Many of the systems of financial calculation that have been developed in recent decades entail modeling probabilities and magnitudes of future price movements, specifically in regard to the volatility of securities (the standard deviation of prices from their average over time). (Henwood, 1998).. Financial risk is evidently not an readily-discernible property of market conditions that can be empirically verified unproblematically, and its calculation is therefore not independent of the models and schemata deployed by market actors (see Best, 2005; Bryan & Raffterty, 2006). The calculative practices that enable financial risk to be abstracted and performatively transformed into discrete quantum values embedded in securities that can be traded between investors presuppose intersubjective codifications to ensure meanings are commensurated among all market actors. However, the systems developed to quantify and manage risk may bring about changes in the very market behaviour upon which they are based. In other words, the process of modelling and calculating market activities may performatively feed back into those activities, potentially altering the form or level of risk being modelled.
Beck’s (1992, 1999, 2000) work on ‘risk society’ deserves consideration here, He argues risk is a characteristic and inexorable feature of ‘late’ or ‘reflexive’ modernity in the sense that the complexities and ambiguities of disembedded social formations resist rational calculation. The notion of ‘reflexive modernity’ (see Beck et al., 1994; Beck et al., 2003) suggests a dialectical process by which the institutional and technological developments intended to manage one historic set of social problems related to modernity in turn give rise to a new set of challenges. Thus the systems and technologies developed to secure control over one set of hazards or uncertainties in turn give rise to new hazards and uncertainties in need of control (e.g. the use of pesticides to ensure crop yields and avoid famine eventually produces new problems of pollution and biodiversity erosion). Risk therefore becomes an intractable and contested feature of late modern society. It might appear inviting to place financial processes in such a framework. However, the notion of abstract social forces unfolding historically according to some dialectical or teleological process can overlook the specific institutional arrangements and the interplay of different agencies that give rise to those forces in particular contexts.
On that point, it is worth noting that the financial media and communication technologies that have facilitated increases in the extensity, velocity intensity the flows of market information perform an important risk-surveillance function in providing investors with almost-panoptic real-time updates of market events. However, real-time feedback about market events increases the pressure on traders to intensify their monitoring and respond quickly to news. Indeed, as Arnuk and Saluzzi (2008) point out, there is increasing deployment of computerised ‘algo’ trading systems which can monitor prices and respond to trading opportunities in subliminal time-frames. Consequently, the real-time nodes of decision making processes are themselves rendered opaque to the market surveillance and risk-
management processes. Interestingly, Green (1999) has suggested that Beck has paid little attention to financial markets and questioned whether his conception of risk as a product of reflexive modernity is applicable to markets83 He nevertheless acknowledges that;
‘What is new is the overt and sophisticated systems of risk management deployed to stabilise the system’s inevitable fragility and the high levels of leverage that risk techniques and technology supposedly allow […] Financial markets have produced risk as an attitude to the future not only to cope with threats but to entrench their systems of wealth creation and epistemological authority.’ (Green, 1999, p.81).
Beck’s recognition that the practices of risk management intended to control one set of recognised uncertainties and hazards may give rise to new ones does not seem incompatible with such observations. However, the aim here is to transcode Beck’s insights into the framework emphasising intersubjective codification and reflexivity. New modes of trading have been made possible by convergences in computing and media technologies, the development of sophisticated networks of financial communication, and increasingly abstract forms of mathematical calculation capable of articulating shifts in the obligation/ownership of financial risk in securitised form. This has entailed a redefinition and renegotiation of the codifications of finance and the channels and modalities of financial action through which risk is performatively reified and transferred (notably through derivatives instruments).
For example, the collapse of Barings Bank at the hands of Nick Leeson in 1995 (see Stephen, 1996), the near-collapse of the LTCM hedge fund which almost caused a systemic financial crisis in 1998 (see Lowenstein, 2000; Dunbar, 2000), and the Enron debacle in 2001 (see Blackburn, 2002; Fusaro & Miller, 2002) all involved sophisticated (mis)calculations of risk related to the innovative deployment of new financial instruments and investment practices. Although numerous critics of speculative finance have blamed derivatives instruments themselves for market volatility (e.g. Berkshire Hathaway chair, Warren Buffet, famously declared that derivatives were ‘financial
weapons of mass destruction’ 84), this should not be taken to assume technological determinism of risk. Indeed, the position of this thesis is that financial risk is produced or performed by the actions of financial agents mediated by the intersubjective codifications specific to their arena (including risk management practices). Henwood (1998) argues that the deployment of derivatives to manage risk by the individual trader or can be perfectly rational from their own institutional perspective, but that the aggregate outcome of such practices across the entire market can be an exacerbation of volatility and the propensity for systemic risk. Best (2005) similarly suggests that the development of new financial instruments and investment practices that allow some kinds of risk to be quantified/managed, have the potential to generate new forms;
‘ Although derivatives may reduce the risks taken by an individual investor, they cannot reduce the overall level of risk in the financial system […] Derivatives create complex
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Green (1999) differentiates beweeen three forms of risk: ‘Modern risk’ refers to a positivist notion of risk that can be objectively modelled and quantified. ‘Reflective risk’ refers to modifications of behaviour in response to percpetion and experience. ‘Beckian risk’ refers to Beck’s conception of how social systems and technologies developed in response late modenrity generate new hazards. Green contends that financial markets entail ‘modern risk’ rather than ‘Beckian Risk’ insofar as they involve highly quantitative calculation and are therefore ‘nonreflexive’. He therefore concludes that this represents a limitation on the applicability of Beck’s framework to financial markets. Here, Green understates the salience of Beck’s approach to financial risk because of a categorical misdiagnosis: By associating financial caclulation/ quantification with his positivist conception of ‘modern’ risk, he does not take account of the reflexive/performative aspects of calculation in financial activity.
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Buffett commented that ‘[D]erivatives and the trading activities that go with them… [are] time bombs, both for
the parties that deal with them and the economic system […] Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers…Central banks and governments have so far found no effective way to control , or even monitor, the risks posed by these contracts […] [D]erivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.’ (2003, pp.13-15). As Bryan and Rafferty (2006) suggest, it is misleading to assume any and all trade
involving such instruments intrinsically entails higher levels of risk because one of the more common uses of derivatives is to insure or hedge investments, reducing exposure to market volatility.
linkages between market segments and can precipitate spill-over effects from one market to another. […] Derivatives can increase the overall market volatility by exaggerating the changes in the underlying securities in which derivative contracts are based. ‘ (Best, 2005, p.131).
In this regard, new financial instruments and trading models designed to manage financial risk have reflexively altered the nature of the risks with which financial agents must engage. Indeed, this was evident in the sub-prime mortgage crisis and the credit crunch which stemmed from the securitization of pooled mortgage-debt, into collateralized debt obligations (CDOs) in order to transform high-risk debt into securities eligible for investment-grade credit-ratings (see Evans, 2007; Blackburn, 2008; Mauldin, 2008). Bryan and Rafferty (2006) have noted that the significance of derivatives for contemporary financial markets stems not from their intrinsic complexity or potential for leveraging investments (thereby amplifying potential profits and losses85). Rather, their impact on financial markets stems from performative commensuration among formerly discrete forms of capital/ securities (e.g. stocks, bonds, currencies). This arises because the issuance of derivatives contracts assumes calculative frameworks in which the risk-return ratios of all forms of capital securities become directly comparable. As Bryan & Rafferty (2006) point out, an important consequence of this is that financial investors seeking to optimise returns can directly compare the relative benefits of different investment options across a wider range of securities than would have previously been possible. In turn this obliges the agents responsible for maintaining and increasing the value of different securities to be cognisant of their relative performance as securities across all the other investment sectors. This has implications for the reconfiguration of relations between financial markets and the industrial economy, notably the increasing pressure to ensure rates of return for publicly-traded companies are competitive compared with other securities and increasingly short-term temporal horizons (Jessop, 1999; Hope, 2002, 2006). A further implication of the commensuration derivatives make possible across different forms of capital is the generation of interlinkages and price correlations between formerly discrete market sectors. NFIs potentially performatively produce relationships between securities not based on any natural, functional relationship (thus for example, oil futures and automobile stocks are functionally related, but Icelandic sovereign debt and US sub-prime real estate have no natural connection). This again underlines the potential for disconnection between the M-C-M’ and M-M’ circuits.
The conception of risk becomes important in explaining how certain forms of ‘accumulation by dispossession’ have arisen. The reprioritisation of the macroeconomic policy trilemma and the reconfiguration of the balance of relations among state, capital and civil society may have served to defer or displace capital’s predilection for crisis and devaluation. However, policies intended to sustain accumulation may entail the asymmetrical redistribution (and socialisation) of financial risk. The use of public money by governments to subsidise losses of private capital (‘corporate welfare’) has been evident in the massive bail-outs of the banking system in the wake of credit crunch. Over a trillion dollars (US) has thus far been committed by US and European governments to stabilise the banking system. In some cases, governments have effectively nationalised failing banks (e.g. the Royal Bank of Scotland and Northern Rock in the UK), but in other cases, governments have loaned capital to the banking sector to increase liquidity and-in theory- enable them to recommence lending. Paradoxically, governments have raised the capital through sovereign bond issues, which effectively entails taking out loans from the private banking sector which is benefiting from the bail- out86. Thus the public will ultimately pay the banks to service the loans used to rescue them. Ironically, the huge injections of public money have thus far not succeeded in encouraging the banks recommence issuing credit on a normal basis, and they appear to have done little to discourage the practice of paying enormous bonuses to the banking executives who presided over the credit crunch. The financial system is now placing pressure on governments in debt to reduce public expenditure or risk incurring a decline in credit-rating and the value of bonds/currencies.
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The leveraging process is made possible by the fact that derivatives contracts conferring the right/ obligation to buy or sell a security at a fixed price in the future cost only a fraction of the notional value of the underlying securities denoted. The contract for a security worth $100 might only cost $2.50, but the movement in the price of that security can be realised (or incurred) by the parties at full value.
86 The irony here is that this is precisely the sort of Keynesian counter-cyclical government spending that