“After serving on the [FASB] board, I no longer trust bank accounting.”
-Don Young, Financial Accounting Standards Board
“Do I trust Bank Accounting? Absolutely not.”
-Ed Trott, Financial Accounting Standards Board member
“There is no major financial institution today whose financial statements provide a meaningful clue” about its risks.
-Paul Singer, Elliott Associates
This month’s must read cover story of The Atlantic was written by two of my favorite writers: Pulitzer Prize winner Jesse Eisinger of Pro Publica (and Portfolio, WSJ, and TSCM) and Frank Partnoy of University of San Diego School of Law, author of F.I.A.S.C.O., Infectious Greed, The Match King, and – most recently – WAIT: The Art and Science of Delay.
They discuss an issue I have talked about here repeatedly — that banks are essentially opaque black boxes; banks have purposefully concealed what’s on their balance sheets; that they are not merely complex, but actually deceptive; investors have no idea what they are buying when they own one of the behemoth money centers like Citigroup (C), Bank of America (BAC), Wells Fargo (WFC) or JP Morgan (JPM).
Of course, no bank article would be complete without at least a mention of the bank frauds and illegal actions that are now merely a cost of doing business: Helping Mexican drug dealers launder money (HSBC); funneling cash to Iran (Standard Chartered); LIBOR fraud (Barclays and a cast of dozens); falsifying mortgage records/improperly foreclosing on borrowers (all the giant banks); routinely misleading clients (Merrill, Morgan Stanley, Citi); Selling securities known to be garbage (Goldman Sachs, Merrill); secretly betting against clients to profit from their ignorance (Goldman Sachs).
Two discussion lines in the article stood out: The first is the number of former bankers now calling for a break up of the giant money center banks: Philip Purcell (ex-CEO of Morgan Stanley Dean Witter), Sallie Krawcheck (ex-CFO of Citigroup), David Komansky (ex-CEO of Merrill Lynch), and John Reed (former coâ€‘CEO of Citigroup). Sandy Weill, another ex-CEO of Citigroup.
The second is the heart of the article: How opaque, misleading, non-disclosing and — WTF, let’s just say it — fraudulent bank balance sheets are.
Perhaps the most damning quote in the entire column comes from former Federal Reserve Board member Kevin Warsh. He suggested that the financial statements a big bank files with the SEC are worthless:
“Investors can’t truly understand the nature and quality of the assets and liabilities. They can’t readily assess the reliability of the capital to offset real losses. They can’t assess the underlying sources of the firms’ profits. The disclosure obfuscates more than it informs, and the government is not just permitting it but seems to be encouraging it.”
That is a damning statement.
If the first rule of investing is know what you own, than how can anyone credibly own a major money center bank? The answer, at least for me, is that you cannot — owning bank stocks is not investing, it is pure speculation.
Who wants to make a bet that insiders are going to act in good faith on what is an investor’s best interests?
Not me. If that means I miss a sector that did well last year, it is something I have to live with. . .
What’s Inside America’s Banks?
By Frank Partnoy and Jesse Eisinger
ATLANTIC MAGAZINE, January/February 2013