Institute for Financial Transparency

Shining a light on the opaque corners of finance


Yale’s reputation used to defend failed response to financial crisis

Several years ago, I coined the expression Opacity Protection Team as shorthand for all individuals and institutions that enabled Wall Street to inject opacity into a global financial system based on transparency.

One member of the Opacity Protection Team I highlighted in Transparency Games were the academic economists.  These individuals were very important members of the team as they provided a cloak of respectability to hide what Wall Street was doing.

They put forward a theory called the Efficient Market Hypothesis.  The strong form of this hypothesis said security prices reflect both disclosed and undisclosed information.  They then argued based on their tests of stock market prices the global financial markets adhered to this hypothesis.

Of course, in 2007 everyone awoke to find global financial markets did not in fact adhere to the Efficient Market Hypothesis.  In fact, there was one form of security, structured finance, that violated this hypothesis by design.  The goal of these securities was to maximize the amount Wall Street could extract from investors.

These securities fall in the quadrant of the Information Matrix where both buyer and seller don’t have the information they need to make an informed decision.  Rather they are blindly betting based on a story told to them by Wall Street.

But as the good team members they are, academic economists didn’t stop defending opacity.  They doubled down with a theory called “informationally insensitive” debt.  They described this as debt that didn’t require a lot of resources to assess.  Conveniently, they provided two examples: bank deposits and AAA-rated tranches of structured finance securities.

The very choice of these two examples staggers the imagination.

If we are talking insured bank deposits, it doesn’t take a lot of resources to assess.  Simply look for the government deposit insurance logo.

If we are talking uninsured bank deposits or any tranche of a structured finance security, it takes significant resources to assess.  To assess the risk of a bank or a structured finance security, you have to look at all of the current underlying exposures.  This takes a lot of resources.

When the academic economists who thought up the term cannot come up with two examples that fit their definition, you can rest comfortably their idea is complete nonsense.  You can also rest comfortably knowing they have absolutely zero idea how a transparency-based financial system is suppose to operate.

So what does this all have to do with Yale?

One of the individuals who co-authored the paper on informationally insensitive debt happens to be heading up Yale’s effort to provide policy makers with real-time lessons for handling a financial crisis.  Yale is promoting it under its Yale Program for Financial Stability.

The Board overseeing this effort includes card carrying Opacity Protection Team members like former US Treasury Secretaries Timothy Geithner and Hank Paulson as well as former Fed Chairman Ben Bernanke.

The goal is to write a crisis response playbook (by the way, anyone who has a copy of Transparency Games already has THE crisis response playbook).

All I can say about this program is wow!

Can you imagine the Yale effort looking at the response to the financial crisis that began on August 9, 2007 and concluding the response was a failure from the get go?  After all, the entire framing of the Yale program is the financial crisis is over.

Of course, nothing could be further from the truth.  One just has to look at the UK voting for Brexit or the US voting for Trump to realize this.  After all, nobody voluntarily votes to blow up the status quo when everything is going well.

Can you imagine the Yale effort seeing the epicenter of the crisis was along the opacity fault line (opaque structured finance securities to opaque banks) and concluding we need to restore transparency?  After all, the Yale program is lead by an individual who authored a paper on informationally insensitive debt and showed beyond a doubt he has no idea how a transparency-based financial system actually works.

Can you imagine the Yale effort concluding that bailing out opaque banks is a bad idea and having the Fed lie about their solvency is an even worse idea? Of course it won’t.  Instead it will enshrine these as brilliant and successful responses to a financial crisis.

Despite all of these clear failings, people will see the Yale name and think the program is credible.  In fact, the program is nothing more than handiwork by the Opacity Protection Team.  Handiwork designed to promote a false narrative of the financial crisis and keep attention away from transparency.