You Don’t Say? Big Banks Systematically Hiding Potential Losses: Report

If you think the big banks learned painful lessons about risk-taking during the financial crisis, think again: They’re still taking the same risks, and we don’t even know how big those risks are.

In the latest edition of The Atlantic, Frank Partnoy and Jesse Eisinger have a 9400-word opus on the untold horrors lurking on big-bank balance sheets. The elevator summary: Boy, banks sure do a lot of dodgy trading, and they hide their potential losses from investors.

This may not come as shocking news. But it’s one of those things that we can’t hear often enough, with the momentum for reform cooling every day we get further away from the crisis. Big banks still have the capacity to blow up the financial system, and our inability to trust them makes another disaster even more likely.

Particularly useful is Partnoy and Eisinger’s deep dive into the latest annual report of a supposedly staid, conservative bank, Wells Fargo. The authors discover that the bank is not simply lending money and giving away toasters, like banks used to do. Based on the authors’ accounting, it looks like nearly $20 billion of Wells Fargo’s $81 billion in revenue in 2011 came from one kind of trading or another.

And the bank doesn’t offer much, if any, detail about the potential risks of that trading. How much money could Wells Fargo lose on its trades, which include hard-to-trade and hard-to-value derivatives? In the worst case, could the losses threaten the $148 billion in capital reserves Wells Fargo claims to have? Nobody knows, because Wells Fargo doesn’t tell us, and they’re not required to.

Read on.

6 responses to “You Don’t Say? Big Banks Systematically Hiding Potential Losses: Report

  1. The cat read the whole “Atlantic” article. This phrase: “generated primarily from model-based techniques that use significant assumptions not observable in the market.” is particularly disturbing. It means banks can pretty much make up the numbers. The cat prefers snake oil. It may be more useful, maybe it would help ease a squeaky door hing.

    • That sums it up. You would think that the government and regulators would learn the lessons of making up numbers from the Enron scandal when the CFO hid their losses and move their money and the top execs knew.

  2. The politicians in government do not learn anything, except how to take money to get reelected.

    • I hear you. It’s not only corruption on Capitol Hill but in the local and state areas. I know. My city has corrupted official. Some politicans should only get two terms: One in office, the other in prison.

  3. By the way, “The Atlantic” article should be dumbed down to the eighth grade level so that other journalists can understand what it means, and dumbed down to the fifth grade level, so people in Congress can actually read it–they will not learn from it but the way it is written is too smart for them.

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