Will private equity bail out the banks? In The Economist this week.

September 3, 2008

An article in this week’s Economist suggests that buy-out firms, flush with ambition and capital, yet a dearth of opportunities in which to invest, might turn their attention towards capital and liquidity stretched banks.  Given the positions of the two parts of this equation, the newspaper suggests that “It does not take a billionaire buy-out barbarian to put two and two together.”

Despite the logical ease with which the connection is made, the article does go on to point out some serious hurdles to its own main proposition, that private equity firms might move from owing banks to owning them.   For one thing, “Control of a bank brings responsibilities—more supervisory oversight and the “source of strength” obligation that can require a holding company to inject capital into ailing bank subsidiaries. No private-equity firm wants to sign a blank cheque, and few would welcome regulators crawling over their books.”

The framing of this piece, which appears at a moment when action has not yet come to fruition, bears within it many of the analytic tensions faced in the social sciences.  First and foremost, there is the tendency towards logical positioning – i.e.that  the conditions were such at moment [t] that it made sense to do [x].  Thus, if private equity does succeed it would be argued that this occurred because it was the obvious move to make.  Yet if private equity does not succeed in buying over banks the argument through classic binaries might go that: it made sense in theory, but was prevented by laws in practice.

The problem with this analysis is that although it makes an equation like statement (A-B=C), it can only construct this statement retrospectively.  Is regulation an insurmountable problem or not to the take over of banks by private equity?  This is the billion dollar question, it is the as yet unknown; and the answer can not be produced until a tentative is made, until the qualities of the regulations and of private equity firms are put to the empirical test.

Taking uncertainty and the uncertainty qualities of agents seriously is one of the virtues of much of the work that has been done from an STS perspective within SSF.  Rather than presuming that a financial situation does or does not make sense; rather than presuming a divide between theory and action, rather than claiming to know what banks or regulations are capable of in advance; these types of analyses have show how, out of positions of sheer uncertainty, work is done to make new positions of certainty emerge.   It is through work that clarity regarding the ability of private equity to become bank owners (and under what conditions) will be achieved.

Both outcomes – success and failure – will involve a) the initiation of action; and b) tracing the detailed shifts and/or the rise of new technical platforms that that set up the conditions by which the test of that action will be carried out.  Thus in the case at hand, it seems as though we will have to watch and see whether the tentative by private equity is made and on what grounds (i.e. what changes to the laws will be made to accommodate them, or what organizational innovations are made to help them navigate the extant laws).  We will also have to observe whether they will be met by the formation of new groups/agents that challenge them (i.e. with the proposition of additional laws).

Can the (as yet to be determined) outcome be accounted for by a reading of static factors existing at time [t]?   From a position that privileges innovation the answer is a resounding no.  Neither the actors working in the moment nor the analyst looking back on the past, can make this determination in the absence of the activites that are to come in [tà…].  The outcome and the qualities of the agents with regards to this problem (the ownership of banks by private equity) will be shaped by factors and agents that precisely do not exist at time [t] (because of they did exist then there would be no uncertainty).  It is only once new tools and their accompanying agents are actively produced forward in time that the players in time [t] will be extracted from the situation of uncertainty and moved towards a position of knowing…

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