In a Bloomberg article, money manager Martin Fridson articulated why the buy-side needs the Transparency Label Initiative™.  Describing the impact of investors chasing yield, he observed

Deals are getting worse and worse for the investor, and they have been powerless to stop it … Companies value secrecy and don’t want people doing analysis. The more they can keep investors in the dark the better it’s been for them.

Issuers and Wall Street recognize with investors chasing yield they can trade off slightly higher interest payments for significantly less transparency.  Of course, these slightly higher payments don’t guarantee the investment will generate a return that compensates the investor for the risk they are taking on.  Without transparency, as Mr. Fridson points out, investors cannot do their analysis to determine how risky the investment is and what level of compensation they should receive for taking on the risk.  By keeping investors in the dark, the investors are reduced to blindly gambling when they buy these securities.

As shown by the private label mortgage-backed securities in the run-up to the financial crisis, even sophisticated investors who should know they are blindly gambling are willing to do so to chase yield.

Why would a sophisticated investor chase yield by blindly gambling? One answer is their job depends on it.

For example, investment charter constrained asset managers are effectively limited in the securities they can purchase. If they want to have a job, they have to keep buying the securities on offer.  Of course, this raises the question of should their funds be open to new investments or reinvestment if placing these funds requires blindly gambling.

The buy-side needs the Transparency Label Initiative™ so even while chasing yield it can demand transparency. The label effectively limits the pool of money available for blind gambling. As a result, there is significant pressure on the issuers to provide transparency.

It’s a zero sum game, and the only winners are issuers and their underwriters…

Another benefit of the Transparency Label Initiative™ is it removes the issue of “how much disclosure” from the discussion as how much is not set by the issuers, the bankers or the investors.  This ends the zero sum game where the only clear winner from investors blindly gambling is Wall Street.