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    What's Your Bank Worth?

    By Michael Maiello on Tue, 02/26/2013 - 2:26pm | Politics

    For Reuters today, I've decided to argue that the whole question about whether or not a bank is solvent, or what it's worth, is something that we'd all be better off without.  And, in a world where you can get the daily net asset value of more than $13 trillion in mutual funds and $2 trillion in exchange traded funds, there's really no excuse for not forcing banks to become more radically transparent.

    You can read my argument over at Reuters.  But if you want to tell me why I'm wrong here, I'm always listening.

    Topics: 
    Politics

    Comments

    Hey Michael, can you fill in some gaps for non-finance guy?

    First off, you're talking about investment banks, right? I know commercial banks have investment wings these days, but FDIC-insured commercial banks have different reporting requirements from pure i-banks, right?

    Second, what distinguishes i-banks from other investment companies, say hedge funds or mutual funds? I understand that they generally fill different roles, but what's the formal distinction? If Bridgewater decided to muscle in on Goldman's territory, at what point would it become regulated under your proposal?

    Third, are you just proposing more frequent reporting (quarterly to daily) or also more comprehensive reporting? If the former, could you explain to me how it solves the problem. For instance, Lehman faced a warranted crisis of confidence during the 3rd quarter of 2008, culminating in its September earnings statement. How would daily reporting over that period have averted or minimized the crisis?


    by Michael Wolraich on Tue, 02/26/2013 - 5:48pm

    Both commercial and investment banks have balance sheets largely made of tradable assets, so this would apply to all of them.

    At the moment what distinguishes iBanks from other investment companies is that ibanks can trade for their own accounts while investment managers manage money for clients.  It's no surprise that those clients demand much greater transparency (and they get it!)  As for Bridgewater muscling in on Goldman's business -- that train has sailed.  Hedge funds engaging in banking activities (loans, equity injections, financing through convertible bond offerings) is what people mean when they talk about "shadow banking."  Generally speaking, they are as transparent a their investors demand and investors are getting more demanding.  But, they also aren't publicly traded, so they are less a worry than the banks are.

    As for Lehman, I think daily asset and liability reporting would have helped a lot.  Investors would have known, to the day, the difference between the market value of Lehman's balance sheet and what Dick Fuld believed its long term value wars.  That would have allowed investors and counter parties to better gauge management's credibility.  Of course, sometimes, management will be right and the markets will be wrong.


    by Michael Maiello on Tue, 02/26/2013 - 7:37pm

    Thanks. I'm not satisfied on the last one though. Why does knowing "to the day" matter? Wouldn't Lehman just have crashed all the same a month or so earlier?

    Another question, why are private companies of less concern? All the ibanks were private until the 90s, weren't they? With new reporting requirements, would the banks be less likely to go public, and if so, would that produce less transparency?


    by Michael Wolraich on Wed, 02/27/2013 - 10:27am

    There's probably no way to convince you of point one except to say that it's not as if Lehman's book lost 80% of its value in a single day.  With more data points, some people might have been able to see the trend.  In a way, this is like our "spree killer" debates that we've been having since Aurora -- there's no way to stop calamity, there are conditions, however, that reduce the likelihood.

    A lot of iBanks were non-traded partnerships until the 90s.  I wonder what level of knowledge their partners demanded about the bank's financial condition?  The securities on the books were also somewhat simpler then but, you could also argue that markets for them were less developed as was the computing power for estimating values.

    Going public and raising a ginormous amount of equity is one way that the banks expanded the way they did.  It's hard to imagine Citigroup or Goldman Sachs reaching their current sizes as private entities.  Fidelity is a private entity, but it only reached scale by selling shares of its funds to the public.  So maybe forcing these banks to disclose more as a consequence of going public will stop some banks from going public.  Is that necessarily a bad thing?


    by Michael Maiello on Wed, 02/27/2013 - 1:12pm

    I don't think that daily reporting is a bad thing, I just don't understand the connection between more frequent reporting and less traumatic financial crises. I'm not trying to pick an argument here, I just don't follow your reasoning.

    I understand the value of transparency for an efficient market. We don't want investors pouring money into hollow companies. Conversely, we don't want investors panicking because of unfounded rumors about sound businesses. But I don't see why quarterly reporting is insufficient to avoid these problems, and I don't see how more frequent reporting would have ameliorated the financial crisis of '08.

    Suppose that Lehman had reported daily and that investors spotted the trend in July rather than September. So what? What does it matter whether Lehman fell in July or September? How would things have been any better?


    by Michael Wolraich on Wed, 02/27/2013 - 4:25pm

    One issue, when it comes to big customers and investors alike is that you can either leg out of a position or dump.

    With quarterly reporting, people had to dump.  Being able to see the trend on a daily basis might have allowed people to get out in a more orderly fashion (and other people to get in, if they deemed the current relationship of price to assets worth the money).

    Say I own Lehman stock or bonds.  When I bought them, I thought Lehman had $80 in assets to cover every unit of what I owned.  Tomorrow, those assets fall in value to $75.  Maybe I trim my position.  If I think that the price of those assets will go back up, maybe I buy.  What I don't do is either dump or double down based on what piece of data.

    I'm not arguing that this would have saved either Lehman or Bear.  But it might have changed the pace of things.


    by Michael Maiello on Wed, 02/27/2013 - 4:33pm

    I am always for more transparency not to mention better and more useful information but since by and large a bank's assets are its liabilities, it might be unnerving for some to find out how little 'there' is actually there. Something else to be wary of is the possibility of provoking a bank run if say a cash-flow insolvency temporarily gives it a negative net asset value.  Even though people may have watched A Wonderful Life a hundred times and intellectually grasp that their money is not sitting in a bank's vault, most will still panic when they think their money is at risk.

    You mention loss of confidence in Bear and Lehman as primary movers of the 2008 panic but not Reserve Primary Fund yet it was Reserve's 'breaking the buck' that influential people in banking and regulation blame for a massive run on money market funds by institutional investors.  The reason no other funds 'broke the buck' was because those funds' sponsors stepped up to back stop the $1 fixed net asset value and the FDIC instituted its TAG program providing unlimited coverage on demand bank accounts.

    You compare your proposal of daily reporting of banks' net asset values to what mutual funds do but you only mention stock and bond funds. Money market funds which would be a better comparison since they are banks' direct competitors. They have not historically reported their actual daily net asset value although I read that some are now doing so as a result of a push by banks and those influential same people who include Tim Geithner and former SEC Chairman Mary Schapiro to require floating, not fixed, net asset values.  

    Sounds like you stepped into the middle of a push back from the money funds to require the same thing from banks although I cannot confirm that because I have been lax about keeping up my finance reading.

     


    by EmmaZahn on Tue, 02/26/2013 - 7:34pm

    Interesting though, that the Reserve Fund broke the buck because... it owned Lehman Brothers bonds.  In that sense, a lack of transparency kept Bruce Bent from really knowing what he owned.


    by Michael Maiello on Tue, 02/26/2013 - 7:41pm

    Bent broke the buck because he chose to not because he had to.  I wrote something about that in a comment at the old TPM Cafe.  His reaction was more of a 'screw me?  screw YOU!' type of thing.  I remember reading some things from the Investment Company Institute at the time and were they ever angry with him.

    What was interesting to me was how Bear, Lehman and Bent always thought of themselves as being ill-treated by the bigger boys on the Street and they are they ones who took the biggest hits in 2008.  


    by EmmaZahn on Tue, 02/26/2013 - 7:49pm