Financial Foreclosures

As far as acronyms go, SIGTARP is a stiffly prosecutorial one. It stands for the Office of the Special Inspector General for TARP. The latter, of course, is the Troubled Asset Relief Program created in 2008 to address the subprime mortgage crisis by buying toxic assets and equity from financial institutions. SIGTARP investigates crime at institutions that received those taxpayer bailout funds. Where the media describes it as “obscure”, the banks it has fined and the bankers it has arrested are well aware of the agency’s bite.

SIGTARP has recovered hundreds of millions of dollars in assets. It has dozens of investigators with guns and badges who travel the country in vehicles bedecked with police strobes and sirens. And those investigators make arrests. To date, the agency and its partners have filed charges against 366 individuals and are responsible for the criminal convictions of 259 defendants, of whom 163 have been sentenced to prison (others are awaiting sentencing). A signature example of SIGTARP’s power to search, seize, and arrest is the conviction of the former chief executive of Virginia’s Bank of the Commonwealth whose “brazen greed and dishonesty” was said to have contributed to the financial crisis. He was sentenced to more than 20 years.

And yet, there remains a sense that the agency is suspended at the threshold of success. Its head, Christy Goldsmith Romero, says that while her office has been enormously effective in prosecuting senior executives at small- to mid-sized banks, it has been unable to catch the CEOS of large Wall Street firms. In the Wall Street culture that insulates and protects the most powerful, high-level executives (though they may have their suspicions) are often kept deliberately in the dark about shady schemes and potential fraud. See no evil, hear no evil, speak no evil. A shroud of willful and strategic ignorance protects the grandees in the corner offices.

Says Goldsmith Romero: “I have called for Wall Street reform based on the difficulties SIGTARP has faced as a law enforcement agency in proving criminal intent of senior executives at large institutions given how isolated they are from knowledge of fraud in their company. …This isolation is part of the culture at large institutions, and is something that is unlikely to change absent reform. That is why I am proposing a reform to bring accountability to the ‘Insulated CEO’ and other high-level executives.”

The proposal would require Wall Street CEOs and other senior executives to annually certify that their company is fraud-free. “No longer allowed to stay ‘in the dark,’ a crime and fraud certification forces the CEO to be ‘in the know.’” Goldsmith Romero said. “Crime and fraud cannot be allowed to go unchecked at our largest institutions.”

So much about the U.S. economy hinges on questions of transparency. In this issue’s Viewpoints, Daniel Beunza reports on a nascent push within large banks to investigate and reform internal organizational culture and the values and norms that shape it. Most regulations passed in the wake of the financial crisis have targeted the structure of the financial industry, doing little to address banks’ risk-taking and win-at-all costs mentality. Reform pressures are partially coming from the “outside”—the U.K. Parliament, for example, has set up a banking standards board to look into these issues, and it is an open question how much of these self-inquiries are self-interested. What is clear is that the investigative spotlight needs a higher voltage.

Exposure needn’t be revealing, however, warns Alex Preda who writes about the financial sector’s increasingly chummy relationship with the media. An industry that has prized secrecy is finally opening up, but only on its terms. Instead of transparency, media appearances by “financial performers” generate spectacle and hype, as they often act on behalf of banks and brokerage houses. Likewise, Frederick Wherry, Kristin Seefeldt, and Anthony Alvarez describe how the financial sector too often is allowed to control the narrative. Moderate- and low-income families facing economic strain are turning to payday loans and to other high-cost financial services to help make ends meet, but they are portrayed not as the victims of an unfair economy and unscrupulous lenders. They are often depicted as irresponsible dullards in need of fiscal disciplining. The authors discuss how to regulate a runaway payday industry and shift matters in the consumers’ favor.

Finally, Kevin Leicht writes about the ascendancy of a culture of finance and how it has distorted the U.S. economy in critical ways. In the place of the production-powered prosperity of Keynesian economics we have seen the rise of supply-side fantasies of growth untold, unleashed by massive tax cuts and the deregulation of finance and banking. The result is that we are now heavily dependent on borrowing rather than earning. We are more, not less, vulnerable to fluctuations in the global economy.

— Shezad Nadeem

  1. Too Small to Help, Too Poor To Trust, by Frederick F. Wherry, Kristin S. Seefeldt, and Anthony S. Alvarez
  2. Can Ethnography Improve the Culture of Finance? by Daniel Beunza
  3. Financial Entertainment and the Public Sphere, by Alex Preda
  4. The End of the American Dream, by Kevin Leicht

Too Small to Help, Too Poor to Trust

by Frederick F. Wherry, Kristin S. Seefeldt, and Anthony S. Alvarez

Political rallies across the country have erupted in applause at accusations that the banks remain too big to fail and their bankers, too powerful to jail. Lost in the roar? The too small to help.

These “little” market actors have increasingly volatile incomes, and, like their more privileged counterparts, they prioritize their relationships with their children, aging parents, and other loved ones over their debt obligations. Through no fault of their own, for about two and a half months out of the year, the low- and moderate-income households in the U.S. Financial Diaries Project typically experience about a 25% reduction in their incomes. (They also had a roughly equal number of months with income spikes.) According to a 2015 JP Morgan Chase Institute Study by Diana Farrell and Fiona Greig, few American households have enough emergency savings to cover those months when incomes dip or expenses spike.

Whether or not an individual has an adequate income from one month to the next, they are obligated to pay for rent and possibly child care. These cost of living expenses have increased dramatically, while wages have only recently begun to recover after decades of stagnation. More importantly, they still want to hail the arrival of newborns, honor birthdays, celebrate graduations, and ceremoniously bury their dead. The living and the dead are monetarily cared for; therefore, to treat budgetary decisions as calculations devoid of relational work, Viviana Zelizer reminds us, is to deny that spending, savings, and investment decisions enable individuals to make sense of their intimate relations with family, loved ones, associates, and socially relevant others. Moral concerns motivate these relationship management decisions; social arrangements sustain them. The question is not whether cash-strapped families will want their children to be like other children (through their public consumption practices) but how they will accomplish it.

To mitigate income shortfalls, some people turn to payday loans and other high-cost financial services. These individuals typically have bank accounts and a steady job. Because there is a balloon payment due at the end of the loan, they often refinance, incurring additional fees and an effective annualized percentage rate of nearly 400%. Outraged, some advocates have called for a ban on payday lenders. For consumers, however, losing access to short-term loans could drive them into even costlier informal practices. Excessive overdraft fees, for instance, might stand-in for a payday loan. So, too, can loan sharks.

Paul Sableman, Flickr CC
Paul Sableman, Flickr CC

What is to be done? Stop treating the borrowers as if they are ignorant or irresponsible. And start treating the lenders as if they are inefficient (and sometimes malicious) providers of needed financial services.

Here’s how they did it in Colorado: By removing the balloon payment at the end of the loan, spreading the payments over five or more months, and capping monthly loan payments as a percentage of the borrower’s income, Colorado’s consumers experienced notable improvements in their financial lives. The onus of change was placed squarely on the payday lenders. Nearly half of them closed shop, but among those who remained, they nearly doubled their loan volume. These efficiencies were accompanied by much lower fees for borrowers.

And here’s what can happen nationwide: The Consumer Financial Protection Bureau has now offered guidelines for regulating payday loans. The guidelines began with a provision to cap loan payments at 5% of monthly income and to avoid balloon payments. Somehow, that provision was removed, but there is a strong push to have it reinstated; without the cap on monthly repayment amounts, we are back where we started.

A more menacing challenge lies in moderating the treatment of low and moderate-income consumers. They have been treated as if they need to be nudged, reprimanded, and disciplined for needing these short-term loans. Social entrepreneur Josè Quiñonez argues that policy makers should revise their understandings of what motivates the too small to help and affirm that the judgments of the poor can be trusted. In short, the “little” consumer needs to be treated as if she has needs that she understands, but lacks efficient suppliers and reasonable protections to meet those needs.

Can Ethnography Improve the Culture of Finance?

by Daniel Beunza

Whether it is the link between millionaire bonuses and reckless trades or between financial models and gigantic losses, the role of financial culture in wrecking the U.S. economy in 2008 has become widely established. Social scientists have been on the frontlines, researching and making this conclusion plain: see, for instance, Mitchel Abolafia’s studies of bond traders, or anthropologist Karen Ho’s vivid descriptions of Goldman Sachs’s recruitment at Princeton.

Unbeknownst to most, however, financial regulators and leading investment banks in the U.S. and U.K. are now turning to culture as the solution to the industry’s problems. In this dramatic reversal, the norms, values, and beliefs that characterize Wall Street banks are being conscripted to limit the risk posed by the financial industry. Culture and ethics are now part of the regulators’ vocabulary, and even specialized tools such as ethnography are included in the regulator’s répertoire.

News of such developments might cause sociologists more trepidation than vindication. How genuine and real, they might ask, is such embrace of bank culture? How safe, they might wonder, is controlling people through norms rather than dollars? And last but not least, how on earth did such a U-turn come to pass?

I’ll start with the latter. In a speech dated October 2014, the President of the New York Fed, William Dudley, argued that “improving culture in the financial services industry is an imperative,” using the word “culture” as many as 45 times. Dudley not only offered an articulate definition of bank culture (“the implicit norms that guide behavior”) but went on to emphasize its importance: “Culture,” Dudley posited, “exists within every firm, whether it is recognized or ignored, whether it is nurtured or neglected, and whether it is embraced or disavowed.”

This speech marked a profound change from the initial regulatory reactions to the crisis. Starting in 2008, regulators have assembled a long list of rules aimed at limiting the systemic risk posed by too-big-to-fail banks. These coalesced in the so-called Volcker Rule, a provision in the Dodd-Frank Act that have made it illegal for banks to engage in proprietary trading. In the U.K., low-risk retail banks are legally mandated to separate their business from their higher-risk investment banking operations. More boldly, the European Commission has mandated banks to limit bonuses to twice the annual salary.

One common feature in this first wave of regulatory legwork has been a focus on the structure of financial organizations. In the regulators’ approach, preventing the next crisis meant slicing off the controversial parts of the banks, fine-tuning this or that compensation practice, or repositioning incentives so that annual bonuses would elicit virtuous behavior.

But effectiveness of such approach was always bound to be limited. As organizational sociologists have long argued, a change in the structure of a company without a corresponding change in its culture is not enough to effect durable change. Instead, it just leads employees to circumvent the new rules and continue with their old ways.

The limitations of structural reform hit regulators hard as news of the Libor scandal broke in 2012. As Donald MacKenzie explained in his lucid analysis of the rate-fixing operation, employees at several banks had submitted fake Libor entries to help fellow bankers profit from their bets. The official review of Barclays Bank’s contribution to the scandal (the “Salz Review”) found that “bankers were engulfed in a culture of ‘edginess’ and had a ‘winning at all costs’ attitude” that contributed to the malpractices.” Culture and ethics, rather than incentives or conflicting lines of business, were the culprit.

Culture thus became the new focus of regulators. The U.K. Parliament, for instance, has set up a commission to study potential avenues for elevating the standards of the financial industry. It recommended the creation of an independent body—independent from both government and industry—to facilitate cultural improvement. The Banking Standards Board was thus created in 2015, funded by member banks and governed by a combination of bankers and independent experts.

The Banking Standards Board has now initiated a new and intriguing policy. In addition to administering a mainstream survey tool, the Standards Board has hired academics such as myself to teach ethnographic research methods to the executives at the banks. In the training sessions, Malinowski and the challenges of participant observation are discussed alongside the use of financial models and risk management. The goal is to equip banks with rigorous tools to describe and conceptualize their culture.

The idea is still at an initial stage, and at this point it offers little more than a glimmer of possibility. As with the cybernetic experiments conducted in Allende’s Chile and described by Eden Medina or the use of behavioral economics by the Obama administration, ethnography might ultimately prove insufficient to effect real change in the culture of finance. But even in these early days of the policy, something is already clear: these are good times to be a sociologist of financial markets.

Financial Entertainment and the Public Sphere

by Alex Preda

More often than not, when we talk about financialization, we refer to three aspects: the rise of global financial institutions, the pre-eminence of the financial services industry in developed economies, and the transformations undergone by contemporary corporations, within which financial activities have become an autonomous center of profit.

Concomitantly, when we zoom in on the changes within financial organizations and markets, we usually emphasize the role of digital technologies. These have greatly increased the speed of financial transactions, substantially contributed to the demise of old trading pits and floors, and shifted professional balances within the financial services industry (for instance, by growing the influence of mathematical and IT expertise).

Mad Money merchandise. Alison, Flickr CC.
Mad Money merchandise. Alison, Flickr CC.

Thus, when we talk about financialization, we focus on the expansion and transformation of financial organizations: the rise of new forms of expertise, of new technologies, or of financial modes of calculation. This understanding is predicated on the premise that financialization is an inward-looking process; that it is difficult to scrutinize and comprehend from the outside and that its addressees are mainly actors engaged in the very process of transforming economic organizations and firms.

Yet, there is another side to this process, and I have begun to study it ethnographically. This side is outward-looking and has resulted in the ongoing emergence of new professional groups, as well as in new inter-professional alliances cutting across industries. It does not operate based solely (or primarily) on hard-to-acquire technical expertise, but on a mix of various formats, combining technical with expressive and emotional expertise.

I am talking about the transformation of finance into a media spectacle. Many of us might have seen Mad Money, the recent film loosely based on Jim Cramer’s TV show. Yet, there is more to that. In their search to fill the airwaves with inexpensive content, TV and radio stations have turned more and more to finance as an eager content provider. Media outlets have established links with banks and brokerage firms. In Hong Kong, for instance, where I have done ethnographic fieldwork, all major TV stations, Internet TV, and radio stations fill their daytime rosters with finance shows. In addition to providing inexpensive programming (they are much cheaper to produce than news, for instance), finance shows attract all-important advertising revenue from the financial services industry.

This has led to the emergence of a new profession, the “financial actor” or “financial performer.” This is not to be confused with a financial analyst or with a financial journalist. Where financial analysts work primarily for institutional investors, financial actors or performers do the TV and radio circuit on a daily basis, going from production studio to production studio. Financial actors are different from financial journalists, too: their job is not to investigate, but to enact finance.

In Hong Kong, where I have done research, there are around 100 financial performers (a significant number for a large city, but just a city). Of them, about 22 have established radio and TV shows and, more recently, a professional association as well. Financial performers have ties with banks and brokerage houses, and in some cases will be employed by them to do TV and radio broadcasts.

Just a few years ago, TV stations in Hong Kong could get a financial actor to come and do a show for free, but as finance shows have spread over the last decade, a status hierarchy has emerged among these financial actors. The more prestigious ones are now paid by TV studios to appear on shows. And like popular film and TV actors, well known financial actors can earn additional revenue by appearing in TV commercials, sometimes along soap opera stars.

The shows themselves are less about conveying or analyzing financial information than dramatizing financial events and emotionally enacting them for audiences. One of the most prominent financial actors, for instance, shot to stardom when she cried on live TV while the Hong Kong dollar was dropping against the U.S. dollar. Clearly, the shows require not only technical expertise, but expressive and emotional expertise as well. Their production format can be complex: some are comedy shows about finance, but there are also talk shows, interviews, and audience Q&A sessions. Some are produced for local audiences (in Cantonese), others for audiences in mainland China (in Mandarin).

Financial entertainment cannot be discounted as a curiosity, or as yet another instance of exoticism. Instead, we must recognize how, by adopting the format of media spectacles, finance in Hong Kong and beyond makes inroads into the public sphere even as it avoids legitimate moral questions regarding the free PR accrued to the financial industry through the spectacles’ existence. Through the shows, seemingly esoteric events are staged as dramas or as comedies requiring emotional responses from the audiences, though in the form of empathy, not in that of seeking accountability or of outrage. We are asked to commiserate along when a crisis happens, not to ask for explanations. Financial entities are fictionalized as (innocuous) characters of public daily life, part and parcel of the public sphere.

Ken Ratcliff, Flickr CC
Ken Ratcliff, Flickr CC

The End of the American Dream

by Kevin Leicht

The American Dream is many things, a number of which are tied to material prosperity: home ownership, steadily rising wages, college educations and upward mobility for children, then retirement after a job well done. This Dream is, at best, on life support. Wages for most Americans have barely moved since the mid-1970s. Housing prices, college tuition, healthcare, and childcare eat up an ever-larger proportion of what little Americans make. Upward mobility is the lowest among the countries in the Organisation for Economic Co-operation and Development. Retirement seems unattainable.

The culture of finance put the nail in the coffin of the American Dream.

This might sound extreme, but I don’t think it is. The culture of finance told the American consumer that anything was possible via your next loan. That loan put you in the service of the financial industry, but you could convince yourself that the loan would never come due and (if it did) you could just get another one. Those in finance genuinely believed they were expanding the American Dream, and, on the basis of the sheer things we purchased, this may be true.

But the things people were able to buy (especially before the 2008 recession) are not where the culture of finance did the most damage. The greatest damage was done through the substitution of borrowing for earning as a means of financing mass consumption.

The centerpiece of Keynesian economics was the connection between economic growth and the economic stimulus produced through average people’s consumption. Keynesian macroeconomic policies sought to stimulate the economy by putting more money in the pockets of those most likely to spend it (those the economists say have the “largest marginal propensity to consume,” a.k.a., most of us!). Over the past 70 years, this stimulus has come in the form of infrastructure spending, higher minimum wages, full employment policies, the promotion of collective bargaining, expanded unemployment benefits and cash transfers during recessions, and educational spending to increase workers’ skills. Direct spending by governments and the stimulation of moderate income growth among everyone else propped up aggregate demand for goods and services and kept the economy strong.

The 1970s saw the slow death of Keynesian ideas. They were replaced by supply-side economic policies that focused on investment and lowering inflation. The deregulation of finance and banking that accompanied this shift had three consequences that helped create today’s culture of finance: maximum interest rates on loans were eliminated, constraints on securities dealing were removed, and interstate branch banking blossomed.

The biggest overall consequence was that borrowing replaced earning as the principal Keynesian multiplier for stimulating consumption and increasing profits. Financial deregulation effectively blew the lid off of the financial industry’s profit potential by increasing the interest rates and fees that lenders could charge. Lenders fell all over themselves looking for new markets to increase the pool of potential borrowers. They developed new forms of lending—an infinite variety of credit cards, home equity loans, subprime mortgages, “no money down” car loans and leases, rent-to-own plans, check cashing services, and other fringe banking practices.

Years of globalization, deindustrialization, and the stagnant wages that ensued have produced a very shaky material basis for the mass consumption the U.S. economy is known for and U.S. consumers expect. Labor and employment policies to increase wages, retool workers, and increase workers’ bargaining power would have helped, but that would have involved surrendering economic power to the very people the neoconservative movement of the 1980s disenfranchised in the first place.

Borrowing replaced earning as the Keynesian multiplier, and the incentive to create new jobs and pay workers decent wages went right through the floor. Good jobs at good wages might increase the productivity of our workforce in the long run, but who cared if the sale of products and services (and profits) were no longer tied to consumer purchasing power created from earnings?

Then the deregulated financial industry developed a way to minimize the risks of these new forms of credit. They created and expanded the Asset Backed Securities (ABS) market that allowed for the sale of securities on all kinds of consumer debt from mortgages to second mortgages to credit card debts and auto loans. This aftermarket for consumer debt increased the volume and turnover of loans and lowered lender’s scrutiny of loan applications.

The culture of finance’s mantra might be: To increase profit margins in finance and to stimulate profits in the rest of the economy, you loan people money, don’t ask many questions, and diversify away your risks while doing so.

Of course, the securities markets for mortgages and credit cards collapsed and created the 2008 recession. The rapid expansion of consumer credit had reinforced the trend that globalization of production and consumption had started. First-world consumers were not buying products and services that they themselves helped to make, so global producers severed the link between aggregate demand and workers’ wages by lowering prices.

The fast-and-loose lending of the culture of finance was widely and rightly blamed for the 2008 recession. But we’ve spent so much time in this short-circuited world that we don’t know how to create decent jobs with decent wages. We’ve spent almost three decades doing the opposite. This is a reality the culture of finance helped to produce, and it helped to kill the American Dream.