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.