That’s the beauty of investing. The day that Hank and Ben come out and eliminate bank and broker disclosure requirements, what do you think will happen? The stocks will go up. You know why? No bad news is coming in the short term, so let’s buy.

For an example, have a look at Fannie’s stock back in 2006 just after they announced that their books were so crooked that they would not announce earnings for 6-9 months. The stock dropped for a day, then it popped 30%. The boys said, “this is the best stock to hold, guaranteed no bad news coming from them”.

Why should I even care about the operating earnings stream if there might potentially be some unknown ticking time bomb sitting on the balance sheet? How can anyone really make the case for investing in any institution without proper knowledge of the risks on the balance sheet?

It is scary, but it’s actually fairly conventional economic theory. It’s just never implemented as economists want. The idea is to use regulatory capital as a countercyclical mechanism – tighten on the upswing to offset boom-mentality loosening of underwriting quality and loosen on the upswing to smooth the contraction. Obviously, however, it’s never actually tightened on the upswing.

The fact that suspending capital requirements is even being discussed as a notionally viable option is the most frightening thing I’ve heard yet. “Let’s just pretend that this corpse in a chair is alive, wheel him on down the street, and pass his check over the counter at the corner mart, hey?” If you’re a street corner junkie, the world laughs at you for this. If you’re a green cocaine junkie, we’re expected to take you seriously?

Oh and banking regulation?: “Don’t ask; don’t tell.” That works until it doesn’t. As of today, it doesn’t.

Just to be clear – *we* can’t even do that. If the head of trading (or worse, the head of the bank) asked us to put all our trades in a template of his own invention, then we would all laugh in his face. Really, we would. If he asked how long it would take us to do it, we would reply, “Never, it can’t be done.”

Per a, they ought to have items you are required to disclose and the onus is on you to answer their questions and provide the data items in the manner required, Investment banks would not under any current rules have to do that (I’m not sure how far the SEC’s powers extend, but their rulebook is geared much more towards the equity market and pretty simple notions of regulatory capital). But commercial banks should expect a supervisory exam to be about as pleasant as a colonoscopy.

The last time I dealt with regulators was in Japan, and believe me, they were very strict about what they wanted and “no” was not an acceptable answer. Of course, the products were simpler then, but their attitude was that they were in charge and the bank had better jump as high as they asked it to. And that is the posture regulators should take, otherwise the idea that they are supervising effectively is a joke.

Of course they won’t be published at all. A lot of information possessed by bank regulators has always been non-public, for fear of sparking runs (think how little the public portions of bank call reports actually reveal). A kind of paternalistic opacity is baked into the system, under the idea that if there’s a problem, the regulators will act to preserve safety, soundness and all things bright and beautiful. But the Fed/Treasury/SEC is trying to _avoid_ disclosures by non-regulated banks–including whether they are solvent–without any indication that the problems will be addressed by anything more than wishing them away. So far the equity markets seem to buying into this regulatory approach, but Bernanke et al are risking that if something trips, it will be in the US and under their control. Good bet? How bout the bet of spreading risk by `encouraging’ people to do business as normal with undercapitalized and probably insolvent counterparties? FDIC’s C&D to Fremont looks positively antiquated as a regulatory approach.

Rather than worrying about `standardized disclosure forms’ for CDO’s, etc. the real transparency problem is US regulators pretending that GAAP doesn’t exist.

Steve

Um, of course not. Regulators couldn’t even download our positions in any sensible way. For our largest and riskiest book, less than 30 people in the firm would be able to actually tell you how to go from the term sheet to how the product actually behaves and should be valued.

And I’m not sure how standardized the disclosure can be – I wouldn’t trust the numbers that e.g. GS publishes, because that’s the way GS works.

As to auditors, well they verify that it looks like we know what we’re doing, and that’s about it.