Transparency's Dark Side
Source: McKinsey & Company
As Wall Street has turned upside down, calls for more transparency, not surprisingly, have become increasingly intense. Markets thrive on information, the argument goes, and more information is better, right? Well, up to a point. Investors in Bernard L. Madoff's self-described "Ponzi scheme" must surely wish that they had known what he was up to. But when it comes to hedge funds and proprietary trading desks, transparency is not always a good thing. In fact, it can be dangerous. The reason lies in the interplay between systemic risk and leverage. The meltdown of 2008 has illustrated the cascading consequences of leverage: when a market moves against a highly indebted institution, it can go under quickly.