On a day when Merrill Lynch announced an $11.5bn writedown, many investment bankers would rather cover their eyes with their hands than be forced to drag more liabilities up from the graveyard of US subprime mortgages.
But Josef Ackermann of Deutsche Bank is right to put openness at the top of the agenda for banks trying to restore customer and investor confidence. He made his first call for greater transparency in September and fleshed out his ideas earlier this week, with proposals that include minimum standards for the valuation of complex products, improved market pricing, and better provision of primary data that would allow investors to make an informed judgement.
Some providers of structured credit products such as mortgage-backed securities will argue that sophisticated investors can already get access to a lot of information about such instruments. But more must be done. Peter Hahn, a former Citigroup banker who is now a fellow at Cass Business School in the City of London, believes no security should be sold unless it supplies enough regular information for third parties to assess it. A credit rating agency involved with the issue could even be contracted to rate the product through its life.
Acronym Alley needs to be bulldozered. It may be convenient for pukka banks to keep CDOs, CLOs and SIVs out of sight in a no-go zone, but it makes no sense if these shady characters are later going to break out and mug shareholders. There is an argument that they should be brought back onto the balance sheet forthwith, even if that means banks having to carry more capital. As Mr Ackermann puts it “regulatory arbitrage does not equal risk management” and investment banks have already proved that they sometimes need to buy SIV assets back to save their reputations from further damage. But at the very least, enlightened banks should now volunteer information about their off-balance-sheet holdings in their public reports. That would oblige audit committees and audit firms to review the detailed information on exposure regulator.
If regulators are up to the task – and banks are serious about it – there’s no reason for this to lead to 1,000-page annual reports. The UK’s accounting watchdog has already launched a review of the complexity of corporate reporting. To motivate banks and their accountants to greater clarity and concision, the initiative should adopt a one-word mission statement : focus. In fact, let that be the bloated banking sector’s belated resolution for 2008.