Keepin’ it real

August 24, 2016

In the previous post, Suhaib Riaz posed an important question, “how critically aware are we that finance is also on a mission to socialize us?” The post demonstrates an earnest effort at self-reflection.  Such efforts are not nearly as common as one (I) would hope or expect from our various institutions of knowledge.

I come to social studies of finance by way of science and technology studies/ science and technology policy.  I study the science and politics of insurance ratemaking including, the role of technological experts in the decision making process.  So, truth be told, I am more familiar with policy scholars and climate scientists than the relevant scholars in organizational studies and management.  But I generally learn quickly and I have found that a select few have made a journey similar to mine.

After reading Riaz’s post, I commented.

I likened the concerns expressed in the post to those regarding the politicization of science.  As I have watched such politicization unfold and the impacts it has on society’s ability to cope and ameliorate its problems, I responded to Riaz’s post by urging collaboration and continuous self-reflection.

Just after my comment, as I was going through emails at the time, I learned that a notable American science policy scholar, Dan Sarewitz, published an eloquent essay geared towards ‘Saving Science’… mostly from itself.  His work, indeed much of his work, aims to lift the veil from science by encouraging scientists and non-scientists to more critically consider the production of science and technology in the context of societal needs, hopes and fears.

I thought more deeply about Riaz’s concern.

Science, much like finance, has benefited and suffered from the myth that ‘unfettered’ production inevitably leads to societal benefit.  In this way, one only needs to be armed with curiosity and all that results will be glorious.

A free scientific enterprise is a myth because it simply isn’t so, at least not anytime remotely recent.  Government steps in often to offer a hand and establish rules of the playing field.  Technology gives science applicability and in turn, drives certain areas of knowledge over others.  In a myriad of ways, we see that societal benefit is not inevitable. Advancements in science and technology have resulted in new risks, severe inequalities, and challenges to our sense of morality.

Yet the myth acts to demarcate the boundary between society and scientists and insulate the institution of science from the critical lens of accountability.  I dare say the myth has served economics and finance in much the same way.

When scientists believe their work occurs separate from the rest of everyone they have no choice but to be self-serving.  I have met countless scientists who believe their work is not about politics.  But, their scientific efforts support their worldview and their worldview supports their scientific efforts.  In either direction the nexus is politics because the justification for inquiry is based on personal visions of what ought to be.  There is always politics.  I think that is ok.  But one has to be aware of it, check in with the rest of society to see how it’s going and honestly consider the role one play’s in guiding the fate of others.

There is much for social studies of finance scholars to glean from the existing science policy literature from both sides of the Atlantic.

In the closing of his essay, Sarewitz notes the “tragic irony” of long standing efforts by the scientific community to shield itself from accountability to ideas and curiosities beyond itself thereby, resulting in a stagnant enterprise detached from the society it claims to serve.  As a means forward, he encourages improved engagement between science and the “real world” as a means to stir innovation, advance social welfare, and temper ideology.

The same suggestion can be made to the world of finance and its growing cadre of prodding social scientists.


I have just received from COST US, a Google group dedicated to corporate sustainability, links to articles about technologies that may reshape how investors and consumers politically engage with companies.

The first one, from the corporate blog of Hitachi, discusses the happy marriage between the Global Reporting Initiative and XBRL language. The GRI is a non-profit that advocates a system for environmental and social reporting, and XBRL is a new format for electronic reporting. This natural union could be one of those happy combinations of content and platform, like mp3s and the ipod.

It’s clear that by providing preparers and users of data with the means to integrate financial and so-called nonfinancial data (i.e., that which discloses a company’s environmental and social performance), XBRL offers exciting possibilities. The potential for XBRL to provide the users of corporate sustainability performance data with the leverage to push and pull information that meets their requirements is certainly there. That was the thinking behind the first version of an XBRL taxonomy for GRI’s sustainability reporting guidelines, released in 2006.

The second one, a Wired magazine article, introduces the efforts of tech-savy programmers to appropriate XBRL for their own activism. See

The partners’ solution: a volunteer army of finance geeks. Their project,, provides a platform for investors, academics, and armchair analysts to rate companies by crowdsourcing. The site amasses data from SEC filings (in XBRL format) to which anyone may add unstructured info (like footnotes) often buried in financial documents. Users can then run those numbers through standard algorithms, such as the Altman Z-Score analysis and the Piotroski method, and publish the results on the site. But here’s the really geeky part: The project’s open API lets users design their own risk-crunching models. The founders hope that these new tools will not only assess the health of a company but also identify the market conditions that could mean trouble for it (like the housing crisis that doomed AIG).

These are exciting developments for sociologists of finance. As Callon has argued, it is the tools that market actors use to calculate that end up shaping prices. There are politics in markets, but they are buried under the device. Following the controversy as it develops during the construction of the tools is the key way to unearth, understand and participate in it. This is of course, a favorite topic of this blog, of several books and of an upcoming workshop, “Politics of Markets.”

One open question, as Gilbert admits, is whether the “open source” approach and tool building will take up.

So, how many companies are tagging their sustainability disclosures in this way? The answer is: surprisingly few. Why is this? Perhaps companies are unaware of the ease with which it can be done. As previous contributors to this blog have noted, XBRL is not that hard an idea to get your head round, and implementing the technology involves very little in terms of investments in time or cash.

An alternative model is Bloomberg’s efforts at introducing environmental, governance and social metrics on their terminals (a worthy topic for another post).

Just when you think you’d had enough with hearing about the end of Wall Street and financial markets as we know them, there comes a story by Michael Lewis. It’s a very nice piece and well worth the read. But there are some points that call for clarification. One of them is the wrong impression that people may have about retail finance. Large part of the complex network of activities, technologies and institutions that is known collectively as Well Street is retail. That is, people and companies who sell financial products. In fact, for most of the public, this is the only side of Wall Street with which they ever get in direct touch. Now, when someone buys a car or TV, they know that the salesperson selling them the product has little knowledge about the intricacies of the technology driving the TV or the car. The same type of realisation about the division of labour does not seem to hold when it comes to financial products. The products there, having very little visible material, technological, footprint (at least to customer), somehow give off the impression that they are ‘made’ by the people who sell them, or, at the most, by a one level up the hierarchy of the retail finance company. The truth, as anyone now knows, is that Wall Street retailers did not know more about their products than your average cars or electronics sales people know about cameras or washing machines they sell. As one of Lewis’ interviewees tells him: “What I learned from that experience was that Wall Street didn’t give a shit what it sold”. Sure, they were some who knew more, but that’s typically because they had more background than necessary to do their job. Of course, “Old” Wall Street encouraged the establishment of indifference, and frequently let immoral and even deceptive practices to take root, but it would be incorrect to single out and demonize retail finance. It is not any better or any worse than any other retail business: it is based on distributed ignorance about the products sold.   

The NY Times has an interesting op-ed about behavioural approaches to financial markets; specifically mentioning the crucial importance of conceptual frames in decision making. All the usual suspects are there: Tversky & Kahneman, Thaler, Shiller, Ariely and, of course, Taleb. Still, it’s nice to see that behavioural finance is making inroads into the mainstream media. What’s next: economic sociology and institutional approaches to markets on WJS? Well, stranger things have happened…

The current crisis is far from being funny, but one of the effects of is that many people who never had to deal with macroeconomics before, now have to turn to it, sometimes with hilarious results. For example, after the UK used anti-terrorist legislation to freeze assets of an Icelandic bank in the UK that withheld deposits of British customers (among them, the London Metropolitan Police), Icelandic websites published quite a few stories and commentaries about international macroeconomics. The following is an analysis of the current liquidity crisis, found in an Icelandic blog, from the perspective, allegedly, of an Icelandic farmer. (Thanks to Amnon for the link)

Well, as you can see from the first comment, this may not be the perspective of an Icelandic farmer, after all. So, I changed the title. It is still very funny, I think, and illuminating in its own way… YM

17.11.08 – Another reader asked me to put a link to the original source of the quote (search for comment by ‘cuppateawifmilk’). I have to say that the comment in its entirety is not as funny, does not carry the economics insight and rather xenophobic. But, hey, my readers’ wishes are my command! YM 

“But you must understanding England peoples. They think they rich because house expensive. I explain problem to my father that England people are like farmers who think they rich because someone say cows worth million pound even if not real. I say problems in England because now they wake up and know cows not worth million pound and all vey panicky on moneys. He ask me Iceland issue and I say it simple: Gordon Brown and England peoples have million pound cows but Iceland is like next door farmer who have billion pound chicken and they make deal to give money to have eggs regular . But cows all sick and not worth million pound anyway and same time Iceland billion pound chicken go missing and Iceland people say all egg go to Iceland people until they find chicken again. But, Gordon Brown say fox eat chicken so no chance and then he grab all egg he can. With this information my father has explain all global liquidity crisis to village at home.”

Prem Sikka, who is a well-known critic of the current accounting system, is providing yet another list of companies who are now failing financial, but receiving a ‘clean bill of health’ from the auditors regarding their latest annual reports. We cannot argue with the facts, of course, but when it comes to explaining the reasons, or perhaps the mechanisms behind the auditing failures, we may have to dig deeper. Sikka is saying that

auditors are expected to be independent of the companies that they audit [yet] Auditors continue to act as advisers to the companies that they audit. They are hired and remunerated by the very organisations that they are supposed to be auditing. The auditor’s dependence for fees on corporate barons makes it impossible for them to be independent.

The dynamic implied in this described structural set of affairs is that there is self-censorship on the account of the auditor. Auditors realize that things are wrong with the companies they audit, yet – fearing for their auditing and consulting fees – they let things slip, hoping that there won’t be a complete collapse. I guess that the main concern I have here is empirical. The picture described sounds plausible, especially if remember the cases of Enron and WorldCom, but to establish the theory we would need to examine cases of auditors who did try to ‘test their clients’. That is, what would happen to an auditing firm that would not give a ‘clean bill of health’ to a large client? Would they lose lucrative consulting contracts with that client? Maybe even have their auditing contract withdrawn? If it can be shown empirically that such organisational set of norms on the part of the auditors’ clients exists and brings about effective results (i.e. auditors yield to their clients’ wills) then the theory of the auditor’s structural dependence on the client can be strengthened.   

Furthermore, in boiling down the role of the auditor to an agent that simply has to make the decision of either being independent (and then, possibly, pay the prices), or play along with the client, we portray a picture of reality that is too simplistic. For example, it can be assumed that there are different mechanisms in which a client and an auditor interact and surely not all of them bring about the same result of independence or, as Sikka suggests, the lack thereof.


The British Bankers’ association’s London Interbank Offered Rate (LIBOR), the rate at which banks loan money to each other, is a good indication of how risky is the world is seen to leading banks. In the case of the US dollar rate, there sixteen banks on the panel that determines the LIBOR (see here for a great description of how LIBOR is determined

The LIBOR is the beating heart of the interbank system, and reacts instantly to new information. However, it also shows how risk perceptions, and following these, a potential recession, come about.

The LIBOR rates for the first 29 days of September show this vividly. The line marked O/N (you can disregard the S/N as the graph is for USD) is the overnight rate at which banks are ready to loan money to each other – the shortest period of loan. The jump on 16th of September to the 18th indicates the flight to look at the jittery. The longer periods follow suit (1 week, 2 week, etc), as can be seen, but more moderately. The jump is dramatic, of course, but more ominous is the longer-term change that the graph reveals. First, LIBOR rates have moved up from about 2.5% to almost 4%. This indicates the higher degree of risk assigned to loans. This on its own is important, but even more telling is the spread of rates across the different periods. While on 1st of September, the range between the lowest and the highest rate was 0.8%, (not taking into account the very volatile overnight rate), the range on 29th of September is only 0.09%! This shows that not only that banks see their environment as riskier than before, but they also distinguish less between more and less risky loans. In fact, they tend to see all loans, regardless of the period for which they were taken, as risky. Such, diminished distinction is a sure sign of flight to liquidity – institutional risk avoidance, but it is also a reflection, if it continues, of a slowdown in macroeconomic activity. If all loans are seen as high risk, less loans are going to be granted.

An interesting follow-up of sorts to our discussion from yesterday about the clash of incompatible orders of worth can be found in the Financial Times. Yesterday, the archbishop of Canterbury, the head of the Anglican Church, Rowan Williams, supported the decision to ban short selling. The archbishop of York, John Sentamu, went further and, according to the FT, ‘called traders who cashed in on falling prices “bank robbers and asset strippers”‘.

This moral condemnation, referring to the fact that short sellers gain from stock dropping in price (and, in effect, someone else’s losses) is correct, of course, according to one order of worth. Yet, short selling is a two-sided practice: someone has to lend the stocks that the short seller sells, and, as it turns out, that someone can be none other than… the Church of England. According to the FT: “Hedge funds pointed to the willingness of the Church commissioners to lend foreign stock from their £5.5bn ($10.2bn) of investments – an essential support for short selling”.

Yes, it is funny and it would be easy to look at this story as just another example of people not really understanding the market practices they criticise. However, there is more than this, I believe, in the story, which brings us back to the discussion about what could be a way to develop a sociological analysis of the events. The unfolding of the market crisis plays out the incompatibility between different orders of worth on the global stage. Yet, very little attention is being paid to how things are actually done. Who are the actors involved, for example, in short selling and what do they do? Very few finance professors can give a detailed answer to this question and, I would bet, even fewer sociology professors. Without understanding the mechanisms of markets at the operational level, we (and by this I include finance and economic sociologists) are cornered into a continuous process whereby we reduce actions, procedures and technosocial structures into ‘manifestations’ of one order of worth or another.

Most attention, at least in the mainstream media, is directed at the potential ‘leakage’ of the crisis from financial markets to other parts of the economy. The most likely avenue for such leakage according to the media is through AIG. A potential demise of AIG, a major player in the re-insurance field, would send a shock to insurance market and would affect dramatically the premiums that business pay, even if they were insured through insurers other than AIG. This assumption is correct, but what seems to be neglected is that default risk is already commoditized and there exists a very active market for default derivatives (credit-default swaps, or CDS): contracts that give their owners a protection against the default of a specific entity. Hence, the prices of such contracts can indicate whether and to what extent the crisis has leaked to the economy at large. It has to be noted that there exists no central market for default swaps, as it is an area of unregulated OTC trading. Still, there are enough market makers in CDS to provide a picture. For example:

Credit-default swaps on Morgan Stanley soared 194 basis points to 458 and Goldman Sachs jumped 122 basis points to 321, according to CMA Datavision prices. Sellers demanded 50 percentage points upfront and 5 percentage points a year to protect the bonds of Washington Mutual Inc. from default on concern that the biggest U.S. savings and loan won’t survive the credit crisis, CMA data show. That compares with an upfront cost of 40 percentage points on Sept. 12 and means it would cost $5 million initially and $500,000 a year to protect $10 million in bonds for five years.

Note: it is true that AIG is a major seller in this market too, and if it goes under it will put the market into an imbalance. Yet, I would dare to say that here AIG is more a symptom than the main cause, as it seems that the problem is not specific to certain companies and that lack of confidence is translated very efficiently to illiquidity.

In attempt to inject liquidity into the anxious markets, the Fed softened its conditions for extending credit:

The Federal Reserve widened the collateral it accepts for loans to securities firms to include stocks in an effort to help Wall Street weather Lehman Brothers Holdings Inc.’s plans for bankruptcy.

This is a daring move, but a very risky one too, as it opens a door to a vicious circle. The markets where the stocks used as collateral are traded are the same markets that are now recording sharp drops… So, the collateral that will now be offered to the Fed for the loans will possibly be worth less, indeed, a lot less, than the loans against which it offered. In fact, if the securities firms use the loans to restore liquidity in the markets (and this is a big ‘if’) then prices will be established at lower level. Hence, even in such a situation, the Fed will be left with under-collateralised debts on its balance sheet. If that reminds you of the sub-prime crisis then you are not alone.