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The heavy blame placed on the supposedly fraudulent rating agencies has consequences regarding how we view neoliberal globalization. As former Moody’s rating analyst William Harrington testifies to the FCIC, “The rating agencies have been the all-purpose bogeymen for the crisis. They bear a heavy

responsibility, absolutely, but this exclusive focus obscures how the problems are embedded in the whole system: the big banks, accountancy firms, financial law firms, investment firms, regulators and the financial

press” (Luyendilj, 2012).While the FCIC highlighted various wrongdoings, such as regulatory failure and

conflict of interest, it failed to adequately explore systemic behavioral patterns in financial markets.

Flandreau discusses this point: the hearings so far are “more concerned with trying to establish wrongdoing in certain specific instances, rather than a general pattern” (2012, pp. 16-17).

Rather than seeking to change the system, such representations of crisis attempt to re-embed. The focus on the conflict of interest as a major cause of the financial crisis suggests that it occurred because “some people were not doing their jobs properly, were intervening in finance ineptly, and that if we can just make sure people do what they are supposed to do, another financial crisis like this can be avoided”

(Sinclair, 2010, p. 101). Financial crises are continually depicted as the outcome of some form of deviance. These politics of blame represent an ideological effort to transpose the root of the crisis from the inherent

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Hill reinforces this argument: “The structured finance lawyers I have spoken to describe a more nuanced picture, in which rating agency employees seemed to be doing a mostly satisfactory job rating a high volume of exceedingly complex deals; indeed, the employees not infrequently demanded (sometimes costly) changes in the transaction structure to increase quality before giving a high rating” (2010, p. 340).

instability of neoliberalism to clearly identifiable actors and actions that are external to normal market activity (Sinclair, 2010). It adopts the most fundamental assumption of neoclassical economics: the idea of a self-equilibrating market. Neo-classical economists are unable to recognize that economic crises can occur as a result of the internal or normal operation of the economy (Nesvetailova, 2007).

Financial crises become serious because they destroy linguistic capital, particularly economic discourse. Crises thus create a need for reconstructive discourse, “in the same way accidents require reconstructive surgery” (Flandreau, 2012, pp. 1-2). Externalizing the causes of economic crises is a key method used by state and private actors to reconstruct pre-existing economic discourse and power relations. As discussed in Chapter 8, this represents a key strategy used by the New Zealand government following a credit rating downgrade as the external deficit is described as the primary cause of New Zealand’s economic woes. Discursive othering is used following financial crises to re-legitimize sovereign power and neoliberal market practices. Blame is attributed to certain deviant practices, thus normalizing and re-legitimatizing pre-existing market practices: the Asian financial crisis was described in terms of lax regulation, fraud and corruption; the Subprime Crisis was orchestrated by the unscrupulous lenders and the corrupt rating agencies; and the Euro-crisis was driven by the corrupt and idle character of the Greeks (Sinclair, 2010; Mylonas, 2012).

Ultimately, the CRAs’ most consequential impact has not been the mispricing of financial risk, but the production of an authoritative framework of financial knowledge that supported the belief that it was possible to objectively determine and manage financial risk. Thus, the focus on the agencies’ problematic incentive structure misses the point. The idea that perverse incentives led the agencies to get the ratings wrong, assumes they can get them right. As Langley (2010) argues, it assumes that the agencies would have been capable of producing accurate ratings if an appropriate system of remuneration had been in place: “There is no acknowledgment of...the incapacity of risk valuations to fully capture incalculable future uncertainties” (Langley, 2010, p. 83). As Paudyn comments, “whether predictive positivism of this sort…helps us acquire ‘objective’ knowledge about fiscal behaviour is a misplaced enquiry. Given the uncertainty of budgetary politics, this risk-dominant approach searches for certainty equivalence that just

does not exist” (2012, p. 6).

It is precisely the focus on the bad subjective inputs in the rating process that enables the rating agencies to claim methodological objectivity. The prevailing idea is: if we can remove subjective elements from the rating process, an objective measure of creditworthiness will remain. This logic creates what Paudyn (2012) terms a fictitious qualitative/quantitative opposition, in which objective quantifiable risk is considered separate to, and distinct from, subjective qualitative uncertainty. This distorts the way in which subjective opinion and uncertainty are in fact embedded within such quantitative practices and has also led to the distorted regulatory aim of producing objective ratings. In 2008 the European Commission proposed regulation that aimed at “ensuring that credit ratings used in the community are independent, objective and of the highest quality” (Amtenbrink & De Hann, 2009, p. 1915). The Permanent Subcommittee described financial modelling techniques as being “handicapped” by subjective inputs (Permanent Subcommittee, 2011, p. 28). This creates a problematic binary between quantitative risk calculation and subjective opinion. The focus on removing subjective bias, whether political or monetary, serves to deflect attention from the contingent, subjective and uncertain nature of the risk modelling techniques themselves and the financial theory they are based on, which are left unquestioned.

This state-based discursive response to the financial crisis effectively re-legitimatized the credit rating business whilst simultaneously removing the state from any obvious culpability with regard to empowering these institutions through regulatory changes. It is thus unsurprising that despite the barrage of criticism levelled against the CRAs over the last decade, little discernible impact to their perceived expertise, market dominance or profitability has occurred. If anything, McVea argues, “throughout much of this period CRAs [have actually] succeeded in enhancing their influence” (2010, p. 709). The story of the

hedge fund Long-Term Capital Management (LTCM) is a good example of this dynamic occurring.

We have already witnessed the resurrection of scientific approaches to finance in the notorious story of the 1990s hedge fund LTCM. The story of LTCM illustrates the consequences of externalizing the

causes of financial volatility. LTCM was a very large hedge fund with assets totalling roughly $100 billion.57 The fund was regarded as a bastion of financial credibility and included some of the most prominent members of the world’s financial community (de Goede, 2001). Its creators were the authors of the Black- Scholes formula: Myron Scholes was the founder of LTCM, and Fischer Black was on the board of directors. LTCM was underpinned by the Black-Scholes formula, the centerpiece of which was that through dynamic hedging – the purchasing of large amounts of financial derivatives – traders could effectively eliminate risk.

Initially the fund was extremely successful, putting up returns of 40% a year. As Lowenstein comments, “The fund’s intellectual supermen had apparently been able to reduce an uncertain world to rigorous, cold-blooded odds” (2000, p. xix). However, in early 1998 LTCM started to take heavy losses; this eventually culminated in a single trading day loss exceeding US $500 million. By September that year LTCM was forced to seek assistance from the New York Federal Reserve to avoid bankruptcy, and was eventually liquidated in the early 2000s. As a result of LTCM’s failure and the cost of the bailout (totalling nearly $4 billion), in 1988 the US House of Representatives began to hold hearings on the role of hedge fund operations in the financial system. Similar to the current criticism of CRAs, the former SEC President David Ruder spoke out in favor of tightly regulating hedge funds: “Our capital markets should not be held hostage to the activities of a group of risk-takers who can operate in secrecy without regard to possible systemic effects” (in de Geode, 2005, p. 134).

The result of such regulatory pressure was the passing of the Hedge Fund Disclosure Act (HFDA), which required hedge funds to publicly disclose the size, composition and risk of their investment portfolio (US House of Representatives, 2000). Two key points defined this act. First, LTCM was seen as an aberration to normal market activity: the market turmoil associated with the LTCM disaster was seen as irrational and rare. Second, LTCM was characterized by poor and reckless upper management who were unique in the amount of leverage they took on. The SEC argued that under normal circumstances hedge funds played a positive role in maintaining the smooth operation of financial markets by contributing to the efficient

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Hedge funds are private investment partnerships. Because historically hedge funds are not sold to the public, but to a certain class of investors (i.e., accredited investors), they have been exempt from regulations that govern other types of investment funds. These regulations include limitations on the level of risk able to be taken.

allocation of capital. The burden of blame was thus limited to the institution’s risk-taking upper

management and abnormal market circumstances. The risk management techniques used, the practice of arbitrage itself, and the financial theory that underpinned it, were never questioned.

Rather than being an aberration, if one looks at the financial techniques used by LTCM, most notably the Black-Scholes formula, they represent the epitome of modern scientific approaches to finance.

LTCM was indeed the quintessential hedge fund of the 20th century. It was an experiment in harnessing the

market through financial theory and computer programming, and therefore was an experiment that was replicated. The belief that tomorrow’s risk can be inferred from yesterday’s prices and volatilities prevails at virtually every investment bank and trading desk (Lowenstein, 2000). The failure of LTCM, similar to that of CRAs, is at the heart of modern finance, it is the belief in the scientific calculability of future risk. The collapse of LTCM lies its failure to acknowledge the irredeemably social and uncertain nature of financial markets: “Unlike dice, markets are subject not merely to risk, an arithmetic concept, but also to the broader uncertainty that shadows the future generally…uncertainty, as opposed to risk, is an indefinite condition, one that does not conform to numerical straitjackets” (Lowenstein, 2000, p. 235).

The attempt to regulate hedge funds and limit their influence did not restrain their operations, but re-legitimized their existence and the financial risk-calculating techniques underpinning their market operations. As de Goede argues, the HFDA act should be seen as a “depoliticization and normalization of hedge fund activity...it created a legitimate domain for hedge funds to operate, and stabilized the

controversy surrounding hedge funds” (2005, pp. 135-136). The growth in the hedge fund industry over the last decade illustrates this point: in 1998 the total assets managed by hedge funds was US $35 billion, by 2005 that figure rose to over $1 trillion dollars (Danielsson, Taylor & Zigrand, 2005). Recent attempts to regulate CRAs have similarly failed to question the foundations of the credit rating and have therefore stabilized the controversy surrounding CRAs, depoliticized the credit rating practice, and normalized CRAs’ role in the financial system.

Conclusion This chapter has attempted to shift attention away from the CRAs and towards a greater focus on the credit rating itself and the role of social norms and beliefs in generating the perceived objectivity of these credit evaluations. The way in which credit judgements are presented is vital to the current

significance of the CRAs. The uncertainty absorption caused by the form of the credit rating, along with the opaque nature of the generation process, removes from view the subjective and political elements within the credit rating process. As was illustrated by exploring the causes of the Subprime Crisis, social beliefs and practice do indeed play a determinative role in financial market actors’ behavior. Finally, by highlighting how the US state was able to reconstruct pre-existing market apparatuses and power-relations following

economic crises, the role of states in the discursive construction of the market is brought to light. The significance of the credit rating form and the role of the state in the discursive construction of the market will be further demonstrated in the next two chapters; both observations have significant consequences regarding how we view state-CRA interactions.