Inside Financial Services

Please, Enough With Transparency, Already

For shareholders, more company disclosure isn't always a good thing

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Long-time bank hater Peter Eavis seems worried that banks aren’t adequately disclosing their legal reserves: As these legal threats loom, the nagging question is whether the banks have properly girded themselves for the payouts. The banks are supposed to build up a financial cushion in advance to absorb the estimated cost of the payouts. Knowing the size of this cushion, called the litigation reserve, is extremely important to outsiders trying to weigh the financial strength of banks. For instance, if a bank’s litigation reserve turns out to be much too small for the agreed-to settlements, it could call into question the strength and management of the bank. Yet most banks are not disclosing the overall size of their litigation reserves. That has left investors and analysts groping in the dark. “I definitely feel that the disclosures around this aren’t great,” said Richard Ramsden, a bank analyst with Goldman Sachs. [Emphasis added.] Goldman’s Ramsden (who doesn’t actually invest money for a living) might prefer more disclosure in this area; as for me (who does) I’m fine as is.You can surely guess why: the more a bank tells the world how much it’s put aside in legal reserves, the more of a disadvantage it puts itself at as it tries to negotiate settlements. Disclosure simply gives the other side a sense of the real, final number the bank has in mind. Why let ‘em know? Duh! I put down Eavis’s silly complaint as yet another instance of what happens to people’s brains after they’ve spent too much time worshiping at the altar of Wall Street’s new favorite virtue: Transparency. Always and everywhere, the thinking seems to be, more transparency is better than less. I don’t buy that. Rather, I’d just as soon that companies I own keep certain information to themselves when they can. Exactly how they’re spending their marketing dollars, say, or precisely where the R&D budget is going. As with litigation reserves, too much disclosure can give competitors and adversaries an unneeded advantage. Why supply it? Besides, there are other ways besides poring over a company’s filings to get a comfort level with certain risks. (Regular company visits help a lot more than most people realize.) In the meantime, this fixation that people on Wall Street seem to have for disclosure for the sake of disclosure can be a bad and costly idea. What do you think? Let me know !

6 Responses to “Please, Enough With Transparency, Already”

  1. Wall Street Critic

    As usual Tom you favor banks and all their vagaries. That said, there is nothing at all wrong with transparency. The banks have gotten away with their underhanded operations for far to long. Banks need to be monitored. They hold our savings accounts, our checking accounts, our mortgages etc; Why shouldn’t they be held accountable in all aspects of their operations? Remember it was us the taxpayer who bailed them out after their most recent out of control shenanigans. I and I am sure most of America does not want to do it again.

  2. Day Banker

    Wall Street Critic, you’ve completely missed the point. Nobody is saying that exec’s at banks shouldn’t be held accountable, this is simply about not giving up leverage in negotiating legal settlements. If you’re buying a house and I’m the seller, should you be forced to give me your final number before we start negotiating? Of course not. Wanting more transparency around legal reserve presumes that other people (presumably analysts) are in a better position to judge if they have enough set aside than the people who are actually doing the negotiation??? Legal bills eventually get paid and we’ll eventually know if they were correct in their assumptions. If they were wrong, than as owners we’re free to gather a number of like minded individuals and force a change. Knowing just for the sake of knowing though is beyond a stupid idea……

  3. Wyld Byll Hyltnyr

    Tom, I agree that, “(Regular company visits help a lot more than most people realize.)”; however, regular company visits are not available to the guy in Des Moines buying 500 shares for his kid’s college fund. Is your view that you should have superior information than the average Joe or do you believe that anything which is spoken to one investor should be disclosed to all resulting in a level playing field?

  4. R Buhrmann

    You are right about not disclosing how much legal reserves are. You are also right about frequent company visits as a better way to get a good idea of a company’s risk. I would rather invest in a company where I knew and understood the facts, figures, culture, and people then one where I just had a fat reserve balance. The government can shake down anyone because it has basically unlimited resources. In that case no matter how big the reserve it is not enough if the powers that be want more. A good risk management limits the chances you will run afoul of the regulators. I would note that most of JPM’s problems stem from Bear Stearns and Washington Mutual where the risk management was much less rigorous then at JPM. JPM is being used as a fall guy in my opinion.

  5. BenDover

    @ buhrmann, There are some problems for JPM with mortgage put backs stemming from WaMu and BS, but come on -JPM as a fall guy? What about the size of CDS trades made by the London Whale where they were literally moving the market? and the company line th

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