Media Proves Its Worth to Wall Street’s Opacity Protection Team
The tenth anniversary of the collapse of Lehman Brothers highlighted why the media is a valuable member of Wall Street’s Opacity Protection Team. It wrote hundreds, if not thousands, of articles repeating the Committee to Save the Banks’ false narrative for why bailouts were necessary and how successful they were. It didn’t write a single article asking why transparency had not been restored to the global financial system.
What makes this discrepancy interesting is the media is fully aware of the role opacity played in the financial crisis. Yet, the media never asked if the opacity in the financial system had been addressed.
The lack of transparency is the elephant in the room, but the media has no interest in it.
On the other hand, these articles did confirm the Information Matrix. The parallels with how I describe the financial crises which emerge from the Blind Betting quadrant are uncanny.
For example, Gillian Tett, the US Managing Editor for the Financial Times, observed:
crises share two things. First, the pre-crisis period is marked by hubris, greed, opacity — and a tunnel vision among financiers that makes it impossible for them to assess risks. Second, when the crisis hits, there is a sudden loss of trust, among investors, governments, institutions or all three. If you want to understand financial crises, then, it pays to remember that the roots of the word “credit” comes from the Latin “credere”, meaning “to believe”: finance does not work without faith. The irony, though, is that too much trust creates bubbles that (almost) inevitably burst.
She goes on to say:
Every innovation revolution needs a sales patter, and this was no exception: the bankers told themselves that this slicing and dicing would make the financial system much safer. …
But there was a catch. Since the techniques that bankers were using to slice and dice the loans were desperately opaque, it was hard for anyone to know who held the risks….
Complexity made this worse. At a conference I attended later that year, hundreds of bankers met in a concrete, mural-filled municipal hall in southern France to discuss the securitisation — aka slicing-and-dicing — game. For two days they unveiled power-points drenched in Greek letters, algorithms and jargon, like a cult speaking a secretive holy language. But as the presentations unfolded, it was clear that very few investors or regulators — or even the bankers themselves — truly understood how the products worked. To the outside world the revolution seemed to be driven by computers; but it was also driven by blind trust….
Blind trust….
The authorities tried to rebuild confidence. But shattered trust is hard to restore — particularly when governments or bankers try to sweep problems under the carpet, say with creative accounting tricks. “You can put rotten meat in the freezer to stop it smelling — but its still rotten,” one Japanese official joked to me as he watched American attempts to reassure the markets, turning to some of the same tricks the Tokyo government had once tried — and failed — to use a decade before.
It was a hopeless task: the “slicing and dicing” process had left American, European and Asian markets so closely entwined that any panic was highly contagious. Month by month trust drained away: investors lost faith in the value of mortgage bonds, the judgment of rating agencies and the balance sheets of banks. When Lehman Brothers collapsed in September 2008, investors stopped believing that any institution was truly safe.
Here is my description of financial crises using 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 | |
People like a good story. This is true whether the investment Wall Street is telling them the story about is in the Perfect Information quadrant or in the Blind Betting quadrant.The key difference between investments in the two quadrants is in the Perfect Information quadrant investors can Trust, but Verify Wall Street’s story. In the Blind Betting quadrant, opacity (the absence of the necessary information) prevents investors from being able to verify Wall Street’s story.Whether the story can be verified or not results in a vastly different response when Wall Street’s story is called into doubt. In the Perfect Information quadrant, the story can be verified and the doubt dismissed. In the Blind Betting quadrant, the story cannot be verified. Not only is the doubt not dismissed, but the logical follow-up question arises: is the investment worth anything? This too cannot be verified. Investors recognize this and, as behavioral economics suggests, naturally panic. The result is a classic bank “run” to get their money back.
Just to highlight a few of the many parallels:
Me: People like a good story.
Gillian: “Every innovation revolution needs a sales patter.”
Me: Trust, but Verify applies to investments in the Perfect Information quadrant and Trust only applies to investments in the Blind Betting quadrant.
Gillian: “It was driven by blind trust” as “the techniques the bankers were using to slice and dice the loans were desperately opaque.”
Me: Is the investment worth anything?
Gillian: “Investors stopped believing any institutions was truly safe.”
I think you get my point.
One more issue. Transparency is the source for restoring trust in the financial system. When investors have the information they need to know what they own, investors can assess this information themselves or have a third party assess it for them. In either case, investors trust the assessment. It is this “trust” in the assessment that translates to trust in the market.
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