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Broker Investors Want More Transparency

Investors will be looking closely at how much investment banks disclose about their balance sheets next week, as the major brokerages begin to report second-quarter financial results in the wake of Lehman Brothers' (LEH) steep fall.

Though followers of financial services companies have long known that the industry's earnings statements are essentially unintelligible, the issue has increasingly come to the fore as investors seek explanations for the roughly $200 billion in writedowns that banks have announced over the last year, and they wonder how much worse things can get.

Lehman officially reports results Monday, while Goldman Sachs (GS) reports Tuesday; Morgan Stanley (MS) reports Wednesday.

Thursday's shocking removal of Erin Callan as Lehman's CFO is emblematic of the heightened scrutiny. Callan was ousted three days after the firm warned it would post a $2.8 billion loss, a vindication of sorts for critics like David Einhorn of Greenlight Capital, who have questioned how Lehman was accounting for various assets on its balance sheet.

While Einhorn criticized Callan, taking the view that she played fast and loose with Lehman's financials, she was hailed by others, notably Meredith Whitney, analyst at Oppenheimer & Co., as being unusually detailed in terms of disclosure. One investor at a multibillion dollar New York hedge fund says he thinks Callan was more forthcoming than most CFOs and that her fate will lead the other CFOs to be less so.

At the center of the storm between Callan and Einhorn were so-called level 3 assets -- assets whose value is highly subjective, because they trade rarely, if at all. The level 3 designation was created by the Financial Accounting Standards Board, the main organization that sets accounting standards for U.S. companies.

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