In Transparency Games, I explain in long form how Wall Street, through the various members of its Opacity Protection Team, managed to capture the process by which Washington determines financial disclosure.  Independent confirmation of my explanation has been provided by Reuters’ Charles Levinson in his special investigation.  This investigation also confirms why the buy-side funded Transparency Label Initiative™ is the only way investors can assure themselves of the disclosure they are entitled to so they can know what they own or are thinking of buying.

Mr. Levinson focused on the portion of the Dodd-Frank Act where regulators were suppose to provide the necessary disclosure regulations for structured finance securities.  What he found according to one participant was

The banks have done an end run around all the disclosure efforts.

One of the ways the banks did an end run was by aggressively lobbying during the process where the disclosure requirements are adopted.  Not only was the Opacity Protection Team frequent commentators on the proposed disclosure requirements, but in their comments they made numerous false claims about disclosure.  For example, one team member falsely claimed

“These problems have been compounded in the structured finance markets not by insufficient information, but by insufficient understanding of the information that is already available to investors,” he wrote in one letter. “Rather than needing more information, these investors need both the commitment and the tools to analyze and distill the information that is already available.”

What makes this claim false is while existing disclosure was adequate to determine private-label subprime mortgage-backed securities were grossly overvalued (see shorts put on by Paulson et al), existing disclosure requirements were not adequate so investors could determine the value of each individual security (see market for these securities freezing).

The measure of whether disclosure is adequate is whether an investor can assess an individual security and not whether an investor has enough information to conclude a whole class of security is overvalued.

The Transparency Label Initiative™ is needed as it effectively neuters Wall Street’s Opacity Protection Team.  The Initiative does not look to the Opacity Protection Team or Washington in determining whether a security’s disclosure merits a label.  Rather, the Initiative works with the buy-side to determine what information is actually needed so investors can know what they own or are thinking of buying.  After comparing this to what information is made available, the Initiative decides whether a label is merited or not.