Monday, August 20, 2007

Bill Gross: Lack of Proper Disclosure

Here is an excerpt of an article posted on CNN website: Tough love on Wall Street

  • What Citigroup's Chuck Prince, the Fed's Ben Bernanke, Treasury Secretary Hank Paulson, and a host of other sophisticates should have known is that the bond and stock market problem is the same one puzzle players confront during a game of "Where's Waldo?" -- Waldo in this case being the bad loans and defaulting subprime paper of the U.S. mortgage market.

    While market analysts can estimate how many Waldos might actually show their faces over the next few years -- $100 billion to $200 billion worth is a reasonable estimate -- no one really knows where they are hidden.

    First believed to be confined to Bear Stearns's hedge funds and their proxies, Waldos have been popping up with regularity in seemingly staid institutions such as German and French banks, and that has necessitated state-sanctioned bailouts reminiscent of the Long-Term Capital Management crisis of 1998.

    IKB, a German bank, and BNP Paribas, its French counterpart, encountered subprime meltdowns on either their own balance sheets or investment funds sponsored by them. Their combined assets total billions, although their Waldos are yet to be computed or even found.

So how now Brown Cow? Just how bad is it?

If one does not know how bad is it, how does one manage the current market risk?

Bill Gross continues..

  • Those looking for clues to the extent of the spreading fungus should understand that there really is no comprehensive data to allow anyone to know how many subprimes actually rest in individual institutional portfolios.

    Regulators have been absent from the game, and information release has been left in the hands of individual institutions, some of which have compounded the uncertainty with comments about volatile market conditions unequaled during the lifetime of their careers.

    Also many institutions, including pension funds and insurance companies, argue that accounting rules allow them to mark subprime derivatives at cost. Default exposure, therefore, can hibernate for many months before its true value is revealed to investors and, importantly, to other lenders.

    The significance of proper disclosure is, in effect, the key to the current crisis.