Do We Need a Capital Markets Safety Board?

Andrew Lo of MIT thinks we need the capital markets equivalent of the National Transportation Safety Board, an independent and disinterested group that comes in after crashes, literally and metaphorically speaking, and sifts through the wreckage. He makes the sure-to-be controversial proposal in an article on hedge fund losses in the current issue of CFO.

It’s a nice idea, but I’m not particularly sanguine about its practicality. Who would these investigators be? How would we make sure there was no strategy leakage, and yet have transparency about crash causes? Tough stuff.

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Comments

  1. Jed Harris says:

    I’ve been wondering about this type of question but haven’t seen it mentioned before. I wouldn’t say that opacity is a right of any company; if the social costs are higher than the benefits, then they have to forfeit opacity and disclose. After all, airlines could say “But our maintenance records contain trade secrets!” not to mention all the things listed companies are required to disclose already.
    The social costs of opacity in the various credit market crises are obvious. The social benefits of opacity are less obvious (though the benefits to individuals and companies are fairly obvious — among them the ability to lie without risk of exposure).
    So I think the concern for making “sure there was no strategy leakage” is misplaced. The economic risk of strategy leakage is future underinvestment in strategy. Is this really a credible problem?
    This is not to say we could accomplish any policy imposing transparency. The entities opposed have lots of money and power. But there’s no need to whitewash their position with concern about “strategy leakage”. If enforced transparency would be good for the economy, but we can’t make it happen because they’re too powerful, we can just say that.