Obfuscation, Half-Truths, and the SEC
When rumors were swirling and investors were feeling nervous about an impending cash crunch at investment banking giant Bear Stearns last week, CEO Alan Schwartz was quick to try and reassure the market, a move right out of the crisis communications playbook. Unfortunately, he didn’t read the part in the playbook where it warned against obfuscation and/or lying when he made the following statements:
“Our balance sheet has not weakened at all.”
“We don’t see any pressure on our liquidity, let alone a liquidity crisis.”
“That [$17 B] cushion has been virtually unchanged. We have $17 billion or so excess cash on the balance sheet.”
And now it isn’t just jilted investors who are taking a closer look at what Schwartz said and what he may have told others behind closed doors. The Securities and Exchange Commission is interested in speaking with potential Bear Stearns buyer JP Morgan about “investigations and potential future inquiries into conduct and statements by Bear Stearns” and in learning more about a surge in options contracts betting. In other words, the SEC wants to know what JP Morgan knew and when.
And the larger point here is that Bear Stearns seemed to practice obfuscation out of habit. According to The New York Times, the company’s most recent annual report showed $46 billion in mortgages and mortgage-backed securities. However, $29 billion of them were valued via computer-generated models “derived from” or “supported by” some kind of “observable market data.” The leftover $17 billion worth of mortgages appears to have been based on “internally developed models or methodologies utilizing significant inputs that are generally less readily observable.”
What does it all mean? Times author Morgensen opines, “Your guess is as good as mine.”
With billions of dollars at stake, and the mood of the market hanging in the balance, making opaque statements in a time that demands clarity is about as smart as leaving the front door of your house wide open while you’re on vacation.
Recognizing that markets detest losses and fear ignorance, the best solution is a powerful dose of the disinfectant called transparency. Letting the sun shine in gives companies a way to control and shape the debate and the opportunity (although seldom taken) to be “for” something, and not “against” it.
Today, the global marketplace is more transparent that it has ever been before. Fighting that trend is surely an unwise battle.
