Meet the man who could finally destroy the Too Big to Fail banks

According to a Business Insider article, the man who could finally destroy the Too Big to Fail banks is the head of the Office of Financial Research.

And why might this individual end TBTF?

Because of the Office of Financial Research's access to data on the banks' exposures.  With this data, the head of OFR can highlight the hidden risks taken by these banks.

Regular readers know that Business Insider is right that transparency is the key to ending the threat of TBTF (hence your humble blogger is really the man who could destroy the TBTF).  Business Insider just doesn't understand that the Office of Financial Research is where transparency goes to die (as a result, TBTF is permanently protected by the veil of opacity).

Transparency in our financial system works because it ensures that market participants have access to all the useful, relevant information in an appropriate, timely manner.  Market participants independently assess this data and adjust their investment exposures based on this assessment.

The Office of Financial Research makes it impossible for market participants to do their own independent assessment.  It has been given a monopoly on bank exposure detail information and there is absolutely no reason in the world to believe that it will be any good at or better at assessing this data than the collective known as the market.

The Office of Financial Research is specifically set up to protect bank opacity.  That is why the banks' lobbyists included it in the Dodd-Frank Act.  It is specifically prohibited from sharing the underlying data with anyone including market participants, Congress or the financial regulators.

It is able to share its conclusions, but not the data itself.  Hence, a dependence on the analytical ability of the Office of Financial Research.

In yet another display of how the economics profession does not understand how our financial system works, a major contributing force behind the creation of the Office of Financial Research were several Nobel prize winning economists.  They advocated for the creation of a bank data black hole.

Not a big name at all, even though it could help to settle the debate by virtue of its data-driven philosophy.

Few Americans have heard of the Office of Financial Research—and even some DC insiders occasionally forget about the $100 million-plus agency created by Dodd-Frank. It lacked a director until the start of this year, when Richard Berner—previously one of the top economists for Morgan Stanley and a counselor for former Treasury Secretary Tim Geithner—received a long-awaited Senate confirmation. 

It could be Berner's work over his six-year term that determines whether ‘too big to fail’ is over or more dangerous than ever. 

The trouble is that the office—which is contained inside the Treasury Department—has been slow to get on its feet as the controversy smolders. 

“They’ve been in the process of setting up for a couple of years,” explained Marc Jaruslic, a former Senate staffer who is now chief economist for Better Markets, an advocacy group pushing for tighter regulation. “I’d really like to see the OFR play the role intended for it in the statute. … We’re just missing a very important voice.”

The mission at the Office of Financial Research is to track previously hidden financial data and identify potential risks to the economy, a process that requires the agency to develop an unprecedented system for monitoring in real-time Wall Street and its darkest of alleys. 

Before the 2008 financial crisis, regulators essentially tried to oversee the markets by looking through the rearview mirror. The shortage of real-time information made it difficult for regulators to fully understand the problems of mortgage-backed securities and the highly-leveraged firms with a web of vast, unseen connections.

Actually, it was opacity that caused the problems.

Market participants did not have access to the data they needed to assess either banks or structured finance securities.

OFR will do nothing to change this.

Through its research and analysis, the OFR can report independently to Congress on dangerous patterns in the markets. It also advises the Financial Stability Oversight Council—the group of 10 federal regulators responsible for overseeing the companies that might pose a threat to the entire financial system....

The way our financial system is designed, market participants are suppose to adjust their exposures so as to avoid taking on too much risk.

OFR is suppose to report on dangerous patterns in the market.  Excuse me, but this is regulators replacing their judgement for the market's.

More importantly, we have market participants blindly gambling while OFR sits on the relevant data.

This is simply not a prescription for a stable financial system.

The OFR currently has about 140 staffers, half the number envisioned for this year under past budget proposals.

The 280 staffers at OFR ars suppose to replace and do a better job than the thousands of individuals the market would deploy to assess bank exposure details.  Intuitively, this is nonsense.

For now, its major initiative involves finalizing a unique code—known as a Legal Entity Identifier—to detect exactly which firms are involved in individual trades before the end of 2013, a key tool the government does not currently have.

Wow, we could have already built the "Mother of all Financial Databases" and made each bank's exposure details available to market participants in the same time OFR has wrestled with how we identify each firm involved in a trade.

The Office of Financial Research should be closed and the portion of the Dodd-Frank Act that created it repealed as soon as possible.