June 25, 2013
by Annelise Riles
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Managing Regulatory Arbitrage: An Alternative to Harmonization

How can the Conflict of Laws achieve for international financial regulation what international agreements have so far failed to achieve? A short summary of my forthcoming paper in the Cornell International Law Journal on the subject, in Risk&Regulation Magazine, makes the case.

 

Managing Regulatory Arbitrage: an alternative to harmonization (.pdf)

May 1, 2013
by Annelise Riles
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“New Governance” and Global Financial Regulation

In its latest newsletter, the Tobin Project covered the online publication of my recent working paper in which I examine the relevance of “New Governance” regulatory theory to the challenges faced by the Financial Stability board in regulating systematically important financial institutions.

Tobin Project Newsletter

Direct link to my working paper: Is New Governance the Ideal Architecture for Global Financial Regulation?

March 5, 2013
by Annelise Riles
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The Changing Politics of Central Banking

Bank of Japan, Tokyo

Last weekend we convened a quite exciting conference on “The Changing Politics of Central Banks” sponsored by the Cornell International Law Journal (symposium website). The focus on central banks as political actors is clearly timely given the growing awareness of the public of the distributive effects of monetary policy and also the debates taking place in many countries around the world about the proper scope of independence for central banks.  Yet we lack a sufficiently rich vocabulary for talking about this politics. Moreover, this is one of those interesting places where traditional right-left divides do not apply: what do we make of Paul Krugman’s embrace of Abenomics, for example?

The perspectives of the conference participants–academics and central bankers, mainly–varied considerably.  Keynote speaker Dan Tarullo pointed out that while independence make sense in the realm of monetary policy there is no reason for independence with respect to the central bank’s regulatory role, since in that space it acts very much like other kinds of administrative agencies which are subject to various forms of oversight (press coverage of Dan Tarullo’s remark: 1, 2, 3, 4).  Peter Lindseth, an administrative law and EU law specialist, spoke of the need for precisely this form of administrative oversight. Anna Gelpern pointed out that given what she called “the big blur” of monetary and fiscal policy, we need to begin to reeducate the public about what political legitimacy for central banks should look like.  Katharina Pistor argued that the focus on central bank legitimacy was not the entirely right question–that we should be asking “what kind of global financial system do we want”–because as long as we have this system, central banks can do nothing other than what they are currently doing.  Bob Hockett argued for an international central bank that would better address the needs of the global financial system than can a network of national central banks.  I took the opposite approach to Bob to the same problem: I suggested that the field of conflict of laws, with its rules for determining “who is in charge” in any particular situation, could better coordinate regulation transnationally than can global institutions.  Doug Holmes presented the findings of his extensive research on how central banks communicate with their various publics and constituencies in order to demonstrate that central banks are in fact more in touch, and more accountable, than the formal institutional structure would suggest.

What was resolved at the conference? I think we clarified a few points:

  1. Central banks are indeed political institutions that can and should be analyzed as such.
  2. Given that the genie is out of the bottle and there is indeed a “big blur” between monetary and fiscal policy, we need new ways of talking about the political accountability of central banks.
  3. There are nevertheless interesting variations in this politics from one state and market to the next, and even in any one context, the processes of accountability are far more complex and multivocal than they appear at first site.
  4. All of this impacts on the ability of central banks to cooperate in order to forestall future financial crises.

 

Sounds like a mandate for more research.  Stay tuned!

October 2, 2012
by Annelise Riles
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Market Totalitarianism

AIG Tower, Seoul

One of the big financial news stories of the week was that the US government will get its money back on the sale of AIG stocks. There is actually a debate about whether this is an accurate description of the state of affairs. But what interests me most is the fact–apparently agreed upon by both the champions and the critics of the TARP program–that the government’s return on its investment is the arbiter of the success or failure of the TARP policy. The state is now an investor, and its success or failure is evaluated according to the terms we apply to any other investor. What model of the state is this?
What fascinates me about this is that the state is a player in the market, to be evaluated on pretty much the same terms as we would evaluate any other market participant. This is a new kind of politics, not just a new kind of regulatory economics.
So what? I think this is actually a very big deal–something that should get political theorists going, and should engage us all in debates about the nature of democracy, or perhaps post-democracy, in an era in which states have imploded into markets and vice versa. I have a new paper coming out next spring on this subject in American Anthropologist and the title gives away my own views on this emerging politics: Market Totalitarianism.
I presented this paper last week as a keynote lecture at a conference at McGill Law Faculty entitled “Law Beyond the State.” A smattering of responses I got:

“You’re crazy.”
“You’re wild.”
“I wouldn’t be so radical.”
“People love what you do but they wouldn’t follow you there themselves.”
‘Your paper did not leave anyone indifferent…These slightly surreal moments are one of the great blessings of life.”
And weirdest of all, “Listening to you is an aesthetic experience.”

But that isn’t the worst: One of my own colleagues at an internal faculty workshop told me I should “just go hang out in the Hamptons with Romney and the other crazies.”
It is a sad commentary on how truly boring the legal academy has become when I count as outrageous. What seems to bother people are two things:

1. I am suggesting that there might actually be unintended consequences to centrist lefties’ eternal defense of the state (nothing new I thought here–see Todorov, Lefort, and any of the leftists with experiences of totalitarian states under their belts) and

2. I am suggesting that the techniques of private law, which we have devoted generations to showing up as endlessly malleable, and worse, politically suspect, might offer an ironic space for creative response to the current condition. Here is a very thoughtful version of the latter point:

“I found your diagnosis of the market and debt most compelling and was drawn to your use of Mauss and Davy. What I found surprising — and I suppose that is the Davy direction rather than the Mauss direction of your analysis — is that you ended up hitching your flag to the mast of the reciprocity of the contractual form (sounding remarkably like Ernie Weinrib in the end) rather than revisiting more insistently the gift relationship. In other words, I was expecting you to tell us that, in effect, capitalism had collapsed upon itself through the involution of debt that you described …and that the sphere of gift, relegated to the margins by market exchange, would have to be reinvested.”

That is indeed what one would expect of an anthropologist! Arguing for gifts instead of law.  What I find challenging about Georges Davy is that he refuses the distinction between the two.

January 25, 2012
by Annelise Riles
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What is the key debate in financial regulation now?

Most of the chatter about financial regulation in the blogosphere focuses on the issues of the moment. But what are the big questions? What does all the debate about the detail add up to?

To me, the big question is this: What comes after the collapse of the neoliberal consensus? What will be the prevailing common understanding of the proper relationship between governments and markets, and between actors in the market (financial entities, labor, enterprises, and yes, the academy?)

This question has so many dimensions, but it is the big challenge of our day, and most of the fights on the front page of the Financial Times–whether it is about disclosure policy at the Fed or what kind of collateral the ECB should accept–come down to versions of this Big Question.

Here are some possible subparts to this question:

-Is New Governance (peer review, self monitoring, naming and shaming, soft law etc) as now practiced at key international financial organizations such as the Financial Stability Board the answer?

-How do we balance democratic participation with the need for expertise? Can these things be “balanced”? What other models might we have of how democracy and expertise can coexist?

-What new forms of collaboration between the government and the market might be possible?

What do you think is the key question? What do you think about these questions?

 

January 18, 2012
by Annelise Riles
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Broadening the methods for studying financial regulation

In my earlier post I discussed some ways we need to broaden the subject of financial
regulation.  Doing so will also require broadening the methods we use to study
financial markets.  It is exciting to see the proliferation of new methods and approaches to studying financial markets and their regulation in the past few years. Here are just a few thoughts about some ways to do this.
  • We need to begin from empirical realities, whatever those are, and not from existing legal categories. The fact is that the legal categories were produced in response to an earlier time in financial markets and bear increasingly little relationship to the reality of markets today. Yet we persist in teaching, researching and thinking about financial regulation as if, for example, insurance, banking and securities were separate fields.  But if we start with what people in the markets tell us, and what we can observe about regulatory problems on the ground, and reason inductively about regulatory issues, rather than deductively from existing legal categories, we will produce analyses that are much more relevant to problems now.
  • Beginning with empirical realities means doing empirical research–talking to people, observing behavior, gathering every possible kind of data about what is actually happening.  This is tough work. Wouldn’t it be nice if we could just stick to our law books! No such luck.
  • We need as many different methodologies and disciplinary approaches to observing these realities as possible.  Economic data, of course. But also historical research, ethnographic research, sociological studies, even new kinds of theory, from alternative economic models to anthropological theory of exchange to political theories of regulation.
  • If we accept the premise of my previous post that markets by their nature are always combining with new subjects-the environment, politics, international institutions and so on–then I have more bad news: we need to start bringing the insights of other fields of law, from environmental law to international institutions, to bear on financial regulatory questions.  For example how can we make sense of the current boom in energy derivatives if we don’t know anything at all about the energy industry and how it is regulated globally?  Or how can we think about what strategies for international financial regulation will work without engaging with the insights of international law and institutions?  Or how can we evaluate the question of how bonuses should be regulated without engaging with debates in labor and employment law and policy? This probably will require collaborating with colleagues with expertise in these fields.
  • But the good news is that we don’t need to do it all alone.  And this brings me to one fruitful avenue for research: collaboration. For too long, legal thinking has been a fairly lonely exercise. But one approach to doing all of the above might be to find new ways of working collaboratively with practitioners in the markets and in government.  Thinking together about theory and practice can produce kinds of insights and solutions that neither side could imagine alone.  Of course how to do this, when the temporality, the standards of evaluation, and the political pressures of our careers as thinkers in the academy or in government or in the market are so different is not easy. Working through these challenges is its own challenge for our field.

January 9, 2012
by Annelise Riles
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Broadening the field of financial regulation

Stock DataThis morning I participated in a fantastic panel at the American Association of Law Schools organized by Anna Gelpern and Eric Gerding on the state of legal scholarship about financial institutions. The question the organizers asked is, what is the most pressing focus for the field today?
I argued that we need to significantly broaden the field–its subject, its methods, and the range of debates it is addressing at the moment.

 

In this post, I will focus on Broadening the Subject:
  • Research needs to become far more seriously comparative. Dodd Frank is not the only thing happening in the world, people!  Elsewhere, very different solutions, different models of market regulation are being developed–and indeed there are different views of what the key problems are.  American scholars pay lip service to the globalization of financial regulation but too often focus only on US and UK law and assume that issues elsewhere are either pretty much the same, or just behind the US and the UK in development. But the days of US and UK dominance are soon over.  The world is far more complicated and more interesting than this.
  • Research needs to become far more focused on international regulatory problems.  Most regulatory problems are now cross-jurisdictional in some sense or another.  This means that new international regulatory projects–from the Financial Stability Board to efforts to coordinate countries excluded from the Basel consensus–are increasingly important.  Yet how much do most scholars in the field of financial regulation know about international law and institutions? Too often we seem to be reinventing the wheel in that field, without taking advantage of the wealth of knowledge about what works and doesn’t work in international institutions in analogous fields. (Stay tuned for my forthcoming paper on this)
  • We need to pay more attention to forms of regulation outside the purview of traditional state institutions.  As I argue in Collateral Knowledge, most market governance is not state-based. It is initiated and conducted by private parties.  How does this work? When does it work and when does it not? How does it interact with state regulation?
  • We need to focus much more on the politics of market regulation–on the changing political climate in which financial regulation is being produced, the differences in this climate in different jurisdictions, and its impact on the policy options available to regulators, the culture/esprit de corps among regulators, the ability to recruit top talent to the bureaucracy, and indeed the zone of what regulators imagine as possible.  Just as internationalizing the field demands reaching out to international law scholars, politicizing the field means reaching out to political scientists and scholars of law and politics working in other domains of law.
  • We need to pay attention to the ways in which the field of finance is always expanding to include other subjects. For example, markets in energy products bring finance into conversation with environmental law and politics, and financial crises and environmental crises mutually influence each other in many ways.
Tomorrow I will take up how we might broaden the methods we use to study financial regulation and what debates deserve our central attention.

July 7, 2011
by Annelise Riles
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Learning from Regulatory Diversity

As we look ahead toward how we can do a better job of preventing, or at least lessening the effects of the next financial crisis, I think we can all agree that the more information regulators have about the real world conditions in the market–the nature of the products, the institutional contexts in which business decisions are being made, and the character of the risks–the better.  The question is, what is the best way for regulators to get such information?

One of the big Ahas of my current research at the Bank of Japan is that different regulatory systems, or cultures, may have different approaches to getting such information.  In the United States and in the UK, there is a big emphasis on hiring regulators with practical market experience.  US and UK regulators know that such individuals can be invaluable because they understand the thinking of market insiders.  Ironically, such individuals often turn out to be the toughest regulators of all as they are least likely to be snowed by bogus excuses about the impossibility of implementation of a certain reform, or the unavailability of a certain kind of information.  Think Gary Gensler, former Goldman Sachs executive now head of the Commodity Futures Trading Commission for example.

There is no doubt that this kind of talent is one important route to information.  Japanese regulatory institutions have relatively few such people, and in my interviews some Japanese regulators have suggested that it would be helpful to have more.

But Japanese regulators have a different approach: they maintain much more intensive, almost real-time contacts with their counterparts in the industry.  For example, a junior regulator may have his counterpart in a given bank on the phone two or three times a day.  In addition there are yearly on-site inspections that last several weeks and provide mini “fieldwork” opportunities for regulators to sit on the inside, as well as multiple “targeted inspections” also on-site.  There are daily or weekly contacts at every level of the bank and government, too, from the most junior to the most senior, since one gets a different picture of what is going on inside a financial institution depending on who one talks to.

One advantage of this approach is that in a world in which market realities change very quickly the regulator’s information is very current.  In contrast one problem with the US-UK approach is that after only a few years in government, a former banker’s experience quickly becomes relatively obsolete.

Perhaps here regulatory theory could benefit from the insights of the field of comparative law. Comparative lawyers know that it is pointless to argue about which system in the world is “best” in some absolute sense. French law and American law each have their relative strengths and weaknesses, but more importantly reflect an adaptation to the wider culture and values of the societies out of which they emerge.  Studying these differences can sometimes provide insights for reform (a French court may wish to borrow some precedent from an American court or vice versa) and can also help sharpen, through the contrast, each side’s appreciation of what they value the most. In much the same way, regulatory cultures are different, and interesting in their differences.  Perhaps rather than throw all our energies into defining one global regulatory approach or standard, we could start by noticing these differences, describing them, and analyzing their relative strengths and weaknesses as well as their cultural sources and purposes within each institutional and economic context.

April 21, 2011
by Annelise Riles
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Raising questions about close-out netting

stock market chartEarlier this month, Stephen Lubben at Dealbook posted an interesting piece querying whether there may be hidden costs associated with giving banks huge breaks in their capitalization requirements under Basel III for close-out netting, the clause in the ISDA master agreement that provides that under a long list of specified conditions such as bankruptcy, reorganization, nationalization and so on, one of the parties to a swap transaction can demand that the two sides close out all their obligations and net them all out.  As I explain in detail in my book, Collateral Knowledge, the reason the parties want to do this is that under modern bankruptcy law, even if Bank A cannot pay Bank B because it is bankrupt, Bank B is still obligated to pay Bank A.  If the two sides have netted out their obligations though, the amount Bank B owes Bank A in this situation will be much less–it’s obligation minus whatever Bank A owed it but couldn’t pay.

One chapter of my book is devoted to the events surrounding the passing of a Netting Law in Japan that would guarantee that netting was enforceable.  At the time, ISDA, the International Swaps and Derivatives Association, was busy pushing such laws through in every major jurisdiction in which derivatives trading occurred. And as Lubben says, everyone in the industry asserts that netting is a universal good. In fact, in the entire period of my research I never heard a single person–not a regulator, not a market participant, not even an academic specializing in derivatives–suggest that there were any possible costs associated with netting. But as my research progressed I became increasingly curious about some of the possible costs. Indeed, ISDA’s furious drive to get netting laws passed all around the world suggested to me that someone at ISDA had to believe that there were at least some judges out there who, faced with a case about the enforceability of close-out netting agreements, might see enough costs there to decide to hold the agreements unenforceable. And yet when I queried people about these issues–even people without a direct pecuniary stake in the matter such as academics and bureaucrats–the question was just dismissed again and again as completely out of left field.

Lubben focuses on one possible problem with close-out netting, the fact that the parties can invoke the clause under the contract for a laundry list of reasons, not simply for actual bankruptcy. His concern is that “letting everyone rush to the exits in time of financial crisis” increases systemic risk.  I am not sure if this is as big of a problem in practice as it appears to be on paper.  My research documents numerous occasions in which parties could have invoked the terms of the netting clause but chose not to do so for a variety of interesting and complicated reasons relating to their calculation of what was in their long term best interest. One of the things I try to do in the book is to show how distant law in the document may be from law in practice in the financial markets and this is an example.

However I have another kind of concern about netting agreements. What I think Lubben is really getting at in his comment is that they run an end game around national bankruptcy laws. This means not only that the parties get to liquidate their agreements for reasons that would not be valid under the bankruptcy law but also that in cases of real bankruptcy or reorganization the parties get out of the rules governing who gets paid first. Under the bankruptcy laws of every country I know, swap counter parties would be close to the end of the line of creditors to be paid in bankruptcy.  In other words citizens, through their legislatures, have decided that when there is not enough money left in a bank to pay everyone, others–secured creditors, employees, and so on–should be paid first. Moreover if you compare the class of creditors who would be paid first with the average class of swap counter parties you will find that the former are more local–employees, landlords, tax authorities–while the latter are far more likely to be offshore. But yet netting says forget all that, swap counter parties’ claims come first, before we even get to the bankruptcy priority list. No wonder ISDA members were worried some judges might not see things their way.

And yet in Japan where I did my research there was absolutely no public debate about the netting law. No NGO took up the issue; no bankruptcy law professors raised any concerns; the opposition did not even raise any questions about it. Perhaps it is not too late, in the context of Basel III, to simply begin to ask whether the benefits to market stability entailed in netting really do outweigh the very serious social costs. That would require at least beginning to recognize what those costs are however.

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