Bourdieu and AIG: how field theory is related to ‘too big to fail’

September 17, 2008

Martha’s post (and particularly, the reference to the FT’s decade of moral hazard) made me think about the notions of moral hazard and systemic risk from a sociological perspective. From a financial economic perspective, moral hazard and systemic risk are categorised as different ‘species’ in the markets’ ecosystem: the former is mostly a bilateral risk while the latter is, well, systemic. However, when looked at sociologically, an interesting connection may appear.

Moral hazard may affect mostly bilateral contractual connections, but its source is rooted in a widely accepted, acted-upon belief or what Bourdieu would have called a field. Continuing Bourdieu’s lexicology, in the case of moral hazard, the field in which many financial actors seemed to have operated included the following habitus: counterparty to a financial contract would have a reason to believe that they can default on their contractual obligation and not suffer the consequences of that action, as the governmental regulator would step in. Of course, not just any actor in the financial market could develop and maintain such habitus. The events of the last few days show us that not even big and well-respected players, such as Lehman Brothers, could count on a bailout.

What is it, then, that allowed AIG to be saved and left Lehman Brothers to the market forces, that is, to go bankrupt? This brings us to systemic risks, or as the case may be, the lack thereof. Maybe the demise of Lehman Brothers was a result of a miscalculation on their part. That is, maybe they assumed that they were big enough to pose systemic risk in case of failure, but they were, in fact, ‘less than systemic’.

Which brings us back also to AIG. Is it the case that AIG was really too big and constituted too many inter-connections to be allowed to fail? The answer, as everyone can recite by now, is a resounding ‘yes’. The collapse of AIG would have been the crystallization of a systemic risk scenario and the Federal Reserve would not have allowed it to unfold. There is no denying that AIG plays a major role in the market’s immune system, as it were. Its share in default protection contracts is substantial. However, it is not only the actual market share that turned AIG into a potential systemic risk; it was the fear, fuelled by uncertainty, about who exactly were the ‘infected’ counterparts of AIG and to what extent they were affect, that drove the Fed to give AIG the unprecedented loan. The Fed, like many other market participants, regulatory and otherwise, is playing in the field of financial markets not according to a fully prescribed set of rules, but more through acknowledgments achieved through practice-based trials and errors.

11 Responses to “Bourdieu and AIG: how field theory is related to ‘too big to fail’”

  1. danielbeunza Says:

    I was particularly interested in your last paragraph: the problem of the “infected counterparties.” This, however, is different in nature from Bordieu and moral hazard. In economic terms, I guess it would create asymmetric information. I wonder what an appropriate sociological concept would be…

  2. yuvalmillo Says:

    Yeah, that is a good question. What I was trying to imply is that maybe such a situation of asymmetrical information that brings about, potentially, market failure (a market for lemons, if you like) can be described as a Bourdieu’s field. The knowledge in the field is not evenly distributed and, in any case, it is imperfect. One may have knowledge about the heuristics operating in the field, but at the same time, it they cannot be sure how strong, well connected everyone else is. This is, obviously, not an answer, but it may direct us to think of markets in terms of action-based theory of knowledge. In markets, as this example shows us, actors learn by doing.

  3. marthapoon Says:

    As a counterpoint to this analysis I wonder what this picture would look like from the point of view of Boltanski and Thevenot’s ‘sociology of justification’ where actors on the ground in the moment weave together reasons why one or the other firm should or should not be saved? (Oh to be a fly on the wall in those negotiations…!) In this point of view we would take the very reasoning Yuval so clearly articulates as an outcome of a process of controversy…

  4. yuvalmillo Says:

    Martha, your comment could serve as a good opening for a theoretical discussion: what if what we witness in the markets now, and in particular, the troubled interface between the market and the political sphere are the clashes between irreducible economies of worth? Sounds far-fetched, yes, but desperate time call for wild theoretical leaps…

  5. danielbeunza Says:

    Not at all far fetched. This is the arena that socially responsible investors and the NYSE have managed to navigate to great effect. First, responsible companies are now enjoying low costs of capital on the basis of their performance on a non-economic dimension… be it the ecology, governance or social aspects. And as to the NYSE, it seems to me that, with Grasso it mobilized notions of nationhood and national interest. With the current managment, it seems to be globalization.

  6. Zsuzsanna Says:

    Martha,
    whether a firm is “too large to fail” is in fact the outcome. I want to add that it’s not only about justifications but also calculation, as Yuval suggested at the end of the original post. In order to establish how “big” the firm is in terms of market worth (if we want to stick with Boltanski and Thevenot), the regulators have to trace or get a vague sense of what the network of contracts looks like, estimate the scenarios, assess the ripples. Another kind of calculation is about credibility. Regulators are always called upon being consistent, because markets have to be calculable, and calculability can only be maintained if actors’ responses are not random. This is both what Max Weber already suggested, and also the lesson from socialist economies with “soft budgetary constraints”. So, regulators have to prove that what they are doing is consistent–why they are saving AIG when they are not saving Lehman.

  7. marthapoon Says:

    This is a great start to thinking through the decisions as negotiated outcomes supported by emerging configurations of jutification.

    I would suggest to Zsuzi, that give the rapidity of the crisis, what is interesting is perhaps the inconsistency of the different justifications given for action, as well as its rupture with the current administration’s general anti regulatory attitudes.

    There is a kind of real time messiness in action here, rapidly changing positions, that seems important to the analysis this story although it tends to be invoked only to enact a critique from different political camps of the actors…

  8. Zsuzsanna Says:

    I agree, there is “real time messiness” and the justifications become inconsistent as they pile up on each other. At some points, however, the actors do look back on their decisions and try to justify how their current super-interventionist measures fit well with their earlier anti-regulatory position. In the most grand terms, Bernanke and Paulson try to say it’s a qualitatively different situation than the ordinary state of markets–it’s a state of emergency. Such a statement allows them to discard free market dogma, gives them carte blanche, and makes them problem-solving world-saving heroes. I wonder how accountability will or will not develop after the crisis is over. Bush managed to avoid it after 9/11.

    Rapid change during this crisis makes the trial and error process of policy-making much more visible than otherwise. We literally see how the regulators are shifting justifications within 24 hours, from the case-by-case, now admittedly ad hoc way of addressing the crisis, to the “systemic” view of intervention.

    What do you think about the following description? That this shift of frame means that the actors have given up calculating the consequences of each failing bank, it’s too complicated and they can’t identify the losers in advance, and they can’t bail them out as companies (that would really go against their anti-interventionist position). They are now calculating in terms of product market categories (what kind of debt should the government buy), which is not specific to the individual company. So they went from a firm-centered view of where the crisis is, to a market-centered one.

  9. marthapoon Says:

    Yes, I see what you are saying about the emergence of coherence out of messiness is part of the messiness. What I was trying to get at was just that we take that messiness in mind and not only the finale ‘smooth’ justifications as the point of analysis. (This seems to me what a field analysis may require…)

    As to your proposed description – it is indeed very interesting. I guess the research question forward would be to ask: what kind of data would be able to show this? Is it enough to follow journalistic accounts? What other forms of evidence are being recorded of these events…

  10. Jibtechwarrior Says:

    This is a different situation than has been delt with in the past. The focus should be set on why AIG wouldn’t accept the bailout unless the government promised they would not interrogate the company of the loss of money. Regular people do not get bailed out if they go bankrupt, why would a company get that safety net? Just because the market will fluctuate and be less stable for a period until other businesses fill the gap. Not to mention that by the end of the bailout, the government would end up spending nearly half a trillion dollars on recovery. Then the company gets sold back to the initial buyout price. (I wish I could cough the word Enron.. oh wait)

    All in all I suppose the bill wasn’t passed. But that has never stopped the States from completing their objectives.

  11. yuvalmillo Says:

    Jibtech: Yes, this ‘reverse blackmail’ is fascinating: we would not let you help us unless you don’t ask how we got here. Only a company that’s too big to fail can offer such a condition, as they assume that their fall would hurt other more than it hurts the company. And, why they impose this rule. I think that we can have a safe guess here: they probably think that the public/government/you name it would not have a good view of the practices that led them so far.
    About getting the ‘mission accomplished’, I am with you. I would not bet against the bill not passing. This administration has proved time and again that little things like not approval from the Congress, or the American constitution, for that matter, do not stand in its way when it’s out to achieve something. And, the forces that made Paulson kneel are very strong…


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