Over the next couple of months, much will be written about Barack Obama’s presidential legacy.  A significant amount of time will be spent discussing his handling of the financial crisis and subsequently, the economy.  Initially, I expect many will praise what he did.  As time passes, a much more critical evaluation will emerge.  Readers of Transparency Games know I expect history will ultimately side with the critics.

The reason I say this can be summed up in one word:  transparency.

He and his Administration favored opacity and Wall Street at the expense of Main Street and transparency in the global financial system.

I used the word “favored” intentionally.  Nowhere is this favoritism better shown than in the JOBS Act (more formally known as the Jumpstart Our Business Startups Act he signed into law on April 5, 2012).  The Act repeals disclosure requirements for publicly held companies it defines as “emerging growth companies”.  These are companies with less the $1 billion in revenue who do an IPO.  The Act also allows companies to raise up to $2 million in equity through crowdfunding without having to provide any disclosure.

If companies do not provide disclosure of all useful, relevant information, how exactly are investors suppose to evaluate the risk/return of an investment in these companies or know what they own?  Obviously, they cannot.

The Act replaces informed decision making with blind gambling.  It creates a precedent for Congress rolling back all the disclosure requirements mandated by the 1930s Securities Acts.

A task Congress has ask the SEC to begin.  The Act requires the SEC to review its disclosure requirements to assess their effectiveness and see where these requirements could be reduced or simplified.  Under Mary Jo White’s leadership, the SEC ‘s assessment is concerned with the issue of:

When disclosure gets to be ‘too much’ or strays from its core purpose, it could lead to what some have called ‘information overload’ — a phenomenon in which ever-increasing amounts of disclosure make it difficult for an investor to wade through the volume of information she receives to ferret out the information that is most relevant.

The only participants in the financial markets who are worried about “information overload” are issuers and Wall Street.  Investors, particularly professional money managers, never complain about information overload.  Investors know if they cannot assess all of the information disclosed, they can always hire an independent expert who can.

This is simply an exercise in increasing opacity in the financial system.  Opacity that was the necessary condition for the financial crises that started in October 1929 and August 2007.

Based on the efforts of President Obama and his Administration, effectively all that stands between the return of opacity across all of our securities markets is the Transparency Label Initiative.

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But the Act was not the first time President Obama favored opacity and Wall Street.  When he first stepped into office he and his Administration began their assault on transparency. At that time, President Obama faced a choice between the Swedish and Japanese Models for how to handle the financial crisis.

The Swedish Model has always been successful in ending a financial crisis and minimizing the damage to the real economy wherever it has been implemented (see US in 1933, Sweden in the 1990s and Iceland in 2008/2009).  The Swedish Model playbook is so well know that most of the global financial system was redesigned in the 1930s and 40s with the addition of deposit insurance and mandatory disclosure to support always choosing this model to end a financial crisis.  Under the Swedish Model, banks protect the real economy by absorbing the losses on the excess debt in the financial system and providing transparency to show they did so.

The alternative to the Swedish Model is the Japanese Model.  The Japanese Model has never been successful in ending a financial crisis, it maximizes damage to the real economy and it never generates a self-sustaining recovery.  Under the Japanese Model, the burden of the excess debt in the financial system is put on the real economy (think “socializing the banks’ losses”) and the true condition of the banks is hidden.

President Obama chose to pursue the Japanese Model with his Administration adding its own unique twist.  Each year, the largest opaque banks are subjected to a stress test.  The government announces the test results saying the banks passed.  With this announcement, the government becomes morally obligated to bail out the banks in the future.  Why?  Since the investors cannot independently confirm or deny the results of the stress tests, it can be assumed investors purchased the banks’ securities based on the government’s saying the banks are safe.

Compounding this problem of undermining market discipline is the acknowledgement by Ben Bernanke the Fed did not have the data it needed as late as 2014 to actually know if the representations it made about the banks’ financial condition was accurate.

The next step in the assault on transparency by President Obama and his Administration was the Dodd-Frank Act.  Rather than strengthen disclosure requirements, the Act introduced countless new complex regulations.  In theory, regulatory enforcement of these new regulations should prevent the next financial crisis.  In reality, we know regulators fail with disastrous consequences.  A prime example of this failure is the financial crisis that began on August 9, 2007.  A promise by the regulators to do better is hardly reassuring.

Given this mind set, it is not hard to see why to President Obama and his Administration continuing the assault on transparency with the JOBS Act would seem perfectly reasonable.