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The financial sector is the talk of the global village. This book highlights that, before asserting that the institutions of the financial sector deserve to be regulated, one should consider that these very institutions are themselves the discreet regulators of the markets where their activity takes place.



Introduction: The Discreet Regulator

Introduction: The Discreet Regulator

The global financial crisis that began in the summer of 2007, and was accelerated in September 2008 by the collapse of Lehman Brothers, has made financial actors generally – and large investment banks more specifically – the centre of attention. Some commentators condemn their ability to circulate vast amounts of capital with no geographical limits, and thus to create damaging competition (Arnoldi, 2004; Bryan and Rafferty, 2006; LiPuma and Lee, 2004, 2005; Pryke and Allen, 2000). The legitimate question of stronger regulation and supervision that would limit their freedom of action arises acutely in this context (Davis, 2009).
Isabelle Huault, Emmanuel Lazega, Chrystelle Richard

Polymorphic Actors as Networks of Influence


1. Financialization through Hybridization: The Subtle Power of Financial Controlling

Globalization, financialization, neoliberalization: these concepts, although widely mobilized, are usually defined in a rather abstract, theoretical way. Their use seems to suggest that contemporary societies are caught up in an overwhelming general trend of redefining an ever-increasing number of issues and settings in economic and financial terms. These definitions usually highlight one central actor, namely the markets, especially capital markets, and one key set of mechanisms, namely regulation. This chapter seeks to advance understanding of how these notions materialize and operate in a concrete setting, and thereby contribute to debates about financial management in organizations and society.
Jérémy Morales, Anne Pezet

2. How Big Four Audit Firms Control Standard-Setting in Accounting and Auditing

The significant expansion over the last 30 years in financial services is one aspect of the phenomenon described as the ‘financialization of economies’(Porter, 2005). This financialization goes hand in hand with the globalization of financial activity: free circulation of capital and stock market interconnection have fostered the development of new practices (notably risk management), the emergence of new markets (the derivatives market, for instance) and the rise of new actors (such as pension funds). Financial globalization and the financialization of economies would be practically inconceivable without access to presumably reliable information on the companies (including banks and insurance companies) listed on stock markets worldwide. One source of this information is the ratings agencies such as Moody’s and Standard & Poor’s (Sinclair, 2005). Another is the companies themselves, which through their accounts report a true and fair view of their assets and the results of their operations. Trustworthy accounting information relies today on the assurance that it has been prepared in compliance with a series of standards known as accounting standards. This assurance is provided by an audit of the accounts. Audit is a practice performed by qualified professionals and is a standardized practice, as these professionals are supposed to follow ‘professional service standards’or simply ‘auditing standards’. Accounting and auditing are thus areas in which the standardization and internationalization rationales are closely related.
Carlos Ramirez

3. Ambivalence and Ambiguity: The Interpretive Role of Compliance Officers

Studies on the regulation of financial activities often recognize a dichotomy between financial entrepreneurs and financial regulators, following Miller’s 1986 seminal article. However, such a clear-cut position raises questions about the ability of this ‘endless symbolic tennis game’(Millo, 2007: 211) to take on board the subtle nuances of financial market development. This chapter follows another intuition, looking at situations where the description of the financial world cannot be taken at face value or seen as a black-and-white picture. Acknowledging this intuition means assuming that even for financial actors, describing financial objects can prove challenging (Muniesa, 2009; Muniesa et al., 2011). Shifting from objects to practices, we find the same set of issues, especially when the subject is focused not on macro-prudential equilibria (systemic risk), but rather on the daily routines unfolding in financial firms and markets. These routines are generally described in policies and procedures offering a frame for the materialization of regulations: located ‘between knowing and acting’(Callon, 2002: 212), procedures provide operators with guides for development of their practical expertise, and help to shape actions as they develop. More specifically, procedures help operators to get rid of ambiguities generated by the fact that practices are embedded in changing contexts: as such, they can be seen as cognitive prostheses facilitating the operators’situated performance.
Marc Lenglet

4. Perpetuating the Regulatory Order in the Credit Rating Industry

The subprime crisis put the spotlight on the debate over the credit rating agencies (CRAs) system. Questions had already emerged following the cumulative effects of the role played by CRAs in a number of crises involving credit ratings: the Mexican crisis (1994–5), the Asian crisis (1997–8), the default by Argentina (2002) and the corporate bankruptcies of the early 2000s (Enron, Worldcom, Parmalat). But since 2006, rating agencies have been more widely criticized for their role in the subprime financial crisis, particularly for assigning top ratings to mortgage-backed securities and other financial instruments which later turned out to be toxic assets, or for failing to take the measure of the threats hanging over A-rated firms (AIG, Lehman Brothers) shortly before their collapse.
Benjamin Taupin

Markets and States: Forms of Joint Regulation


5. Banks as Masters of Debt, Cost Calculators and Risk-Sharing Mediators: A Discreet Regulatory Role Observed in French Public–Private Partnerships

External, top-down regulation by public authorities is increasingly being combined with endogenous bottom-up regulation by private actors to produce various forms of ‘joint’regulation (Lazega, 2003). The financial sector – banking in particular – plays a central role in this joint regulation. This chapter looks at a case in point, describing the central but discreet role of the banking sector in the construction of a new institutional system combining public procurement and private markets through the promotion of PPPs (public–private partnerships) in France.
Elise Penalva-Icher, Chrystelle Richard, Anne Jeny-Cazavan, Emmanuel Lazega

6. Market Information as a Public Good: The Political Economy of the Revision of the Markets in Financial Instruments Directive (MiFID)

The crisis triggered by the US mortgage market meltdown in summer 2007 initially forced governments with a deep-seated belief in deregulated markets to do what they had repeatedly said they never could or would do again: namely to take stakes in financial institutions, suspend certain transactions deemed to be speculative and manipulate their currencies. Once the emergency was over, they said, they would take measures to put credit institutions and the financial system – currencies, banks and markets – back on a sound footing.
Paul Lagneau-Ymonet, Angelo Riva

7. Finance in Public Service: Discreet Joint Regulation as Institutional Capture at the Paris Commercial Court

Businesses of all kinds are usually very keen to participate in regulation of their own sector. One way of contributing to regulatory activity is to exercise influence in the State institutions set up to solve conflicts between businesses and discipline entrepreneurs. This can lead to institutional capture, which we redefine at the institutional (not individual) level as an extreme form of joint regulation. This chapter describes and illustrates one of the ways the financial industry effectively runs a State institution through analysis of the operations of a judicial institution, the Paris Commercial Court. This is France’s main first-level commercial court, and its judges are lay volunteer judges, that is, business people elected by their business community through their local chamber of commerce. The court functions as an institution of discreet joint regulation of markets, hearing commercial litigation and bankruptcy cases. It is a contested terrain, the object of broader conflicts played out outside the court buildings. We focus on how this court handles bankruptcy proceedings, observing the composition of chambers, the judges’networks, and the normative choices made by bankers when dealing with insolvency and recovery plans. The results illustrate the financial industry’s domination of this institution, and its epistemic, normative and regulatory influence. This exposure of the connections between discreet joint regulation, the dual role of finance, and institutional capture more generally shows it is time to re-examine the inner organizational, structural and normative workings of economic and legal institutions, from the perspective of protecting the public interest in regulation of capitalist economies where the private/public sector boundaries are increasingly blurred.
Emmanuel Lazega, Lise Mounier

The Process of Rule Production


8. How Finance Regulates Trade Union Involvement in French SRI

Corporate social responsibility is a somewhat elusive concept. It corresponds to a number of different local contexts and a variety of organizational structures. The resulting vagueness and diversity of definitions of CSR has been the object of several studies (Aguilera and Jackson, 2003; Louche and Lydenberg, 2006; Matten and Moon, 2008), but is also an issue for the major interested parties in CSR, usually called stakeholders, as opposed to shareholders. CSR is also linked to the financial sector through Socially Responsible Investment (SRI), another concept with a range of meanings, from adding ethical criteria to investment motivations to searching for a new kind of social or environmental performance. Use of the term ‘socially responsible’must therefore reach beyond the positive aura surrounding this type of initiative in order to understand how practices are defined, and their potentially complex implications for the actors involved. The ‘green’aspect of sustainable development is frequently foregrounded to the detriment of its social dimension. CSR is most easily explained in environmental terms, and its social aspects tend to escape the attention of journalists and the general public. There is a need for certain actors to show that it is not solely an environmental matter, and that it affects them as much as other stakeholders who have greater media visibility in topics concerning the future of the planet. Finance is one of these actors, and it has chosen the angle of SRI performance (Allouche and Laroche, 2005; Gond, 2001) to increase its legitimacy on this subject. But this financial focus on SRI was not a foregone conclusion; it is the result of discreet regulation by the financial sector in a context that could have been influenced by several types of actor.
Elise Penalva-Icher

9. Legitimizing an Ambiguous Financial Innovation: The Case of Exchange-Traded Funds in France

The capacity of financial engineers to develop new products is apparently limitless. After a very fertile period from the mid-1960s to the mid-1980s that saw development of a huge number of innovations, including the advent of index futures and options, Miller (1986) argued that this extraordinary age had finally come to an end. As shown by Tufano (2003) in his review of financial innovation, the next 30 years were about to prove him wrong. New forms of financial products appeared regularly in the form of simple or exotic derivatives, and equity-like products trading on exchanges or in OTC markets. Tufano defines financial innovation as ‘the act of creating and then popularizing new financial instruments as well as new financial technologies, institutions and markets’. It is thus not only a matter of inventing products paying new types of cash flow, the way products spread is also of importance.
Laurent Deville, Mohamed Oubenal

10. Constructing the Market for Credit Derivatives: How Major Investment Banks Handle Ambiguities

What relationship is there between the highly modern financial market for credit derivatives and the auction sale of a prized Kansas dairy cow? Although both involve some form of economic behaviour, the old-fashioned, if not exotic, ritual of auctions seems to be at odds with the style of transactions on one of the most modern and sophisticated derivatives markets. However, appearances can sometimes be deceptive.
Isabelle Huault, Hélène Rainelli-Weiss


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