Sunday, October 30, 2011

NY Times' Thomas Friedman calls for meaningful transparency

In his NY Times column, Thomas Friedman calls for meaningful transparency.

His column is very interesting because despite his focus on foreign affairs, Mr. Friedman describes in the US exactly the behavior that the Nyberg Report associated with the causes of the Irish financial crisis.

He identifies the self-reinforcing feedback loop between the financial institutions and the politicians.  The financial institutions "donate" money to the politicians.  In return, the politicians "pass" laws that favor the financial institutions and "influence" the financial regulatory process.

As the Nyberg Report documented, politicians influence on the financial regulatory process goes well beyond passing laws.  It directly impacts the enforcement of the laws.

Mr. Friedman confirms this finding of the Nyberg Report when he observes that even the judge was surprised by the terms of the SEC's proposed settlement with Citigroup over Citigroup's version of the "Abacus" CDO.

Regular readers are not surprised by the settlement as it is just another example of the Wall Street Opacity Protection Team in action.

Finally, Mr. Friedman offers his solution to offset the Wall Street Opacity Protection Team:  meaningful transparency.
[W]hat happened to us? Our financial industry has grown so large and rich it has corrupted our real institutions through political donations. As Senator Richard Durbin, an Illinois Democrat, bluntly said in a 2009 radio interview, despite having caused this crisis, these same financial firms “are still the most powerful lobby on Capitol Hill. And they, frankly, own the place.” 
Our Congress today is a forum for legalized bribery. One consumer group using information from calculates that the financial services industry, including real estate, spent $2.3 billion on federal campaign contributions from 1990 to 2010, which was more than the health care, energy, defense, agriculture and transportation industries combined. 
Why are there 61 members on the House Committee on Financial Services? So many congressmen want to be in a position to sell votes to Wall Street. 
We can’t afford this any longer.... 
Capitalism and free markets are the best engines for generating growth and relieving poverty — provided they are balanced with meaningful transparency, regulation and oversight.
The only way you can have meaningful transparency is if the financial institutions are required to disclose their current asset, liabilities and off-balance sheet exposure details to market participants in an appropriate, timely manner.

Market participants can use this data to enforce market discipline on the financial institutions.  Part of enforcing market discipline is assisting the regulators in understanding the risks that the financial institutions are taking.  Part of enforcing market discipline is adjusting both amount of and the price of any exposure to a financial institution to reflect the riskiness of that financial institution.
 We lost that balance in the last decade. If we don’t get it back — and there is now a tidal wave of money resisting that — we will have another crisis. And, if that happens, the cry for justice could turn ugly. Free advice to the financial services industry: Stick to being bulls. Stop being pigs.
A tidal wave of money from Wall Street's Opacity Protection Team...

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