January 4, 2011
by Annelise Riles
(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.