INVESTMENT BANKS ARE TOO BIG TO VEIL / THE WALL STREET JOURNAL ( RECOMMENDED READING )

The Wall Street Journal

HEARD ON THE STREET

NOVEMBER 9, 2009

Investment Banks Are Too Big to Veil

By PETER EAVIS

We don't know what's in the belly of the beasts.

Some of the U.S.'s largest financial firms contain sizable investment banks and securities operations. Yet even though these businesses tend to be volatile and complex, and recently produced large losses, investors don't get enough data to properly understand them.

Take the investment-banking operations at Citigroup or J.P. Morgan Chase. Because these businesses are presented as segments within larger entities, they disclose far less than stand-alone Wall Street firms like Morgan Stanley or Goldman Sachs Group. (Despite its acquisition by Bank of America, Merrill Lynch still makes detailed quarterly securities filings.)

Admittedly, some investors might like the fact that securities operations at Citi and J.P. Morgan are part of a bigger organization that may support them in tough times. And being part of a larger bank may give investment-banking subsidiaries an edge with clients.

But when investors can't get the numbers they need on a company, they tend to pay less for its shares. Worse, lack of transparency breeds nasty surprises. For instance, in the months before American International Group's financial-products business imploded, analysts had to guess how much equity the unit had. In early 2008, one analyst put it at a paltry $273 million.

Detailed balance sheets are particularly important, because they give insight about equity, leverage and funding.

But outsiders get limited segment balance-sheet data for Citi's Securities and Banking segment, which includes investment-bank activities. In the third quarter, this unit disclosed $771 billion in assets, roughly the same as Morgan Stanley. Yet no segment equity figure was given, making it impossible to calculate something as crucial as leverage.

Citi does break out a balance sheet for its U.S. broker-dealer, which had $466 billion of assets in the second quarter. Its $18 billion of equity is equivalent to 3.88% of assets, up from 1.41% at the end of 2008. The fact that this ratio more than doubled in six months shows that segment equity should be watched -- and disclosed.

J.P. Morgan does give an equity number for its entire investment bank. It was $33 billion in the third quarter, or 4.86% of the unit's $679 billion of assets. Wrapping in the separate asset-management segment helps make a closer comparison with Goldman and Morgan Stanley. Doing that creates a combined equity-to-assets ratio of 5.41% at J.P. Morgan, below Goldman's common-equity-to-assets ratio of 6.6%.

What is more, J.P. Morgan's investment-bank equity number is of limited analytical value. It has remained at exactly $33 billion for four quarters, suggesting it is merely a theoretical figure and not something that moves in line with the fortunes of the business.

Of course, even the stand-alone investment banks lack transparency. Outsiders have no real idea of the sustainability of Goldman's trading profits, for instance. But at least there's a balance sheet.

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