University of Virginia’s Darden School of Business Professor Robert Bruner offered up his insights into the lessons we did not learn in the ten years since the global financial crisis began:
To be sure, regulatory reforms since 2008 have produced more strongly capitalized banks, tests of resilience to shocks, more inter-agency coordination, and some consumer protections. But like the generals who are prepared to fight the last war, these reforms don’t persuade me that we’ll be ready for the next crisis.
Professor Bruner is not alone in thinking we aren’t ready for nor have we prevented the next financial crisis. After all, given the financial regulators did not see the financial crisis that began in August 2007 coming, why is there any reason to think they will see or prevent the next crisis?
Professor Bruner studied 17 financial crises. He described the missing financial crisis lesson as follows:
History shows that crises arise unexpectedly from corners of the economy that fell beyond the conventional radar screen — in such corners, regulations are light or nonexistent, information is scanty, players are relatively unknown, and flows of capital in and out are particularly hot. Human ingenuity will always create such corners of the economy, either to serve new needs or to arbitrage around regulations. [emphasis added]
Regular readers know Professor Bruner confirmed what I have said about financial crises.
He found financial crises emerge from the opaque corners of the Information Matrix’s Blind Betting quadrant. He also found Wall Street is so motivated to create the securities in these opaque corners it will get around both regulators and regulations to do so.
In short, he makes the case for why the Transparency Label Initiative is necessary.
Investors need an entity Wall Street cannot capture or arbitrage around that identifies investments whose valuation is completely dependent on a story Wall Street tells. These investments exist in the corners of the global financial system where there isn’t sufficient disclosure so the investors can Trust, but Verify Wall Street’s story. The label allows investors to limit their exposure to investments where information is scanty. It also allows investors to recognize Opacity as an asset class and demand a return on their investments in opaque securities consistent with the risk of losing 100% of their investment.