note that banks that provide utter transparency were still able to make loans and the bankers who ran them still able to make money.  There is no reason to think that acting with trust and integrity by providing utter transparency will hurt Barclays' ability to make loans, to act as a market maker or to make money as a good citizen.

Rather, with this data, market participants can assess Barclays' risk and adjust the amount and price of their exposures accordingly.

In theory, if Barclays' manages its risk as prudently as Mr. Diamond suggests, its access to capital should increase and its cost of capital should decrease - each would be very good news to its shareholders.

Based on his column, Mr. Diamond should be delighted therefore to have Barclays be the first of the global financial institutions to offer this ongoing detailed disclosure.

Of course, maybe Barclays really is a bad citizen. As Yves Smith at NakedCapitalism says no one on Wall Street was compensated for developing low margin, transparent products.  Occupy Wall Street noticed this opaque products and observed that it was wrong to sell them.

If Mr. Diamond and Barclays, as card carrying members of Wall Street's Opacity Protection Team, have something to hide they will come up with an excuse for not offering utter transparency.  This will further confirm that the global financial institutions cannot be good citizens.

I look forward to working with Mr. Diamond and Barclays in providing all market participants access to their detailed disclosure.  To reach me, Mr. Diamond simply needs to express his willingness to provide utter transparency in the comment section to this post.
Soon after the financial crisis of 2008, at a meeting in the United States, a senior economic adviser at the White House put a question to me: "Do you think banks can be good citizens?" As I started to answer yes, he interjected: "If your answer is yes, think about the fact that no one will believe you."...  
The single most important thing for banks and other businesses to focus on immediately is creating jobs and economic growth. To play their role, banks have to rebuild the trust that has been decimated by the events of the last three years. That requires us to use the lessons learned from the crisis to become better and more effective citizens. Put simply, the private sector has an obligation to become the engine of growth and job creation, and banks have a vital role to play in that. 
Frankly, though, banks have done a very poor job of explaining how we contribute to society. We need to fix that as part of the process of restoring trust in what we do. At the simplest level, banks are entrusted with deposits from individuals, businesses and governments. We put that money to work by, for instance, helping people to buy homes or lending to growing businesses. 
Banks also provide critical services to governments and business by providing direct access to global buyers of debt and equity and by establishing large, consistent markets of buyers and sellers. Some characterise these activities as speculative trading. They aren't; they serve a fundamental client need, so it's wrong when they are caricatured as gambling. 
Of course, to meet these client needs banks must be safer and stronger than prior to the crises. The reality is that much is different in today's financial sector. Banks are not borrowing as much, they have more capital, and they have far more stable and liquid sources of funds to lend. Strong banks want strong regulation, and we believe that no taxpayer money should ever again be put at risk to rescue a failed or failing bank.... 
The only way that banks will win back the public's trust is to become better citizens. That starts with how we behave, and in demonstrating we act with trust and integrity. At banks this means the interests of customers and clients must be at the very heart of every decision made.... 
That's why I think the answer to the question posed to me three years ago is that banks must be good citizens. I appreciate that believing this will require you to see a visible difference in the way we participate in society. You may not recognise that right now. It's the early stages. We're determined to keep working at it, and I am committed to making it happen.

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