I was very surprised by how dramatically the Trump Administration has scaled backed the Office of Financial Research.  Why?  Doing so reduces its ability to act as a barrier to the restoration of transparency across the financial system.

To fully appreciate this comment, you need the back history of my involvement with the promoters of OFR [I cover the creation of OFR extensively in Transparency Games].

The promoters of OFR had a vision for this agency.  It would function like the National Weather Service.  It would collect data from across the financial system and use this data to make forecasts.  Equally importantly, if you care about transparency, it was suppose to share the raw data it collected with anyone who wanted to take the time to assess it.

At first blush, this sounds wonderful.

Of course, a nanosecond later you realize the problems with this vision.  The major problems begin with i) will all the relevant data be collected and ii) if it is, will it be shared.  The latter problem is particularly important.  If the data from the opaque sectors of the financial system is not shared, these sectors continue to be opaque.  This opacity leads to another major problem:  how to get investors to reduce their exposure to these opaque sectors if OFR accurately assesses investors are taking on too much risk.

Naturally, I reached out to the two leading promoters of OFR to share my concerns.  Both were PhD Economists.  One could not have been more condescending had he tried.  He explained how PhD Economists would be assessing the data so of course they would collect all the relevant data.

I promptly reached out to the other promoter.  He acknowledged my concerns and explained to me how the first two major problems would be addressed in the drafting of the Dodd-Frank Act that created OFR.

We talked at least once every couple of weeks for the 6 months leading up to the creation of OFR.  During these conversations I would congratulate him on his progress, but warn him the bank lobbyists are letting OFR proceed for a reason.

The reason was OFR is where the bank lobbyists sent transparency to die.

The bank lobbyists knew OFR was no threat to the banks’ business model of selling opaque securities so long as OFR could not share the raw data it collected.  As Dodd-Frank was passed, they inserted a prohibition on OFR from sharing this raw data.

With that, the bank lobbyists won.  They now had an agency they could point to and say it has transparency into all the opaque sectors of the financial system.  At the same time, OFR was limited to publishing summary reports of its findings.

Fast forward to today.  By gutting OFR and making it unfit for any purpose, the Trump Administration is reopening the discussion for how to restore transparency across the financial system.