At too-big-to-fail banks, transparency should mean letting us know when risk models scream TILT!

In an interesting turn of events…

When J. P. Morgan Chase CEO Jamie Dimon meets with analysts Friday, he can expect tougher questioning than when he testified before Congress twice last month.

 

Senators from both sides of the aisle tip-toed around Dimon in June, incredibly deferential in their questioning. The “fawning” from the members of the Senate banking commitee greatly disappointed critics apalled that ”too-big-to-fail” banks have jumped back into risky investments so soon after being bailed out by U.S. taxpayers. Dimon had been called on the Congressional carpet after JPM announced that it had lost at least $2 billion in bets on derivative investments tied to a single trader with a made-for-tabloids nickname, the “London Whale.”

Some analysts expect those trading losses to be much higher than $2 billion. First order of business for Dimon Friday is to provide an accurate–and hopefully final–accounting of the losses. Then he needs to detail how JPM will improve its risk managment. Analysts certainly will have some tough questions about how JPM judged the riskiness of the trades and controls the bank has since put in place.

A key issue for analysts, investors and, ultimately, the SEC: How JPM and other big banks have kept their investors in the dark about how they calculate trading risks. Investment banks evaluate risk with proprietary “value-at-risk” (VaR) formulas that are kept closely guarded. JPM, for example, did not disclose to investors or regulators even when their VaR calculations showed that risk assumptions had changed. According to a recent Bloomberg report:

Wall Street firms routinely give only broad outlines of how their mathematicians calculate VaR, according to data compiled by Bloomberg, and almost nothing about changes in statistical assumptions or the prices they choose to feed into their models.

Dimon should come to the analyst meeting Friday prepared to detail improvements in transparency, while protecting what is rightfully proprietary. Even though Congress has to this date been easy on him, Dimon cannot expect to be able to continue to keep JPM’s investors in the dark.

- Jon Harmon

 

 

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