Friday, January 18, 2013

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.

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?

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