None are So Blind as Those Whose Finances Depends on Their Not Seeing
In 2009, I first used the term Opacity Protection Team to reference all the financial market participants who objected to the return of transparency in the global financial system. Team members included the usual suspects: Wall Street and its lobbyists, rating firms, financial regulators (including central bankers) and politicians. Team members included some market participants you might have thought were neutral or actually in favor of transparency: academics (both economists and finance professors), accountants and, perhaps most importantly, institutional asset managers.
In her talk about the lessons she has learned since the acute phase of the financial crisis, Stanford business school professor Anat Admati discussed these team members and how they also undermined her quest to raise bank capital requirements.
She did this effectively by also paraphrasing Upton Sinclair’s observation:
It is difficult to get a man to understand something when his salary depends on not understanding it.
I first applied this to asset managers. Asset managers know they are hired based on their claimed expertise (notice the focus on their investment track records). As a result, asset managers claim to be able to value even the most opaque securities. They know it would be very difficult to attract money to manage if they said to the investors they were blindly betting the investors’ money.
Professor Admati applied this to the many enablers of our current banker friendly financial system starting with politicians:
It is difficult to get a politician to understand something when his campaign contribution depends on not understanding it.
As Illinois Senator Richard Durbin said in 2009,
Banks are still the most powerful lobby on Capitol Hill. And they frankly own the place.
She applied Sinclair’s quote to financial regulators including central bankers:
It is difficult to get a regulator to understand something when his future job depends on not understanding it.
This is a nice way of saying regulators are cognitively captured by the banks because they want to make sure they don’t do anything that prevents their going through the revolving door back to the banks for a higher paying position.
Of course, this means regulators are not going to take action like requiring banks to provide current exposure detail disclosure as this would end Too Big to Fail and the outsized salaries that go to senior managers of these firms.
She applied this to journalists. [I am not sure why. A significant number of journalists sought out a quote from her or wrote about her book favorably despite her lack of true expertise when it came to commenting on bank capital requirements. Clearly these journalists thought the credentials of having an Economics PhD from Yale and being a professor at Stanford were important despite the fact these credentials have to do with academic institution reputation and nothing to do with any subject matter expertise.]
It is difficult to get a journalist to understand something when his access to news depends on not understanding it.
My discovery was journalists understood transparency, but they were told by institutional asset managers that they had no problem assessing the risk of even the most opaque of the black box banks. Journalist concluded if these investors thought there was adequate transparency then it was a non-issue.
Of course, the journalists didn’t pause to think what incentive the asset managers had to say they had x-ray vision and could assess the contents of a black box. The asset managers’ incentive was to keep their job. Who would give money to an asset manager who says “I am going to blindly bet your money in opaque securities I and my firm cannot assess the risk or value of?”. Asset managers know they are hired for their self-proclaimed expertise even when this expertise cannot possibly exist because the securities are opaque.
Anat stopped short of applying Sinclair’s quote to academics. So I’ll do it for her,
It is difficult to get an Economics or Finance professor to understand something when their research or consulting depends on not understanding it.
No place is this more evident than with the Information Matrix.
Information Matrix
| Does Seller Know What They Are Selling? | |||
| Does Buyer Know What They are Buying? | Yes | No | |
| Yes | Perfect Information | Antique Dealer Problem | |
| No | Lemon Problem | Blind Betting | |
Regular readers know the Blind Betting quadrant of the Information Matrix allows us to explain financial crises (they are the result of doubt being cast on the value of opaque securities and the subsequent investor run to get out of these securities before their price drops to zero). The Information Matrix allows us to explain why the global financial system is based on transparency and why transparency is the foundation for confidence in the financial system. The Information Matrix also allows us to understand why the Committee to Save the Banks response to the financial crisis was so horribly flawed.
But Economics and Finance professors fight against the Information Matrix tooth and nail.
Why?
It undermines many of their suggested policy responses to the Great Financial Crisis.
For example, the Information Matrix explains why focusing on bank capital requirements was a complete distraction. It doesn’t address the fact bank unsecured debt and equity securities are in the Blind Betting quadrant and hence are prone to runs regardless of the level of book capital.
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