Wall Street Firms Refuse to Disclose Exposure to European Debt


JP Morgan Chase and Goldman Sachs have sold credit default swaps that put them on the hook for $5 trillion of debt ? but they won’t say whose debt they are on the hook for. That leaves investors worried that it may be debt issued by Greece, Italy, Ireland, Portugal and/or Spain. Greece and Italy are insolvent, and the others are not very creditworthy, according to experts.

The most the banks will disclose is what they call their net exposure. For example, JP Morgan asserted in federal filings that over 98% of the credit default swaps it has written on the unspecified debt is offset by credit default swaps it has purchased on the same debt. But it will not disclose every long and short position, the debt issuers, nor the counterparties it may depend on.

Critics point out that the “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, adding: “Their position is you don’t need to know the risks, which is why they’re giving you net numbers.”

According to Prins, in order to properly evaluate the banks’ true exposure, it is entirely appropriate for investors to want to know every long and short position credit default position, the issuers of the debt on the sold credit default swaps, and the counterparties on the purchased credit default swaps.

The exposure of Goldman Sachs, Bank of America and Morgan Stanley to troubled European debt is even more opaque. Those firms only disclose what they call their “net funded” exposure, which does not include debt they may be required to repay as a result of credit default swaps they may have sold.

“We learned from Lehman that all of these firms are tied together with bungee cords — you can’t just lift one out without it affecting everyone else in the group,” Brad Hintz, an analyst at Sanford C. Bernstein & Co. who previously worked at Lehman Brothers and Morgan Stanley, was quoted as saying. He added that more disclosure “may push the stock prices down when it becomes clear how big the bungee cords are. But it certainly would be a welcome addition for an analyst.”

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