What Banks Should Say to Investors, But Won't

NEW YORK (TheStreet)--It doesn't matter what management teams at Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM) and other big financial companies tell investors and analysts Tuesday and Wednesday at the Merrill Lynch investor conference: their companies' shares will continue their lackluster performance.

That's because the problem for financials is far larger than any individual disclosure companies could possibly make: their exposure to mortgage liability, or Europe, or to lost fees from debit card swipes as a result of new regulations.

No one believes the numbers financial companies put out anymore. They may be technically correct, they may follow the necessary regulations, but that is meaningless as far as investors are concerned. The only thing investors want to know is this: what are you hiding from me?

The latest case of poor disclosure was provided by MF Global (MFGLQ.PK), which imploded in the space of just a few days after owning up to more than $6 billion in bets on European sovereign debt.

It wasn't the bets themselves that triggered the panic, or even their disclosure, exactly. MF Global had disclosed the investments long before they roiled the company's stock, or provoked the ratings downgrade that caused the stock's plunge.

Previously, however, the disclosures weren't very clear. It was only after regulators pushed MF Global to present the risks it faced more plainly that ratings analysts and investors understood the fragile nature of the company's balance sheet.

In the case of MF Global, there was an added element of fragility. The company became so vulnerable so suddenly for the same reason that Bear Stearnsand Lehman Brothers imploded in 2008, with Merrill Lynch, Morgan Stanley (MS) and Goldman Sachs (GS) nearly suffering the same fate: heavy reliance on short-term funding. In March 2008, Bear Stearns borrowed $70 billion daily--effectively giving those lenders "a free option--every night--about whether to continue doing business with them," as William Cohan author of "House of Cards," a book about the collapse of Bear Stearns, explained in a recent article for Bloomberg.

Since 2008, securities firms say they no longer rely so heavily on short-term funding. Goldman, Morgan Stanley and others became bank holding companies, potentially giving them access to overnight loans from the Federal Reserve if they lose the confidence of their lenders. They have also drastically reduced leverage, they say.

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