Bank balance sheets are incomprehensible, even to experts
A protestor holds a sign as a bank customers speaks to a bank teller during a demonstration by members of Alliance of Californians for Community Empowerment, Occupy Our Homes and Los Angeles area homeowners inside a Wells Fargo bank on December 6, 2012 in Los Angeles, Calif.
In the wake of the financial crisis, banks have complied with piles of new regulation, but that hasn't made their financial statements any more transparent.
"We're not talking about incomprehensible to a layman," Eisinger says, "We're talking about incomprehensible to people like the people who make accounting standards or incredibly sophisticated investors... They don't understand what's inside giant American banks."
Risky trades are obscured deep in bank balance sheets, and when risky trades become public -- as happened at JPMorgan or in the LIBOR scandal -- that erodes confidence in all banks, argues Eisinger. As a result, banks lend less and by extension, our economy is slower.
Eisinger and Partnoy looked specifically at Wells Fargo, widely considered the most conservative of the big banks. Hundreds of pages and thick with footnotes, the 2011 Annual Report is not for the faint of heart, says Eisinger.
"You can't understand enormous corners of the bank. Trillions and trillions of dollars of assets." And, says Eisinger, "they don't understand their own institition."
The cure? Partnoy and Eisinger propose regulation with teeth.
"Bankers need to go to prison if [balance sheets] are misleading."
Short of that, Eisinger believes that Congress could successfully come up with a grand bargain to streamline the many forms of disclosure banks provide to different regulators, in exchange for clear, meaningful information about their institutions.