Wednesday, 15 August 2012

Spaceship Finance And The Displacement Of Blame

I like Joris Luyendijk’s Guardian blog. And the latest revelations about Standard Chartered in the cavalcade of misdemeanour that is the financial services industry reminded me of one particularly pertinent post of his. In his February 17th blog Joris described the peculiar world of ‘spaceship finance’: the world of elites working close to the clouds in the top floors of the tallest buildings in the square mile, with no allegiance to any particular national project and little regard for the opinions of the national populace. This was exemplified in his interview with ‘Phillipe’, a financial services headhunter who was asked a very simple question: “how can bankers live with themselves?”. This was his reply:

"They feel unjustly singled out…What I hear is: look, nobody would run a bank with the intention of wrecking it, would they? Banks lent to people who couldn't repay. But nobody forced these people to take out loans that they must have known were far beyond their means. Banks may have been enablers, but in the end it was reckless individuals who did this. But what politician is going to blame this crisis on his voters, some of who must have been among the reckless borrowers? Much easier to heap it all on the bankers….Then again, many of my clients simply don't seem to care a whole lot about what the general public think. These are extremely well-educated and multilingual professionals. Many are in mixed marriages with kids who have lived on two or three continents. These people don't belong anywhere and don't feel beholden to any national project. They want to pay as little in tax as they can, and they want to be safe. That's it. Rule of law is very important for them.”

It should be said that many within the industry accept something has gone seriously wrong in banking, and that behaviour must change. But the kind of alternative history expressed above which exculpates their own and implicates others still remains a powerful narrative within spaceship finance. 

It is, of course, beyond plausibility that those discussed by the interviewee did not sense the wrongdoing in their organisations: they may not have been familiar with the detail of those excesses, but they must have suspected that enterprise was a little loose in the engine rooms. It is, then, all the more perplexing that contrition is expressed only under duress in the public circus of the Select Committee or under the glare of the television cameras. Even here remorse may take the form of inoculation where a tincture of guilt is added to disarm critics and to make a more extravagant claim about banking’s national benefits appear more reasonable. Privately, it is clear that often no such remorse exists – indeed there is a deeply engrained sense of defensiveness and injustice within the banking sector. They view themselves as convenient scapegoats for a global crisis.

So how is it possible to be both aware of fast and loose play in your organisation yet remain so defensive about its culture? The simple and easy answer is delusion – that this is a group of people so wrapped up in their own self-interests that they cannot see the wood for the trees. Another answer is that it’s a smoke and mirrors tactic: bankers have a lot to lose if the propitious regulatory conditions and mindboggling innovation which create ample opportunity for enrichment within the sector are threatened. Both are undoubtedly part of the story. But from the few conversations I have had with friends, associates, and others working in the industry, I think there is another equally valid explanation, which brings us back to the issues around cultures and structures discussed elsewhere in this blog series.

For some in the industry, there seems to be a genuine internal conflict - the feeling of persecution is real. They feel they are blamed, yet also feel they did nothing wrong because they always obeyed the formal and informal codes of conduct within the organisation (or at least kept within acceptable deviations from those norms and codes). Their internal conflict here is born out of psychological dissonance when the reflexive ‘other’ changes, and individuals re-evaluate their cocooned, insular world of the spacecraft - with its own autochthonous understandings, explanations, history, culture and morality - in a different moral register. How individuals come to terms with those conflicting values plays out in different ways. Some, particularly those leaving the industry (often involuntarily), reject the banking industry culture as if they were leaving a cult and become major critics. The bookstores and blogosphere are full of poacher turned gatekeeper stories like those of Michael Lewis, Tetsuya Ishikawa, Yves Smith at Naked Capitalism et al. Others, perhaps the more instrumentally minded, find a bit of dissonance no problem, and life goes on. But a third group - like those in Joris’ extract – react in a very different way; one that reflects the peculiar parallel universe within which many bankers operate. They preserve inner coherence by defending their organisational culture and externalising blame.

This reaction should come as no surprise to psychologists and criminologists familiar with the work of Gresham Sykes and David Matza. They argue that those who engage in delinquent behaviour are not immune to the demands of social and moral conformity, but when accused, draw on certain framing devices to justify their actions. They term these devices ‘techniques of neutralisation’. These include: denial of responsibility ("It wasn't my fault"); denial of injury (“It’s no big deal”); denial of the victim ("They had it coming"); condemnation of the condemners ("They were just as bad"); and appeal to higher loyalties ("We did it in the interests of others”). These techniques reduce the social controls over the actor and allow the person to rationalise or justify transgressive acts, and so explain continued patterns of deviation.

If I were to summarise three explanations I have heard bankers use to justify or defend action in the financial services industry, they powerfully echo these techniques of neutralisation.

The first explanation is a familiar one about moral hazard, and the corrupt incentives produced by government and its regulatory exigencies. The second, and the one preferred by Standard Chartered’s own CEO Peter Sands, is that banks are overly-enthusiastic, waiters in a system where everyone was hell bent on getting drunk. The third, that everyone has blood on their hands, so no one can take the moral high ground.

The moral hazard argument is a classic case of 'denial of responsibility': bankers here represent themselves as playthings of the wind, tossed and blown from one act to another; inert agents responding mechanically and unthinkingly in a moral vacuum to the incentives created by someone or something else. It is those who produce the incentives, not the agents who act on them, who are to blame. This is the equivalent of saying that if you park near broken bricks, then it is your fault (not that of the thief) if your window gets smashed and your briefcase stolen.

The overly enthusiastic waiter argument is another form of displacement of responsibility, only here there is an 'appeal to higher loyalties' – that of their service to customers. Here fault and blame are loaded onto the clients or onto an impersonal ‘system’ who ‘make them do things’ they otherwise would not have done. The more cynical ‘everyone has blood on their hands’ argument is one that bankers use to blame the credit rating agencies, the central banks, Fannie and Freddie, the regulators, politicians and homeowners. 'Condemning the condemners' by questioning whether any actor has the moral high ground to judge is another powerful way of displacing their individual blame.

Blame displacement, and its allied hostility to reproach from outsiders, is a cultural feature of the financial services industry. This culture is hot-housed in an environment of late hours, high intensity work and ‘up or out’ competition. It produces an identity, a unity, a sense of ‘us’ and ‘them’. It also produces groupthink and confirmation bias. And those are particularly damaging in our core financial institutions because they encourage arrogance, detachment and disregard.

Those cultures, as we have previously argued, evolve in particular structures. When banks become loose federations of money making franchises, fast and loose activity can be expected when safety controls and oversight duties are dampened to maximise returns. The sense of invulnerability, of immunity from criticism, comes from those fluid organisational structures where small groups within silos lift large values. Here, power and status drifts inexorably to key traders or 'the bricoleurs', who subsequently become untouchable. The sense of invincibility is also caused by weak regulatory regimes which open out large spaces for autonomous action and privately advantageous (but socially useless) innovation. The absence of paranoia, of fear of moral judgement and legal redress that a more panoptic regime might bring, is a recipe for hubris. We should all be worried when more and more activity reaches for the shadows.

The result, as the headhunter in Joris’ extract later explains, is the hardening of a genuinely global elite with no connection to or regard for its national base:

“A highly educated professional in the City of London has much more in common with a peer in Hong Kong, New York City or Rio de Janeiro, than with a monolingual, mono-cultural teacher or nurse somewhere up in Birmingham or Manchester. Solidarity for the new global elite is not geography-based or tied up with a state”

I have heard this kind of rhetoric before; and not from within the pages of the Harvard Business Review or the Journal of Finance. This is the language of class. In form and language it is strikingly reminiscent of the kind of thing that would appear as caricatures in pamphlets of the Trotskyite left. Perhaps our politicians and regulators should begin to understand finance as finance sees itself?: less as a set of impersonal national economic institutions, and more a collection of densely networked individuals with shared backgrounds and interests whose temporary base for their spaceship is the jurisdiction which expresses the least resistance.  And although, as the Bischoff and Wigley Reports show, finance is particularly adept at mobilising the national imaginary when it suits their purpose, isn’t it now in all of our interests that we begin to think about how we exert greater democratic control over these elite networks? Banking culture will only change when we develop regulatory structures that are the equivalent of Bentham's panopticon: a space of open visibility and moral judgement that checks the power of unaccountable elites to work against the national interest.