Is Transparency Always a Good Idea?

I’m not a fan of this proposal from Josh Rosner, via Gillian Tett:

Joshua Rosner, a New York analyst, for example, has made the sensible suggestion that AIG should reveal the banks that have received credit protection as a condition of receiving that $85bn loan. That, at least, might help silence some of the wildest rumours about Goldman Sachs or anyone else.

Silence them? Hardly. Amplify them, more like.

The problem is that AIG knows how much credit protection it’s written to Goldman Sachs: about $20 billion, according to Gretchen Morgenson. And it also knows how much collateral it put up against those contracts. I do hope that Rosner’s proposing that AIG reveal the collateral number as well, otherwise the counterparty risk will look vastly greater than it actually is.

And even after taking into account the collateral, Goldman is quite typical in having a desk of credit-market professionals dedicated to nothing but managing and hedging the bank’s counterparty risk. It can be done: commenter Kamekon mentioned one method, which is buying contingent credit default swaps, or CCDSs, and I hope to have more detail in an upcoming blog entry.

So I fear that Rosner’s proposal should be filed under the category of "a little knowledge is a dangerous thing". Tett’s broader point is quite right: we had a system where only a tiny elite was capable of understanding what on earth was going on, and that system broke when millions of people outside the elite suddenly realized they had no idea what was happening. So it’s a very good idea to address what Tett calls the "yawning information gap". But what we really need is not more information, so much as more understanding. And that’s not something you can get through proposals like Rosner’s.

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