The Quandary of True Transparency
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Transparency and disclosure seem to be the sine qua non of regulatory reform these days. What this means exactly is yet unknown but certainly worth a lively debate. After all, new mandates for more information will require someone, somewhere to do more work. Our guest blogger, Mr. Doug Miles, provides some interesting insight. CEO of GlobalPrivateequity.com, Miles leads a team of independent pricing experts. Here are Doug's remarks:
Almost two years into the global credit crisis, we all yearn for it to be over. Piercing the 8.5% unemployment level last week, not seen for 25 years in the United States, represents one of many aftershocks in a chain reaction throughout 2008. This is a realized metric, unthinkable by any respected economist, as recently as two years ago.
Trillion dollar stimulus packages commit us to years of obscene budget deficits. When combined with the already committed bailout monies, the result is an unfathomable sense of dread and gloom. We wistfully pretend that all of the hot spots of balance sheet and leverage quicksand have now been identified and are being addressed. Sadly, we await the other shoe to drop in the form of additional larger losses. Can we learn from history or are we destined to repeat it?
Recall the bankruptcy of Penn Central. Triggered by the default of its AAA commercial paper in 1970, ensuing problems badly damaged investors' confidence. Not a single Initial Public Offering ("IPO") came to market for seven years. The financial world was smaller then and capitalism in places like China, Brazil, Russia and India did not really exist. There were no derivative markets. Yet market psychology and human reaction remain little changed 38 years later. Balance sheet surprises in the form of imprecisely measured liabilities wreak havoc on cash flow for large and small companies alike, accelerating their need for credit when ready money is a memory of the past.
One remedy is an open asset pricing system, recognized by corporate management as a way to stabilize, if not reverse, a slide in equity levels. Just as it did a century ago with the Panic of 1907, true transparency has the power to calm and heal. Then JP Morgan and his syndicate openly embraced and bolstered the balance sheet investments of a half dozen or more banks as their respective share prices more than halved 52 week highs. Two years later, as asset prices recovered, those financial stocks returned to within 10 to 15 percent of pre-panic highs. The same restoration of confidence and transparency may be achieved in today’s climate but only if corporate executives acknowledge financial measurement problems (rather than blame accounting rule-makers) and busy themselves with economic solutions.
