January 28, 2011
by Annelise Riles
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Move Your Money and Beyond — Reforming Market Culture From the Bottom Up

(this post was originally published on Jan. 27, 2011 in the business section of the Huffington Post website. Link)

There’s a glaring omission in all the talk over financial reform, the question of whether legislation goes far enough to rein in the bad behavior that led the economy off the precipice.

As an anthropologist who has spent ten years studying financial markets from the inside, I have learned that reforming market culture is as crucial as any regulation. And we all have a duty to change the culture. “Move Your Money” may be your first effort, but it shouldn’t be your last.

What we found during the financial crisis is that the most agile players (like those of Janine Wedel’s Shadow Elite) can get around regulations and legislation, in part, by influencing the culture. They encourage deference to anonymous expert opinion–a sense that markets are something far away from the ordinary person’s experience or ability to understand, and hence are best left to the shadow elite themselves. And they help normalize shady activities, like, say, so-called “liar loans”, things banned on the books, and even actively enforced as illegal, but not considered entirely wrong by ordinary people. The result is that the government can’t prosecute violations fast enough and illegal behavior nevertheless continues.

Thus, changing policies or even laws has an impact, but they won’t do the job alone. Reforming culture is what’s needed, and that is best supported by social movements made up of people of all types — ordinary citizens, market professionals, people inside government who believe in the cause and are not just pursuing the policy because it is their job.

So what should we do?

If you are an ordinary investor, someone who has a 401k, or a bank account, or a loan, or a credit card, you should consider, as Arianna Huffington has suggested, moving your money out of big banks whose policies you do not support. You also have a responsibility, as a citizen, to educate yourself about how the economy works, who are the players, what are the policy proposals.

If you are a regulator, or in a position to influence a regulator, don’t be afraid to listen to voices, opinions or suggestions that have not been historically at the table. Former Commodity Futures Trading Commission chair Brooksley Born or FDIC Chair Sheila Bair were considered out of touch when they engaged in aggressive regulation efforts. Had we acted on their warnings, the financial crisis might well have been greatly mitigated.

If you are a stock broker, lawyer, banker, analyst, a paralegal, or bank clerk, you have a special role to play in changing market culture. In my experience such people from the bottom to the very top often claim that they are just cogs in the wheel, and yet they have tremendous latitude to make very small changes–to push for option A over option B, both of which are plausible alternatives for their organization but one of which might steer a slightly better course for the economy as a whole. These are the changes that matter. If each person in such a position resolved to take small steps we would see dramatic change. These need not be altruistic steps; they need only be wiser actions that reflect a sense that, in the case of a bank loan administrator, for example, choosing not to foreclose immediately on a loan but to put in the extra hours on a Friday night to see if a solution can be worked out, takes commitment but might be good for the distressed homeowner, the bottom line and the economy as a whole.

If you are a neighbor, friend, or relative of one of these market professionals, you can let them know what you expect of them, let them know that you view them as stewards of a very important public good, our economy, and share with them why this matters to you personally. My research shows again and again that market players are motivated not only by money but also by what other people — their spouses, their children, their friends, their colleagues, their former classmates — think of them. They don’t want to be bad actors. They want to be respected and appreciated. Use your social influence to change market culture.

If you are part of the media, or in the education professions, you have an obligation to make the market understandable and accessible to citizens and not just to pander to insiders. You should encourage a conversation about the common good in markets.

And there are also some things that all of us can do, no matter who we are. No one is wholly disconnected from the market. You can behave in a responsible, ethical, constructive way — whether it is paying your babysitter fairly or living by your own obligations in your workplace or bringing your own spending under control. Every time we act based on an appreciation that our own long-term self-interest is tied up with the self-interest of others, we change our own corner of market culture.

All of this involves taking risks and making hard choices. If everyone in your company talks as if ordinary investors are bumbling fools who exist only to be taken advantage of, it is hard to begin to articulate the view that the firm also has a social obligation towards average investors. If all your friends are running up large credit card bills, it is hard to live within your means. If you are a bureaucrat who has qualms about dominant paradigms, it is hard to go against the group think and risk looking silly or ignorant. Moving your money might not be costly, but moving your talent to a company that upholds the common good could be a gamble.

So changing market culture takes courage. But my research convinces me that it is the only way forward. I liken it to efforts by citizens to clean up a decrepit park frequented by drug dealers. It’s time to pick up the trash left by the financial destruction, and challenge each other to clean up our acts.

January 21, 2011
by Annelise Riles
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What is Collateral Knowledge?

Collateral Knowledge - Book Cover

We’re now in the final countdown towards publication of my forthcoming book, Collateral Knowledge: Legal Reasoning in the Global Financial Markets. My publisher just unveiled the cover and I am really honored to have three people whose work I respect tremendously–Howell Jackson at Harvard Law, Bruce Carruthers at Northwestern’s Sociology department and Bill Maurer at UC Irvine’s Law School and Anthropology Department–saying some really nice things about the project on the back cover. The book can now be pre-ordered from Amazon and from the University of Chicago Press.

Someone recently asked me to explain why I picked this title for a book about private global governance. The book takes as its motif the workings of collateral in the financial markets. Participants in the global derivatives markets routinely post collateral with one another as assurance that they will make good on their promises before they trade. The regime of collateral maintenance and collateral calls proved surprisingly robust during the financial crisis, and tweaking the quantities and methods of accounting for collateral remains one of the principal policy proposals for financial regulation going forward.

I call the book Collateral Knowledge because I am interested in all the knowledge work that goes on behind the scenes to make collateral do its job–the computers, the documents, the legal arguments, the industry committees and much more. I argue that all this activity does far more work than first meets the eye. I go so far as to claim that it amounts to a kind of “private constitution”–a set of templates for action and institutional relationships that constrain market participants and govern how they act in ordinary times and in moments of crisis.

But I am really interested in collateral as one example of the role of legal expertise in financial markets. After all, collateral is basically a species of property law, and its management involves teams of legal experts around the world, from bureaucrats to professors to paralegals and practicing lawyers. I argue that law is “collateral knowledge” in the sense that it is often treated as something on the sidelines, under the radar screen, “collateral” to the main action of market transactions. And yet just like collateral in the financial markets, legal expertise turns out to play a very important role in market governance. Understanding how lawyers think–what kinds of problems they see, what kinds of solutions they imagine for their problems, how they work together, how they work with other market players, and how they interpret and react to regulatory efforts, helps us to understand a great deal that goes unnoticed about market governance (and its limitations as currently imagined).

And of course collateral knowledge is also a play on the concept of collateral damage–the notion that there are unintended but often drastic consequences to certain ways of thinking and doing things. Thinking about legal practice in global market governance helps us to think in fresh ways about why so much has gone wrong and what options are available for reform.

January 7, 2011
by Annelise Riles
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Building a Culture of Compliance

(This entry was originally posted on Jan. 7, 2011 on the Credit Slips website)

I was scheduled to speak at the AALS Financial Institutions breakfast this morning, but due to flight cancellations I was unfortunately unable to attend. I’m posting below a summary of what I intended to say there, and which I had already planned to share with the readers of Credit Slips anyway. I wanted to talk about what anthropological research among market participants and regulators tells us about how to change the way people behave in the financial markets.  After all, the whole point of regulation is just this–to change behavior. Yet how do you do it?

Of course you can make rules.  There has been a lively discussion on this blog about the value of rules, and I agree that rules have many benefits including their power to signal certain collective commitments: from now on, X behavior is not OK.  Yet rules also have a major disadvantage. Call it the cat and mouse game: as soon as regulators come up with a rule, some market participants start trying to find a way around that rule. For example, as soon as the G20 starts setting new capital adequacy requirements for banks, some investment banks start selling derivatives products that change the look of a balance sheet so that it seems to come into compliance with the new rules.  So then regulators invent another rule to close the loophole. And then market participants find another loophole. And on and on. Lots of wasted regulatory energy.But wouldn’t it be great if we could change the culture of the market–change the mindset of people in the market– so that they would choose to do the right thing all on their own? I mean to suggest that in order for regulation really to work, market participants have to be brought in; they have to feel they have a stake in good outcomes; their view of their own self-interest has to be in line with the larger collective interest.

This is of course the logic behind the idea of tailoring bonuses to long term results rather than short-term results. But one thing you learn from doing qualitative research in the financial markets that will surprise people on the outside is that market participants are not motivated entirely by money.  In fact I would go so far as to say that many of them are not motivated primarily by money. They care about all kinds of things–like having interesting, challenging work, like inventing something new or somehow making a mark that will last, like having meaningful relationships with friends and colleagues and family, like other symbolic forms of rewards ranging from industry recognition awards to academic publications. If this is the case, then bonus reform is a step in the right direction, but it is a pretty limited step.

In my presentation, I intended to talk about how Japanese financial regulators have grasped this point and have sometimes exploited it artfully.  Recognizing that many market participants actually have bigger dreams than a paycheck they have thrown them a line: join us and work with us to fix the market.  Regulators have created prestigious and competitive “fellowships” at the Bank of Japan, Japan’s central bank, for example, where market participants can come to do research, in daily conversation with regulators. The value of these fellowships is that they provide the opportunity for regulators to gather information, and they give both sides a chance to work out creative public-private solutions. But many fellowship recipients come away with an emboldened vision of their larger mission–not just to do well but also to do good, in their own corner of the market.  Likewise, informal “study groups” of academics, policy makers and key market participants serve as a forum for building trust and a shared sense of mission.  When disaster hits, I have seen policy-makers call on these relationships in very effective ways.

One of the lessons economic historians give us about the successes of the early years of the SEC is that the strong culture of professionalism at the SEC gave regulators the confidence, and the skills, to regulate effectively.  But professionalism, confidence and a sense of mission and wider purpose isn’t just for bureaucrats.  It can and does contribute to market stability and fairness in the private sector as well.  The anthropology of markets suggests that it is worth investing in building such a culture.

Anyone interested in more detail can download the slides that I had intended to show during my presentation this morning here.

January 5, 2011
by Annelise Riles
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What Can We Learn from Wikileaks About Market Regulation–or, Is Transparency Always a Good Thing?

(This entry was originally posted on Jan. 5, 2011 on the Credit Slips website)

In the wake of the Wikileaks debacle, we have started to see some conversation in the editorial pages about whether transparency is always a good thing in internationa

l affairs. The point is that there are times when allowing the parties to talk in private may help to reach optimal outcomes for all sides. As we learn more about the personalities and motivations behind the leaks, also, the image of the whistleblower as the pure-hearted pursuer of truth and justice is getting a bit tarnished. It is a complicated issue, with room for reasonable people to disagree, but that in itself is news: it used to be that if you were against transparency you had to be for cronyism, corruption, and fraud, and in fact everybody everywhere felt compelled to assert that they were of course in favor of full public disclosure. Now we are not quite so sure.

I think that some of the heatlhy skepticism–or at least complexity of thought–about transparency that is coming into the public debate about foreign affairs also has a place in the conversation about the regulation of financial markets. Why?

•  Transparency is too easy.

How many times, when faced with a difficult political choice between, say, siding with investors or siding with the financial institutions, have the politicians settled for simply demanding more disclosure to consumers? There is even a certain cynicism to this solution at times–research shows us that investors are often ill-equipped to digest the information that is handed to them in the name of transparency. And yet politicians get to say they took a stand in favor of the common good.

•  Transparency isn’t all that transparent.

Goldman Sachs artfully exploited this insight when they dumped literally tons of documents at the doors of Congress in response for a request for information–“go ahead, be our guest..” and yet it might as well have been a truckload of manure, for all it was worth to Congress.  The point here is that information alone is only valuable to those with the tools–that is, the resources to get the tools–to turn information into insight.   As the sociologist of science Bruno Latour has put it, referring to the beautiful transparent glass building that houses to German Bundestag or parliament–itself a symbol of transparency in the political process–you can stare at it all day but somehow you don’t see anything at all.

•  Transparency can do damage.

My own research among regulators has produced case after case in which an informal off-the-record conversation among representatives of the market and representatives of the state was able to avert disaster and reach a win-win result for each.  Yet my research also shows very high levels of fear (even paranoia) among bureaucrats that informal contacts with market participants will expose them to charges of corruption or non-transparent behavior. So too often the less courageous of them opt to do nothing, rather than to stick their necks out and solve the problem, and potentially expose themselves to charges of inappropriate behavior.  Now again, this is a complicated issue: I don’t deny for a second that some bureaucrats and market participants have at times exploited their informal relationships for personal gain so we have reason to demand transparency. However, the pro-transparency rhetoric goes too far where it suggests that any such contact is always motivated by naked self-interest. And the institutionalization of this position into policies that make all email correspondence, meeting records and so on a matter of public record has serious social costs as well as social benefits that deserve to be more carefully weighed as we think about the way forward in financial regulation.

Now again, all of these points are not mine alone: the anthropology and sociology of bureaucracy around the world has produced many examples now of how serious political harm, and the promotion of very questionable private interests has come to pass in the name of well-meaning transparency campaigns. This research suggests that transparency is not a simple good–that it has different costs and benefits in different situations, that we need to ask questions about whose interests transparency serves, and that if we value transparency there may be additional work to do to make it real and meaningful for all sectors of society.

My research has convinced me that a more effective financial regulation will require a new set of scripts for deep cooperation between regulators and market participants. It is the only way that regulators can get the information they need, and it is the only way that we can begin to get around the cat and mouse game in which as soon as the government proposes a rule market players look for a loophole.  Yet regulators and market participants alike insist that a certain degree of privacy is necessary in order for each side to trust the other.  How we carefully balance the costs and benefits of various institutional options, given this reality, is a complex, but interesting and important question.

January 4, 2011
by Annelise Riles
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Memo to Elizabeth Warren: How to Do Things With Documents

(This entry was originally posted on Jan. 4, 2011 on the Credit Slips website)

Elizabeth Warren has proposed, as one of her first initiatives, that banks should simplify their standardized credit card contracts with customers to insure that customers understand what they are signing.This proposal has generated lots of enthusiasm among centrists as a modest, relatively non-political initiative, something that hardly anyone could be against, but that holds out the possibility of reducing fraud and confusion in the credit markets by at least ensuring that consumers know what they are getting into.

This is a great idea, but I wonder if Warren’s team has explored all the governance possibilities that inhere in something as simple as revising the look and language of a credit document. Here they might take a page from a private industry group specializing in credit documents, the International Swaps and Derivatives Association. ISDA’s agreements account for billions of dollars in loans worldwide. ISDA’s documents are also standard, pre-printed forms used by virtually everyone in the OTC markets. When we look closely at what ISDA does with these documents, we see that they serve many more purposes than just assuring that parties to a loan are clear about the terms. I have called these credit agreements “private constitutions” because they set in motion a whole set of institutional relationships among global players outside the purview of state law: it takes a back office staff, wither particular training in ISDA procedures, just to manage these agreements, which means that a sector of each bank spends time at regular intervals attending ISDA seminars, investing in the significance of ISDA as a career strategy, and building relationships with their cohort in other financial institutions and a set of ways of thinking about the issues that become the basis of informal dispute resolution when a problem does develop. Never mind that the ISDA “protocols” are rarely enforced in court–they take on a life of their own by virtue of the fact that real people in the market make a working life of them and couldn’t imagine doing without them.Now it should not surprise us that documents should become the cognitive tools for a whole set of very deep and real market governance mechanisms used by private actors beyond the actual terms of the contracts they memorialize: anthropologists, sociologists and historians have noticed similar phenomena in contexts from scientific laboratories, to university administrations, to hospitals, to prisons, to Fijian mortuary rituals. They have shown for example that the layout and look of forms causes people to think differently about a problem–think of the power of actual physical checklists in medical settings for example to encourage medical staff to think in certain patterned ways about complex problems. Research also shows that experts and laypersons have different kinds of attachments to documents, and that the material qualities of documents–whether they exist in paper copy or just as words in an email–affect people’s sense of their significance (ISDA interestingly steadfastly sticks to plain old paper documents).

But what this research does suggest is that a regulator with an appreciation of how different kinds of documents shape people’s sense of their obligations might restructure the documents in order to restructure the relationship between the parties. For example, although Warren has emphasized how simplifying the terms of loan agreements might alter the negotiation between the loan officer and the consumer, it would be worth thinking about how this document mediates lots of other important relationships that impact on the stability and justice of a loan: How about the relationship among different units in a bank, or different players in the chain of economic actors involved in the packaging and resale of mortgages? We now know that one big problem in the housing crisis was the sheer difficulties in making sense of what was being bought and sold.  Could different kinds of forms do some work in making these values more transparent to future potential buyers? Or how about the relationship between financial institutions and their legal departments–could certain kinds of forms make it more likely that legal staff do not cut corners? Or again, on the consumer side, would there be a style of document that would encourage an equally open conversation among spouses, for example, about their mutual obligations regarding this loan? For example, taking a page from the wider value of asking banks to produce wind-down plans for giving bank executives a palpable sense of their institution’s mortality, one could imagine a set of questions in a loan document that would encourage borrowers to actively contemplate a scenario in which they would not be able to meet their monthly payments and what would happen as a result, that might in turn spark a private conversation among spouses about how to plan for all possible contingencies or indeed about whether the risks are really worth taking in the first place.

Seen from this point of view, what looks like a very modest, minimally interventionist policy initiative–revising loan agreements–could set in motion a much larger chain of reforms.

January 3, 2011
by Annelise Riles
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Market Governance Is About People (And How They Think)

(This entry was originally posted on Jan. 3, 2011 on the Credit Slips website. I want to thank again Bob Lawless and Adam Levitin for inviting me to guest-blog daily on Credit Slips during the first week of January)

This week I want to raise with you a few thoughts about the way forward on financial regulation that have come out of interviewing and observing regulators in their interactions with market participants over ten years. My research has been mainly in Japan but involves some US components as well.

Before I get started though, the wider theme this week is going to be how vitally important it is to get out in the market and among regulators and talk to people rather than to just assume we know what a rational person in this or that role might think or do. I am continually amazed at how little we know about what regulators think and do; how little they know about what market participants think and do; how little market participants know about each other; how little the journalists know about any of this. And yet there is a growing body of very serious and solid empirical qualitative research out there based on long term observation and deep knowledge of particular markets that we could be relying on to answer these questions. Some examples: Doug Holmes on central bankers, Vincent Lepinay and Hiro Miyazaki on derivatives traders, and my work, and the work of Credit Slips’ own Anna Gelpern on lawyers. We need to start basing out regulatory policies on the empirical facts–on what we know about how real people in the markets think and act–not on what we imagine they might do.The keywords here are “people” and “thinking”.  Somehow we seem to have forgotten that markets and their regulation are all about real people, in real relationships that carry certain expectations about what doing the right thing might be–with regulators, with their competitors in the industry and their former classmates, with their customers, with their spouses and children, with their bosses and secretaries, and on and on–and certain sets of intellectual and mechanical tools for making sense of the realities they confront and making choices about what to do about them.

The disciplines of sociology and anthropology have a whole bunch of sophisticated tools for studying these things, and there is now a growing field out there called the anthropology of finance.  What anthropologists and sociologists know about market activity dovetails with behavioral economists’ insight that market behavior is not inherently rational or self-interested.  The next question is, what does shape market behavior? Anthropologists and sociologists study market culture, market institutions, and market thinking–everything from the kinds of technologies traders use to interpret the market to the relationships between regulators and market participants–to answer those questions. I discuss the insights of my own research and what anthropological approaches more generally have to offer in my book, Collateral Knowledge: Legal Reasoning in the Global Financial Markets, which will be out from the University of Chicago Press in March 2011.

If we really take in this simple fact about markets, all kinds of new opportunities to shape market activity come into view. So in the next few days I will throw out a few examples of how this perspective might contribute to current policy debates in the headlines. I look forward to your ideas and criticisms, and if any of you are attending the AALS meetings in San Francisco this week it would be great to talk in person too.

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