Fitch Ratings issued a report on November 16 on the U.S. banking sector saying that “the risks of a negative shock are rising” if the effects of European debt crisis keep spreading. (“Fitch’s Warning Spooks Investors, ” Wall Street Journal).
The article says that banks have stepped up disclosures to quiet the markets, but the disclosures have left many people wanting more. For example, JP Morgan Chase and Goldman Sachs recently disclosed that they have sold credit default swaps that put them on the hook for $5 trillion of debt, but they did not say whether the debt was issued by Greece, Italy, Ireland, Portugal and/or Spain.
Gerard Cassidy, a banking analyst at RBC Capital Markets, was quoted as saying: “If you aren’t disclosing it, you are hiding information.” What is being hid is material information that the banks are required to disclose under the securities laws.
According to the article, Fitch reported that the five largest U.S. banks had $114 billion of exposure to French banks, which are believed to have a large exposure to the debt of the most troubled European countries. The banks also have $188 billion of gross exposure to France, which is approximately 25 percent of their Tier 1 capital.
The exposure to France alone (i.e., not including direct exposure to Greece, Italy, etc.) shows “the susceptibility of banks to contagion risk and the interconnectivity of large global banks,” Fitch was quoted as saying.
The banks insist their net exposure to Eurozone debt is not that great. Morgan Stanley apparently claimed its net exposure to France was negative $286 million, meaning it would realize a gain in a default.
However, some in a position to know better have cautioned that “net exposure” assumes that the banks’ counterparties will fully meet their contractual obligations, when they actually may not. “Net is only as good as the counterparties on each side of the net ? that’s why it’s misleading in a fluid, dynamic market,” former Goldman managing director Nomi Prins was quoted as saying in another recent article, adding: “Their position is you don’t need to know the risks, which is why they’re giving you net numbers.”
“Investors don’t have very good transparency from the big banks,” Mr. Cassidy said. Hence Fitch wanted “to go on record” with a serious statement about its concerns, managing director for financial institutions Christopher Wolfe said.
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