Transparency and Risk

These two words tend to spring up in most stories dealing with our current financial maelstrom. Let’s start with transparency: I get the feeling that it refers to the ability to see who’s doing what to whom and for what reason. Or something close to that, anyway. The problem lies in the fact that transparency becomes important only when bad things happen. Otherwise, no one seems to care about the who’s and the why’s.

Every business transaction holds some sort of agenda that must remain hidden to achieve a maximum gain. Asking prices are inflated so the seller can accept a lower price without sacrificing the desirable profit margin. And the buyer’s agenda of getting something for less is also satisfied. It would be difficult to conduct business in any other way.

Poker players understand this concept perhaps better than anyone. The cards are held close to the vest for a reason, you know. To play a poker hand with all of the cards face up offers the greatest degree of transparency at the expense of any potential gain. No, we don’t want transparency so much as we want fairness, but neither are overabundant in today’s world of commerce. We want the Ken Lay’s of the world to tell us when our Enron stock is about to tank instead of delaying the inevitable collapse. The deceit creates the call for transparency and only to provide an explanation for why things went so terribly awry.

Mortgage brokers knew the real estate bubble would someday burst, but continued to package financial vehicles to keep it going as long as possible. Now that many are upside down in their homes, the hue and cry for “transparency” in lending has increased exponentially. Do you expect your banker or broker to tell you the worst case scenario instead of the best? Sorry, that’s just not how one closes a deal. The worst case scenario depends upon the buyer crunching the numbers to decide whether the worst case is survivable. Many did not do the math and are now dealing with the consequences.

Risk, in a way, goes hand in hand with transparency as both are found in the commercial arena in the buying and selling of products. The same financial meltdown that sparked the cry for transparency has also created a demand for less risk. If you want to keep your money safe, put it in your mattress. Or maybe an FDIC insured bank. (What with interest rates so low, one may not be that much more advantageous that the other.) The only other choice is to invest it in other things, be they real estate or mutual funds, or stocks and the like. And each one has an associated level of risk. Once again, the choice lies with the buyer. Don’t expect the seller to tell you that you’re making a mistake. That kind of honesty (or transparency, if you wish) runs counter to the art of selling.

Ironically, no one seems to care about risk or transparency when times are good. Most folks didn’t want to know how Bernie Madoff was providing consistently high returns on investment. Only when his Ponzi scheme was revealed did they scream for more information. Many made out quite well in the real estate market and other investments, but now that the tide has turned, someone else must be held accountable. Someone should have told us to get out of that fund or that market.

Alas, we have only ourselves to blame for failing to realize that all gain involves risk and what goes up...well, you know the rest. And with integrity in business there is no need for transparency. No commercial venture is risk-free: all opportunities have downsides and the buyer must rely on counsel from others than those doing the selling.