Is there evidence that ‘losses’ may be endemic to derivatives?
May 17, 2012
Were the $2 bn losses incurred at J.P. Morgan by the London Whale avoidable? New evidence that a group in another part of the bank were buying the contracts through other banks suggests that a logic of practice undergirds the actions that allow traders to wind up these large positions.
There is a subtle distinction between the improper execution of a logic (exogenous error) and a logic that when executed leads to a collapse of value and an uneven distribution of gains and losses.
My point is simply that financial losses are unwanted and unexpected by may unfold as a direct consequence of a logic of practice that is endemic to modern finance… even if theories of modern finance that intellectually support the development of these practices tells us otherwise.
The general idea I’m trying to get at is captured in a phrase in Rachel Maddow’s recent book on an altogether different topic where she writes: “It’s not a bug in the system. It is the system.”
A similarly configured argument was made by Errol Morris in his film Standard Operating Procedure (2008). Morris depicts the famous photographs of smiling soldiers and dead bodies at Abu Ghraib as the just the sort of uneasy behaviour that might emerge among regular people confined to working in a situation where they bear witness intense political violence as subordinates.
Morris’ point is that if we look beyond the frame of the pictures we will see that the disturbing actions they capture are an expected or even ‘reasonable’ outcome of the harsh conditions in which these soldiers were made to live and work.
I do not invoke Morris’ film to suggest that the London Whale was a victim of subordination or the perpetrator of violence (as others might wish to do), but rather to express that outcomes which are a direct consequences of the actions taken are not, technically speaking, errors or crises.
Recognizing the endemic nature of a problem to a system demands an altogether different analytic and policy approach than an immediate denunciation of mistakes, sloppiness or corruption.
The approach I’m suggesting is supported by first symmetry principle of the strong programme, a founding principle of science studies. This principle extended the analysis of science as a contingent social endeavour to groups that were able to establish firm truths instead of only studying disciplines that were considered wrong.