Full disclosure is a hard concept for an industry that advertises its discretion in landing business and recognizes the legal and competitive advantages of keeping one's mouth shut.
Silence was a reasonable strategy when delinquencies first appeared in subprime mortgages, but it is increasingly perceived as a sign of guilt in the confidence crisis now gripping the markets.
The large banking companies and investment banks that originated, sliced, diced, and distributed risk are facing strident calls to start talking about where it all went. Regulators and investors are focusing on exposures in leveraged lending and structured products, including mortgage securitizations and commercial paper. They also are looking for assurances that different constituencies within the companies, from accountants to traders, are coming to a consensus on how to value these products.
Though large banking companies are likely to be more forthcoming than usual when they report third-quarter earnings next month, their cultural resistance to bean-spilling is still in evidence. Calls to the four with developed capital markets operations — Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., and Wachovia Corp. — did not turn up one banker willing to discuss what steps their companies might take in their reports and conference calls to alleviate concerns about risk.
In short, banking companies will not even disclose what they intend to disclose.
Christy Phillips Brown, a spokeswoman at Wachovia, read this statement from its chief financial officer, Thomas Wurtz: "Wachovia has always had a strong reputation as an industry leader for the transparency and completeness of our disclosure. We expect to continue with our commitment in transparent disclosure and over the next several weeks will be working to determine what information will be most helpful to our investors."
The other companies would not comment for this story, but bankers should have plenty to say when reports start rolling out next month.
Kevin Blakely, the new president and chief executive officer of the Risk Management Association — and the former chief credit officer at KeyCorp — said current market conditions, coupled with a new standard on fair-value accounting, have pushed the industry into a "new era" of disclosure. What remains the same, however, is the balancing act the companies must perform.
"I think we'll see some better efforts at disclosure," and "I think banks will try to do the right thing," he said. "They want to disclose to shareholders that they have some issues, but they don't want to make a mistake that unnecessarily spooks the market."
The struggle to place debt raised by financial sponsors arranging leveraged buyouts has raised questions about how much of a hit bankers will take. They face exposure in the form of undrawn commitments, loans that failed to find markets and were taken on to lenders' balance sheets, and loans placed at sharp discounts.
"We'll get more disclosures than we are used to — the question is how much more detail we will get," said Jeffery Harte, an analyst at Sandler O'Neill & Partners LP. "Ideally, we would find out about their lending-related commitments to financial sponsors and leveraged buyouts — and what kinds of marks they are taking."
Deal-specific disclosures are not likely. Borrowers expect confidentiality when it comes to negotiations and some terms of big syndications, and giving away too much information could threaten bankers' competitive positions. However, providing aggregate numbers would preserve confidentiality and would be a strong step toward mollifying investors.
Additional disclosure is certain to make some bank managers queasy, but they may find more transparency is a better option than blatantly ignoring shareholder concerns.
"Even if banks don't specifically spell it out in their comments or their press releases, I guarantee detailed questions will be asked in every conference call," Mr. Harte said. "To some extent, they are going to have to address it, even if they only say that they don't disclose that information."
Structured-finance disclosures could present more problems, because the accounting for these complex, opaque products defies easy valuation. Many of them were never liquid to begin with, and now that bids have all but disappeared, companies are struggling to determine market value in the absence of a market.
"Regardless of what and how the banks lay things out, we really won't know the risks anyway," said Cassandra Toroian, the chief investment officer at Blue Rockefeller LLC. "I don't think the banks know, and I don't think enough time has gone by for people to come up for air and get enough bids to determine accurate prices."
Banking companies can make good-faith efforts to value the securities with models and still reach wildly different conclusions. And depending on intent — either to sell the securities eventually or hold them to maturity — the effect on income can vary.
"If you're sitting on a piece of a subprime securitization, and you can't sell it because there's no market, does that mean your market value is zero?" Mr. Blakely asked. "Depending on how you define mark to market, you could mark it between zero and 100. It will be interesting to see how much consistency there is from one bank to another and one audit firm to another."
Banking companies with developed trading operations, particularly prime brokers, will face an even more challenging problem: They must use the same valuations for similar securities on both their own balance sheets and those on the books of their clients. The decidedly different motivations undoubtedly will lead to some interesting conversations among business units and auditors.
Mr. Blakely said that internal tension "can be part of a healthy process" in which haggling between auditors and trading desks leads to a realistic assessment of value. However, investors must also be realistic in their expectations, he said.
"The market has to be a little circumspect as to how these things come out," he said. Investors "can't expect absolute unanimity across the board during this reporting period, but I think every period after this will bring greater consistency and greater transparency."
Ms. Toroian said she is not convinced that now is the time for additional disclosure.
"Anyone who thinks that putting a little more detail in an earnings report is going to give investors enough comfort to start buying is kidding themselves," she said. "If you didn't lay something out for the past 10 years, don't start now. You set a precedent, and what if you don't do it again next quarter?"
But Joseph Mason, a professor at Drexel University's Lebow College of Business, who has been beating the drum for more transparency in securitizations, said bankers resist additional disclosure at their own peril.
"The industry should not want regulators to jump down their throats and impose disclosure," Prof. Mason said. "Right now the industry is in such a state that if they don't self-regulate and provide adequate disclosure, the probability of them getting heavy-handed regulation in the near future is very high."
And the costs of disclosure may not be as great as bankers fear. "This is not a question of who has the most stellar earnings," he said. "People are going to reinvest their funds after this is all over. They will look to those banks that tried to operate on an honest basis — that tried to value assets — even if they got it wrong."
