In a late September 2008 speech to the UN, Gordon Brown, then the UK’s prime minister, called for an end to the “age of irresponsibility”.
The Guardian reported
The prime minister’s official spokesman refused to date when this age of irresponsibility started and said the remarks were a reference to the way in which “large financial institutions had racked up large liabilities that they were themselves unable to quantify”.
What was to end this age of irresponsibility?
Brown called for a new world order based on transparency and not opacity.
Apparently Mr. Brown did not realize since World War II, the global financial system was based on transparency and not opacity. Initially adopted by the US under FDR in the 1930s, this transparency based financial system was exported globally in the 1940s.
He argued: “The international institutions created in the aftermath of world war two have not kept pace with the changing global economy. We need national regulators to be cooperative, rules and principles to be consistent and international movements of capital to be transparent.”
Why were the national regulators unable to keep up with the changing global financial system?
First, they engaged in a global race to the bottom in an effort to attract banks to their countries. For example, under Mr. Brown, the UK pursued a policy of light touch regulation. This consisted of regulators asking nothing, seeing nothing and doing nothing.
Second, the bankers captured the process by which regulators set the disclosure requirements for new securities. As a result, the bankers were able to sell opaque securities like the subprime mortgage-backed deals.
“No member of senior management should be able to say they did not understand the risks they were running and walk away from their obligations,” he said.
Senior management of banks could only get away with this excuse because of the opacity of the banks. Had the banks had to disclose their current exposure details, the market could have assessed the risks the bankers were taking and exerted discipline on both senior management and the regulators to reduce this risk taking.
So a decade after the start of the financial crisis, how far have we come in establishing a new world order based on transparency and not opacity?
Outside of the work being done by the Transparency Label Initiative, the answer is not very far.
The Opacity Protection Team has managed to dominate the regulatory response to the financial crisis. As a result, the Too Big to Fail banks are as opaque today as they were before the financial crisis began. In addition, Wall Street continues to create and sell opaque securities that charter constrained asset managers claim to be able to value.