Half a decade has passed since the financial crisis, and yet the behemoth banks that caused economic chaos remain much as they were before – influential, opaque and potentially dangerous. It doesn’t have to be this way. Radical transparency could not only boost the industry, it could safeguard the economy. Forget “mark to market” and quarterly filings. Require every bank to report the value of its assets and liabilities on a daily basis. Don’t believe it can’t be done. Realize that it must be.
Elizabeth Warren, a Democrat from Massachusetts and newly established on the Senate Banking Committee, has already started asking tough questions of the bank regulators. She used to oversee them in her role as chair of the Congressional Oversight Panel that was created to oversee the Troubled Asset Relief Program. Among her most pointed questions is this: Why are so many publicly traded banks valued by the market at less than what they report to investors every quarter as their tangible book value?
Tangible book value is a bank’s assets minus its liabilities. It should be what you could sell the bank for, were you as fortunate as It’s a Wonderful Life’s Mr. Potter and owner of the whole shebang.
One explanation is that the collective consciousness of Main Street and Wall Street investors has coalesced around the idea that the banks are assigning too much value to their assets. Another might be that investors believe the banks are understating the extent of their liabilities. It could, of course, be a combination of both.
The right answer is certainly of interest to people who might be pondering investing in bank stocks. It’s also important to large institutions that might hire banks for money management services or enter into counterparty trades with them. These were the questions around Bear Stearns and Lehman Brothers, and when they weren’t satisfactorily and quickly resolved, it led to their failures and ushered in the financial crisis. For the economy to function, we need a way to address these concerns.