This has been a week full of cloudy events: Icelandic ash, the Greek bail-out and the Goldman CDO lawsuit, to name a few. Notwithstanding the “transparency imperative” in the wake of the financial markets meltdown, we are still mired in opacity. Gillian Tett of the FT shared similar sentiments in today’s column. Readers of this blog are well aware of my views on transparency in every aspect of the financial markets: financial reporting, risk management and trading. Yet transparency remains a stubborn and seemingly unattainable goal, even with the knowledge that the social and financial costs of opacity are stunningly high.
Why the trouble? Easy – lobbying, money and ignorance. While transparency is couched as super-sophisticated Wall Street issue, it is fundamentally a Main Street issue. Opacity is what leads to “unexpected” crisis, the price tag of which is invariably picked up by Main Street. Fundamental reform stuck in Congress? Tell your Congresspeople to get on the stick and to represent their constituencies – not their lobbyists. Moving the lion’s share of OTC derivatives to exchanges is both an academic and pragmatic no-brainer, yet this shift is consistently stonewalled by those with huge checkbooks and contacts in Congress. I have written about fair-value accounting and how it should be used in all situations where there is neither the intent nor the ability to hold an asset to term. Not surprisingly, there has been huge push-back on this issue from the same people who want continued opacity in the OTC derivatives markets. And more complete accounting disclosures with “plain english” footnotes would also be a thrilling development, yet many corporations are none too keen to have to display all their laundry, dirty and otherwise. Common sense has not prevailed, largely because of our system of lobbying, privilege and fear of reduced campaign contributions if a powerful business interest is angered.
The costs of friction in everything from complying with our arcane tax code to complex documentation for non-standard financial transactions to extra time spent analyzing byzantine financial statements has to exceed $100 billion – per year. And this says nothing about the reduced investment due to fears over the high costs of growing businesses. Consider the recent proposal to cause venture funds with over $30 million in AUM to have to register with the SEC because of fears over systemic risk. This is nothing more than a publicity stunt by an ill-informed Congressman, but it is simply a microcosm of the bias towards posturing and grandstanding instead of substantive, common sense reform. We are in the midst of a jobless recovery, yet a Congressman is wasting time and money talking about idiotic regulation of the venture capital industry whose very lifeblood is creating the high-value jobs we need to resume a healthy growth trajectory. Why isn’t he talking about tax reform, financial transparency, or something else that really matters? Because those issues don’t make for good headlines and he probably lacks the knowledge to propose something intelligent.
Perhaps the issue is that our Congresspeople are simply ill-equipped for the job. Based upon their decision-making, it is fairly clear to me that many lack even basic knowledge of economics and finance, yet have a hand in making legislation that requires real understanding of the issues. My guess is that the lobbyists and special interests, who have a very keen understanding of the issues and what’s at stake, have a large hand in how legislation is worded. This does those of us who pay our Congresspeople and put them in office a great disservice, and it is hard to see how this will change unless people get really angry. At a minimum, incoming Congresspeople need to go to school, a finance and economics “boot camp” for starters. Classes on micro and macroeconomics. International trade. Financial markets. Corporate finance. Basic yet important stuff. Should a Congressperson really be able to cede their vote to someone more knowledgeable (e.g., that lobbyist or special interest making a campaign contribution) than they are? Clearly not.
So much of what needs to be done is just so simple. None of this is rocket science, but it does require a basic level of understanding (and a good heart, common sense and a conscience). Naysayers will mutter “What you are saying is stupid – your suggestions are unrealistic.” My response: Why?