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In reply to the discussion: STOCK MARKET WATCH -- Thursday, 17 January 2013 [View all]Demeter
(85,373 posts)2. What’s Inside America’s Banks?
http://www.theatlantic.com/magazine/archive/2013/01/whats-inside-americas-banks/309196/#
Some four years after the 2008 financial crisis, public trust in banks is as low as ever. Sophisticated investors describe big banks as black boxes that may still be concealing enormous risksthe sort that could again take down the economy. A close investigation of a supposedly conservative banks financial records uncovers the reason for these fearsand points the way toward urgent reforms... The financial crisis had many causestoo much borrowing, foolish investments, misguided regulationbut at its core, the panic resulted from a lack of transparency. The reason no one wanted to lend to or trade with the banks during the fall of 2008, when Lehman Brothers collapsed, was that no one could understand the banks risks. It was impossible to tell, from looking at a particular banks disclosures, whether it might suddenly implode. For the past four years, the nations political leaders and bankers have made enormousin some cases unprecedentedefforts to save the financial industry, clean up the banks, and reform regulation in order to restore trust and confidence in the American financial system. This hasnt worked. Banks today are bigger and more opaque than ever, and they continue to behave in many of the same ways they did before the crash.
Consider JPMorgans widely scrutinized trading loss last year. Before the episode, investors considered JPMorgan one of the safest and best-managed corporations in America. Jamie Dimon, the firms charismatic CEO, had kept his institution upright throughout the financial crisis, and by early 2012, it appeared as stable and healthy as ever. One reason was that the firms huge commercial bankthe unit responsible for the old-line business of lendinglooked safe, sound, and solidly profitable. But then, in May, JPMorgan announced the financial equivalent of sudden cardiac arrest: a stunning loss initially estimated at $2 billion and later revised to $6 billion. It may yet grow larger; as of this writing, investigators are still struggling to comprehend the banks condition. The loss emanated from a little-known corner of the bank called the Chief Investment Office. This unit had been considered boring and unremarkable; it was designed to reduce the banks risks and manage its spare cash. According to JPMorgan, the division invested in conservative, low-risk securities, such as U.S. government bonds. And the bank reported that in 95 percent of likely scenarios, the maximum amount the Chief Investment Offices positions would lose in one day was just $67 million. (This widely used statistical measure is known as value at risk.) When analysts questioned Dimon in the spring about reports that the group had lost much more than thatbefore the size of the loss became publicly knownhe dismissed the issue as a tempest in a teapot. Six billion dollars is not the kind of sum that can take down JPMorgan, but its a lot to lose. The banks stock lost a third of its value in two months, as investors processed reports of the trading debacle. On May 11, 2012, alone, the day after JPMorgan first confirmed the losses, its stock plunged roughly 9 percent.
The incident was about much more than money, however. Here was a bank generally considered to have the best risk-management operation in the business, and it had badly managed its risk. As the bank was coming clean, it revealed that it had fiddled with the way it measured its value at risk, without providing a clear reason. Moreover, in acknowledging the losses, JPMorgan had to admit that its reported numbers were false. A major source of its supposedly reliable profits had in fact come from high-risk, poorly disclosed speculation. It gets worse. Federal prosecutors are now investigating whether traders lied about the value of the Chief Investment Offices trading positions as they were deteriorating. JPMorgan shareholders have filed numerous lawsuits alleging that the bank misled them in its financial statements; the bank itself is suing one of its former traders over the losses. It appears that Jamie Dimon, once among the most trusted leaders on Wall Street, didnt understand and couldnt adequately manage his behemoth. Investors are now left to doubt whether the bank is as stable as it seemed and whether any of its other disclosures are inaccurate....
Some four years after the crisis, big banks shares remain depressed. Even after a run-up in the price of bank stocks this fall, many remain below book value, which means that the banks are worth less than the stated value of the assets on their books. This indicates that investors dont believe the stated value, or dont believe the banks will be profitable in the futureor both. Several financial executives told us that they see the large banks as complete black boxes, and have no interest in investing in their stocks. A chief executive of one of the nations largest financial institutions told us that he regularly hears from investors that the banks are uninvestable, a Wall Street neologism for untouchable. Thats an increasingly widespread view among the most sophisticated leaders in investing circles. Paul Singer, who runs the influential investment fund Elliott Associates, wrote to his partners this summer, There is no major financial institution today whose financial statements provide a meaningful clue about its risks. Arthur Levitt, the former chairman of the SEC, lamented to us in November that none of the post-2008 remedies has significantly diminished the likelihood of financial crises. In a recent conversation, a prominent former regulator expressed concerns about the hidden risks that banks might still be carrying, comparing the big banks to Enron. A recent survey by Barclays Capital found that more than half of institutional investors did not trust how banks measure the riskiness of their assets. When hedge-fund managers were asked how trustworthy they find risk weightingsthe numbers that banks use to calculate how much capital they should set aside as a safety cushion in case of a business downturnabout 60 percent of those managers answered 1 or 2 on a five-point scale, with 1 being not trustworthy at all. None of them gave banks a 5...
Some four years after the 2008 financial crisis, public trust in banks is as low as ever. Sophisticated investors describe big banks as black boxes that may still be concealing enormous risksthe sort that could again take down the economy. A close investigation of a supposedly conservative banks financial records uncovers the reason for these fearsand points the way toward urgent reforms... The financial crisis had many causestoo much borrowing, foolish investments, misguided regulationbut at its core, the panic resulted from a lack of transparency. The reason no one wanted to lend to or trade with the banks during the fall of 2008, when Lehman Brothers collapsed, was that no one could understand the banks risks. It was impossible to tell, from looking at a particular banks disclosures, whether it might suddenly implode. For the past four years, the nations political leaders and bankers have made enormousin some cases unprecedentedefforts to save the financial industry, clean up the banks, and reform regulation in order to restore trust and confidence in the American financial system. This hasnt worked. Banks today are bigger and more opaque than ever, and they continue to behave in many of the same ways they did before the crash.
Consider JPMorgans widely scrutinized trading loss last year. Before the episode, investors considered JPMorgan one of the safest and best-managed corporations in America. Jamie Dimon, the firms charismatic CEO, had kept his institution upright throughout the financial crisis, and by early 2012, it appeared as stable and healthy as ever. One reason was that the firms huge commercial bankthe unit responsible for the old-line business of lendinglooked safe, sound, and solidly profitable. But then, in May, JPMorgan announced the financial equivalent of sudden cardiac arrest: a stunning loss initially estimated at $2 billion and later revised to $6 billion. It may yet grow larger; as of this writing, investigators are still struggling to comprehend the banks condition. The loss emanated from a little-known corner of the bank called the Chief Investment Office. This unit had been considered boring and unremarkable; it was designed to reduce the banks risks and manage its spare cash. According to JPMorgan, the division invested in conservative, low-risk securities, such as U.S. government bonds. And the bank reported that in 95 percent of likely scenarios, the maximum amount the Chief Investment Offices positions would lose in one day was just $67 million. (This widely used statistical measure is known as value at risk.) When analysts questioned Dimon in the spring about reports that the group had lost much more than thatbefore the size of the loss became publicly knownhe dismissed the issue as a tempest in a teapot. Six billion dollars is not the kind of sum that can take down JPMorgan, but its a lot to lose. The banks stock lost a third of its value in two months, as investors processed reports of the trading debacle. On May 11, 2012, alone, the day after JPMorgan first confirmed the losses, its stock plunged roughly 9 percent.
The incident was about much more than money, however. Here was a bank generally considered to have the best risk-management operation in the business, and it had badly managed its risk. As the bank was coming clean, it revealed that it had fiddled with the way it measured its value at risk, without providing a clear reason. Moreover, in acknowledging the losses, JPMorgan had to admit that its reported numbers were false. A major source of its supposedly reliable profits had in fact come from high-risk, poorly disclosed speculation. It gets worse. Federal prosecutors are now investigating whether traders lied about the value of the Chief Investment Offices trading positions as they were deteriorating. JPMorgan shareholders have filed numerous lawsuits alleging that the bank misled them in its financial statements; the bank itself is suing one of its former traders over the losses. It appears that Jamie Dimon, once among the most trusted leaders on Wall Street, didnt understand and couldnt adequately manage his behemoth. Investors are now left to doubt whether the bank is as stable as it seemed and whether any of its other disclosures are inaccurate....
Some four years after the crisis, big banks shares remain depressed. Even after a run-up in the price of bank stocks this fall, many remain below book value, which means that the banks are worth less than the stated value of the assets on their books. This indicates that investors dont believe the stated value, or dont believe the banks will be profitable in the futureor both. Several financial executives told us that they see the large banks as complete black boxes, and have no interest in investing in their stocks. A chief executive of one of the nations largest financial institutions told us that he regularly hears from investors that the banks are uninvestable, a Wall Street neologism for untouchable. Thats an increasingly widespread view among the most sophisticated leaders in investing circles. Paul Singer, who runs the influential investment fund Elliott Associates, wrote to his partners this summer, There is no major financial institution today whose financial statements provide a meaningful clue about its risks. Arthur Levitt, the former chairman of the SEC, lamented to us in November that none of the post-2008 remedies has significantly diminished the likelihood of financial crises. In a recent conversation, a prominent former regulator expressed concerns about the hidden risks that banks might still be carrying, comparing the big banks to Enron. A recent survey by Barclays Capital found that more than half of institutional investors did not trust how banks measure the riskiness of their assets. When hedge-fund managers were asked how trustworthy they find risk weightingsthe numbers that banks use to calculate how much capital they should set aside as a safety cushion in case of a business downturnabout 60 percent of those managers answered 1 or 2 on a five-point scale, with 1 being not trustworthy at all. None of them gave banks a 5...
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