Category: Book Reviews

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Our Precious Perversions

It’s a strange time to be a pervert in America. Donald Trump may well be elected the 45th president, running on a platform of protecting the traditional family by rolling back newly-won, sweeping marriage rights for gays and expanding the first amendment to protect outright anti-gay discrimination. At the same time, the New York Times ran a human-interest story last week about an interracial, sadomasochistic relationship involving a well-known musician and Columbia University professor, calling it, blandly, “A Composer and His Wife.”. Just a few years ago, both would have seemed equally improbable, perhaps even farcical. There’s something vertiginous about both the speed of the progress made by gay marriage advocates and the severity and far-reach of the backlash. How do we understand the simultaneous expansion of marriage regimes and the increasing public articulation of “alternative sexualities”? Are they, as many queer thinkers lament, impossible bedfellows? While public discourse about polyamory and kink is all but ubiquitous, we are still unbearably, insufferably held hostage to the marriage discourse. As Katherine Franke has so beautifully elaborated in her new book Wedlocked, marriage, particularly reproductive marriage, is increasingly the sole vehicle through which we can make space in public to talk about sex. That is one of the many unanticipated and vexing consequences of the push to legalize same-sex marriage. It used to be that marriage was “the place where sex goes to die,” but now I think marriage is just, somewhat disappointingly, where sex goes, period. But is that the end of the story?

As a “recovering” lawyer-turned-sociologist, I’ll focus here on some of the more general socio-legal claims in Franke’s book, which press us to approach the current moment with sobriety rather than celebration. As marriage expands its umbrella to shelter the dyadic, reproductive (“homonormative”) gay family, rights to marriage risk ossifying into obligations. Intermediate forms of relationship recognition, like domestic partnerships, begin to fall by the wayside, and a crag separating the legitimacy of the legal marital form for all other forms of kinship widens to a chasm.

Freedom has rules, Franke tells us, and they are not always the ones we might choose if we were in charge of our won freedom (3). History is instructive here. Attempts to force the plurality of kinship ties forged by newly freed slaves into legal, marital families required a series of arbitrary distinctions (for example, which of a succession of female partners would qualify for an emancipation or pension tied to one man’s military service). Coincident with the transfer of African American families from the “private control of owners to the public control of law” (5) was the political sentiment that any kinship tie outside of those marriages was either unimportant or the sign of social pathology. While we may think of marriage as a means of escaping the burden of social abjection (60), marriage regimes themselves produce that abjection. They are self-reinforcing. Communities with weblike, inventive kinship networks, which often serve protective functions for disadvantaged groups like racial minorities or sexual dissidents, are simultaneously invited into the dominant family form and told their existing affiliations are signposts of their unfitness.

I felt a familiar sense of hopelessness reading Wedlocked. As I’ve watched the gay movement rebrand itself from one focused on sexual and gender liberation to a “focus on the family,” I’ve wondered how we might recuperate some of the radical potential of queer kinship. And now, I’m left wondering how we might use marriage, since clearly it isn’t going anywhere, to assist in this project. In that spirit, I’d like to add a point to Franke’s “Progressive Call to Action for Married Queers,” for which I think we might take inspiration from Mollena Williams and Georg Friedrich Haas, the subjects of the Times story I described above.

It’s a rich story with a banal headline: world-famous composer and college professor finds love after three failed marriages—but this is not just any kind of love. Haas, a white Austrian, meets Williams, a black American, on a typical, bland dating site, and they commence a deep, negotiated power exchange, in which Williams submits to serving Haas, to making his life “as comfortable as possible.” Though the text of the Times story is less direct, this is a configuration familiar to those schooled in sexual diversity. Haas is a dominant; Williams is a submissive. He likely controls much of their joint life, and Williams derives satisfaction from being controlled. (This is not conjecture; Williams, a well-known sex educator, writes openly about her submission on her blog, The Perverted Negress.)

http://www.mollena.com

http://www.mollena.com

The rich layers of complexity in such a dynamic are, I’m sure, not lost on this readership: the juxtaposition of a feminist consciousness with female submission, the racialized power dynamics inherent in the configuration, the likely illegality of some of the sexual practices they admit to engaging in (when was the last time we saw the word “caning” in the New York Times?), the fact that such a relationship can also be, and indeed is, a marriage. Yet, while each of the dynamic concerns appears in a single sentence, the word marriage weaves its way through the narrative, the most dynamic portrayal being his failed previous marriages and his journey into this one.

But BDSM, a “compound acronym that connotes sexual interactions involving bondage/discipline, domination/submission, and sadism/masochism” often leans into and not away from the law. It is likely that Haas and Williams have both a marriage contract and an extra-legal bdsm contract detailing the terms of their Dominant/submissive dynamic. And perverts are not the only ones making such creative use of law. Martha Ertman’s new book, Love’s Promises, profiled in an earlier symposium on this blog, describes those used by a range of what she terms “Plan B” families to negotiate the terms of cohabitation and parenting in ways formal law fails to address.

If marriage “cleaves the sex out of homosexuality” (6), we certainly shouldn’t see marriages like this one in the popular press. But, increasingly, we do. And while gays have struggled mightily to distance ourselves from this type of depiction to preserve our standing as viable legal and political subjects, now that we have attained it, perhaps it’s time to let some of that abjection back in. In a context of legal and social exclusion, both racial minorities and non-heterosexual people form a variety of kinship structures that mediate relations of intimacy and of care and dependence. Think, for example, of the “army of ex-lovers” responsible for caring for the first sufferers of hiv/aids. What happens to forms of non-marital intimacy under a marriage regime? They risk disappearing. Perhaps one thing we might do is take a lesson from Haas and Williams and make sure we don’t lose our precious perversions to the marriage discourse.

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Neither Freedom Nor Equality

Be careful what you wish for – that’s the clear warning that Katherine Franke gives the reader in her new book, Wedlocked: The Perils of Marriage Equality. In the book, Franke offers a far-reaching and incisive critique of marriage, based on the ways in which marriage was both sought after and suffered through by two distinctly different populations: newly freed slaves after the Civil War and same-sex couples in the wake of marriage equality. Careful not to make direct comparisons between the two populations, Franke presents the experiences of both groups side by side and draws out similarities that are always striking and often surprising. The intertwining stories of these two groups provide a window into “what it means to elaborate a new conception of freedom and equality through a form of state licensure.” (p. 11)

Freedom and equality frame the discussion and serve as touchpoints for Franke as she details the unintended consequence of access to marriage for both populations. What becomes clear, as the book progresses, is that the elaboration of freedom and equality through marriage is quite different than the reality of obtaining freedom and equality through marriage. Franke’s first overarching theme – marriage is not freedom – comes through sharply in the wide-ranging stories she tells about couples, both then and now. Marriage does not and cannot equate with freedom because it is a form of state control. This is not news, but the way in which Franke adeptly draws out the myriad ways in which marriage is used as a mechanism for domestication and governance is compelling. But Franke does not stop there. She deepens this argument by describing the peculiar genius of marriage which is that, despite its being a freedom-constraining relationship, the promise of equality that it offers is sufficiently tantalizing to make the trade-off not only acceptable but even desirable. As she presses on the idea of equality in the context of marriage, however, Franke develops her second, twin theme – that marriage rights do not necessarily produce equality. Not only is freedom illusory; equality is not guaranteed.

Beginning with freedom, Franke presses on this concept throughout and skillfully underscores how marriage operates as a “tactic of governance” (p. 62) that is both plastic and persistent. One particular loss of freedom that concerns Franke derives from marriage being deployed by the State as a technology of power that regulates sexuality, erasing all forms of “fantasmatic curiosity.” (p. 115) The embrace and imposition of marriage on both populations has placed alternative sexualities in service of hetero- and now homonormative ideals. Franke regrets in particular with the gay community that, under the yoke of marriage, “we have lost for now the opportunity to explore the possibilities of a ‘lawless homosexuality.’” (p. 115) Marriage is (as I have explored elsewhere) deeply implicated as a part of the “civilizing process.” As such, marriage demands that sexuality be confined to be legitimized and that individuals discipline their internal, sexual drives. Consequently, relationships that tolerate alternate sexualities – such as bigamy, informal marriage, and multi-party relationships – have been penalized, and might be again, in the rush to ensconce marriage as the one legitimate container for sexual intimacy and activity.

Marriage also entails another, related, loss of freedom because it demands not only sexual but also social conditioning. Marriage is a public-facing relationship that requires that families look and act a certain way: a husband and wife, several children, a well-ordered household. Measured against these perfect families, Franke’s “fluid families” come up short and are penalized for their different-looking, non-traditional forms. Women bear a particular burden of regulation and correction, because the picture-perfect form of marriage is a hierarchical and gendered one. “Fluid families” are therefore disrupted and disciplined not only because of their expressive sexuality but also because they do not conform to gender-based hierarchy. In the context of freed slaves, “female-headed households, or even matrifocal families, in many slave communities were pointed to as evidence of the dysfunction, or even the pathology, of slave family life.” (p.81) Even current marriage laws, however, “take matrimony to be a legal relationship that is fundamentally structured by gender inequality.” (p. 209) Accordingly, Franke worries about the effects of marriage on same-sex couples and how it might transform previously gender-fluid relationships into gender-filled ones. Whether or not same-sex couples will change marriage or marriage will change them, encouraging same-sex couples to reinscribe conventional gender roles in their relationships, remains to be seen. The sociology is in the making. Nevertheless Franke’s warning to monitor the impulse to gender within marriage is apt, especially given power imbalances that result in many couples due to asymmetrical earnings in a marriage.

Finally, marriage represents an immediately relevant form of state intervention and loss of freedom because it imposes default rules about money, resources, and sharing. Marriage economics are, as Franke points out, intimately related to the gendered nature of marriage and marriage as a form of “private welfare.” (p. 90) Because of legal assumptions about the specialization of household labor and marriage as an economic partnership, divorce laws mandate forced sharing, absent private contracting. Same-sex couples are not always aware of these rules (not unlike their different-sex counterparts) and, furthermore, divorce courts don’t always know what to do when confronted with couples who might have been married sooner than they were, had they been allowed to do so. Franke’s story of Ruth and Beth underscores these problems and highlight the possibility of unjust enrichment. (p. 211) Equally likely, however, is the possibility that long-term same-sex couples who have been economic partners for years will be dealt with unfairly by courts refusing to recognize those years of partnership upon divorce. That is to say, while backdating to the beginning of the dating period is one option courts have when constituting the marital estate, they also have the option of not taking into account anything that happened previous to the marriage and thereby artificially circumscribing the assets available to distribute at divorce. Given the reluctance of courts to accord property claims to unmarried cohabitants – and the almost complete rejection by state legislatures of the ALI principles (p. 156) – this may be the more likely danger. Either way, Franke establishes through an abundance of examples that freedom has little relationship with marriage.

Having deconstructed the notion of freedom with respect to marriage – the freedom to marry is really an invitation to relinquish personal freedom to the State – Franke goes on to suggest that the promise of equality through marriage may also be illusory. Marriage inequality operates on several levels. For starters, the right to marry for same-sex couples does not necessitate the right to equal treatment by a legal and societal culture still hobbled by bias and discriminatory desire. One noteworthy thread that runs through the book is that bias has an afterlife – it does not just disappear but rather gets channeled into new outlets and finds new modes of appearance. In the case of marriage equality, inequality may appear in the guise of reinvigorated enforcement of adultery and bigamy law with respect to same-sex couples. (p. 151) Laws that have been on the books for decades, never invoked, may be animated anew because of reconstituted homophobia. Gay men and lesbians, Franke remarks, “have long been accustomed” (p. 152) to outdated laws being selectively applied in order to penalize gay sex. Marriage equality may not change this. This bias may also find other ways to get into court. With same-sex couples having and adopting children, as well as divorcing, bias could easily show up in family court. It is, in fact, simple to speculate about how discrimination and stereotypes might find their way into judicial determinations about property division, spousal maintenance, and child custody. This is a matter, in many respects, of cultural change lagging behind legal change on certain issues and in certain locations. Franke does not have the space, nor is it necessarily a part of her project, to take on the question of how to move cultural change forward, to full acceptance of same-sex relationships and sexuality. The necessity of doing so, however, remains.

There are also other inequalities engendered by the push for equality. In fact, the larger problem with marriage “equality” may be that it creates inequalities within and between various communities. This is a major point in the book and one that weaves together the stories of the gay and African-American communities in the contemporary landscape. In short, the problem with the move to gain rights through marriage, thereby making marriage the standard by which other relationships are “both made legible and assigned value” (p. 112), is that it renders other relationships different and lesser. As Franke argues, “winning the right to marry should not result in making non-traditional families … even more vulnerable for their failure to take a nuclear form.” (p. 111) Perhaps one of the most damaging aspects of this bias “offloading” is that it penalizes and further stigmatizes African-Americans because of the high prevalence of non-normative families in African-American communities. (p. 61) The promise of equality is, consequently, tempered by competing claims to relationship legitimacy and the continuing legacy of racism.

Freedom is not free and equality is not equal. Looking at the possible losses rather than gains in freedom and equality that result from obtaining the right to marry, one is left to wonder two things. Why do we need marriage? And, if we do need marriage for certain purposes, how can and should we manage the technology of marriage so that it serves as a mechanism for enabling freedom and equality?

An answer to the first question is that we don’t need marriage for everything. Consequently, one way to reduce marriage governance is to stop provisioning goods and resources through marriage to the extent that we currently do. There are indisputably good instrumental and practical reasons to marry, given the structure of our current system. As Windsor winningly demonstrated, it is manifestly unfair to ask same-sex couple to be taxed when different-sex couples are not. And, on the flip side, if many different-sex couples count financial planning among the reasons for marriage, why shouldn’t same-sex couples do the same? The thousand-plus benefits that the government provisions through marriage constitute an extremely compelling reason to get married. This has led to a phenomenon of many same-sex couples “holding their noses” and getting married.

This argument, however, does not justify marriage on the merits. There is nothing inherent to marriage that makes it the right or only way to provision benefits. In fact, the answer to the benefits question may be to have the State provision them outside of marriage. Franke does not explore how else we, collectively, might choose to provision benefits or the responsibility of the State to do so in a more equality driven manner. She does, however, nod at the question of redistribution when she suggests that all “married queers” think about what it means to enjoy economic advantage through marriage and reshape their behavior accordingly. (p. 235) Actions like these will help decrease the marriage privilege and smooth out differences among the various types of intimate relationships. This will also prevent couples from being channeled into marriage without any real desire for it.

Another answer is that we need marriage for certain people because, for these couples, the substance of marriage is compelling. Marriage, for some, is a positive good. Consequently, a second strategy – compatible with the first – is to commit to making marriage more equal for those who choose to be in it for affirmative substantive reasons. Franke rightly critiques the fact that “marriage has been recharged as the most august holding environment for the elaboration of one’s mature and authentic self.” (p. 61) Trying to find the charm and charisma of marriage, however, it may be that marriage is deeply appealing because it is a site for making and maintaining a unique connection with another person. The modern ideal of companionate marriage reinforces this ideal and demonstrates how marriage is more than money. Marriage provides a way for individuals to commit to one another, offer continuing support, and receive both love and encouragement. Marriage is of course not required for this type of relationship to develop and flourish. Marriage does, however, serve a signaling function and provide a legal framework for resource sharing and caretaking of multiple kinds.

For these people, marriage is an unalterable part of the social landscape. For them, Franke offers valuable suggestions in her “Call to Action For Married Queers,” including asking spouses to monitor their economic privilege, be aware of gender, and resist offloading bias on other, various non-normative groups. The notion alone of queering marriage is a project worth pursuing in an attempt to help further change the nature of marriage. In this vein, one additional suggestion for Franke’s Call to Action is for married queers – and unmarried ones as well – to open and protect robust critical, queer spaces both inside and outside of marriage. Franke’s message about preserving queer spaces in the context of sexuality is equally important in the political context. Part of keeping marriage equality in play and in question is curating spaces of play and resistance – critical spaces in which divergent practices and personae can be explored. Franke laments that the push to marriage has foreclosed many of these spaces in the gay community. These spaces, however, can be perpetually reinvented through critical inquiry and activity, and they will be the sites of cultural as well as legal resistance.

Ultimately, Wedlocked deftly deconstructs the notions of both freedom and equality with respect to marriage. What remains is to think through how to counter marriage primacy, change marriage internally, and keep open the space for critical play.

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B Corps for Bankers

Claire Hill and Richard Painter’s new Better Bankers, Better Banks aims to find a way forward by looking backward – and by casting a few sidelong glances as well. It is valuable for what it has to say about the view in all directions.

Begin from where we are – the point from which Hill and Painter would like to see forward movement. Where we are now is a world in which, even seven years out from the crash of ’08, banking scandal is near boring in its ubiquity. From Libor in 2012 to Euribor, forex, commodity and precious metal cornering thereafter, the story of financial markets of late seems an unending parade of horribles.

How do we get out of this seeming cesspool? Here is where Hill and Painter look backward and sideways.

First let’s look back. Time was when ‘bankers’ – Hill and Painter employ the term broadly to cover all folk who hold ‘other folks’ money’ – invested not only our money, but their money too. By organizing as general partnerships whose partners were jointly and severally liable for losses, they kept, as the current idiom has it, ‘skin in the game.’ This of course aligned their interests with client and institutional interests – to some extent, anyway. (Names like ‘Jay Gould’ should remind us that ‘some extent’ wasn’t the ‘full extent.’) And so there were limits on how much by way of other folks’ money the bankers were likely to fritter away.

Now let’s look sideways. There appears to be growing consensus, in the face of such scandals as those just rehearsed, that our regulatory and law enforcement regimes’ penchant for penalizing banks rather than bankers just isn’t cutting it. Compared to the gains to be had from wrongful behavior unlikely to be caught, even five or twelve billion dollar settlements between banks and their regulators are chump change. Oughtn’t we, then, focus our efforts upon the human agents through whom the banks act? After all, five billion – or five years in jail – are more likely to pinch if you’re human.

Hill and Painter like what they see in both directions. They find limitations, however, in how effective the enforcement of finance-regulatory provisions can be. These, they believe, are just too easy to game – a fact that might partly account for regulators’ going after the banks rather than the bankers in the first place. Why not, then, take yet another sidelong glance in another direction – that of contemporary moves to simulate better regulation through private ordering? Are there not means, for example, of appealing to socially responsible investors by committing to operate as a socially responsible business – e.g., as a ‘B Corp’ or ‘Benefit Corp’?

Indeed there are, and though they do not discuss these new business forms, Hill and Painter valuably adapt, in effect, the idea behind them to financial firms. Herewith the authors’ novel suggestion to introduce a practice of what they call ‘Covenant Banking.’ The idea is for financial firms whose owners or managers are comfortable with the idea to undertake ‘skin in the game’ commitments on the part of their managers. Managers would voluntarily assume some liability for losses, thereby partly replicating the ancien regime of pre-corporate partnership banking. Investors could then choose between what kinds of institutions through which they invest – the more risk-averse perhaps working through covenant banks, the more risk-cavalier working through today’s more familiar casinoish firms.

It would be hard not to like this proposal. What’s not to like? Like recent proposals for Wall Street voluntarily to maintain ‘naughty lists‘ of bankers who have gotten themselves into trouble, it imposes nothing, yet offers something – the prospect of ‘better bankers,’ hence ‘better banks,’ for at least some investors. It simply expands the field of choice, and who in these times doesn’t like choice?

If I have any reservations about Hill and Painter’s proposal or their brief in its favor, they have to do with the prospect of some people’s possibly taking the authors to claim or to promise more than they actually intend.

To begin with, we should note that wrongs such as those alleged in connection with Libor, Euribor, forex, and commodity and precious metal cornering are not wrongs of excessive risk-taking. They are wrongs of sheer fraud and manipulation. It isn’t the case that ‘skin in the game’ on the part of the relevant fraudsters in these cases ‘would’ have helped; the ‘skin’ seems to have been at the core of the ‘game’ from the start, and was indeed part of the problem – the fraudsters profited precisely by illicitly betting their own money on what they controlled. Hill and Painter, then, should not be taken to be targeting this form of market abuse through their proposal.

A distinct but related point has to do with the lead-up, not to 2012 and after, but to 2008. It is still common to hear that year’s cataclysm blamed upon venal behavior or ‘excessive risk-taking’ by ‘bankers.’ And such behavior clearly occurred – it always does. But a very strong case can be made – I think I and others have made it – that the principal causes of 2008 were more radical than mere vice or recklessness on the part of some bankers. They are endemic to capitalism itself absent serious and sustained effort on the part of the polity to distribute capital’s returns – or capital itself – far more equitably than we’d managed before 1929 or between 1970 and 2008. ‘Better bankers’ would certainly be better than worse bankers; better still would be better distributions of that with which bankers bank.

Finally, there is a danger in underselling what proper law enforcement, adequately funded and staffed, can do where finance-regulation is concerned. When Wall Street contributes more to political campaigns than most other industries, when DOJ officials openly admit to having feared to prosecute bankers for fear of rattling markets, and when regulators like the CFTC and the SEC are chronically understaffed and underfunded, we should be skeptical of suggestions that ‘gameability’ of the rules is the sole – or even principal – reason for old fashioned law enforcement’s not having eradicated rulebreaking by financiers. Indeed, as Hill and Painter themselves note, a rule change at the NYSE in 1970 played a critical role in the move from partnership to incorporated form among Wall Street investment banks. If that is so, could a legal re-imposition of some variant of the old rule not itself make for ‘better bankers’?

None of these caveats should be taken as more than what they are – mere caveats. There is much, much to be learned from a reading of Hill and Painter, and much is quite plausibly promised by their Covenant Banking. And since, as before noted, their proposal is made in effect to the banks rather than the polity, it seems to be all upside, no down. Let, then, those bankers intrigued by the Hill/Painter proposal give it a go. One might even imagine some funds offering their services in A and B flavors, so to speak – in Covenant and Noncovenant forms. In such case consistently better performance by one kind over the other might in future foment a stampede to the winning kind, and with it a privately worked transformation.

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Better Bankers Symposium, June Carbone

Thanks to everyone who participated in the Better Bankers Symposium.

My two cents worth it that the current system does not just reward “greed,” it create a Gresham’s dynamic where those most motivated not just by self-interest, but a preference for short term financial rewards, drive out others who see their self-interest defined in other ways.  Market discipline may produce boom and bust cycles that put firms like Lehman Brothers out of existence, but the corrections of the market often either overcorrect (Akerlof’s references to lemons’ markets) or do so at very high cost (the financial crisis).  This is because greedy individuals (those motivated by short term gains) have managed to create an opaque system in which market responses kick in only after individuals have a chance to leave the companies they undermined, with their outsized individual bonuses intact.

Better Bankers thinks more creatively about how self-interest can be marshalled to police such activities before they get out of control.  It seeks to restore the identity of interests between bankers and banks.  It thus seeks to create a system in which self-interest includes interests broader than short term financial incentives, and in which private market mechanisms can become more effective.  The old joke is “how many economists does it take to change a lightbulb?  None, the market will do it if it needs to be done.”  Hill and Painter’s answer is that it requires a design and it requires the will to create the conditions where the more intelligent design is likely to be adopted because it advances the common good at the expense of individuals who would like to be able to continue to game the system.  Let’s hope their proposal finds fertile ground.
JUNE CARBONE
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The Arc of Covenant Banking: Hill & Painter’s Better Bankers, Better Banks

banker300px

University of Minnesota law professors Claire Hill and Richard Painter do a great service in their new book, Better Bankers, Better Banks, by focusing concretely on an issue that many have discussed but few have offered to change: how to align the incentives of bankers and banks.

They argue that “bankers [should] be personally liable from their own assets for some of their banks’ debts” for money owed due to insolvency, fines, or fraud-based liability. Thus, they propose formal, liability-creating contracts—which they call “covenants”—between banks and bankers: “Covenant banking operates directly on bankers’ monetary rewards” because, under their proposal, “highly paid bankers would bear some personal liability if their banks become insolvent, are fined by regulators, or are found liable in civil cases involving fraud. The liability would not be unlimited, but should potentially adversely affect the banker’s standard of living.”

The Hill/Painter proposal is valuable and interesting both in its own right, and for the harder questions that it raises.

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Better Bankers Book Symposium – Is the Problem Bankers, Rather Than Banks?  BY David Zaring

better bankers

I’d like to put Claire Hill’s and Richard Painter’s fine proposal in the context of how we think about the purpose of financial regulation more generally.  Specifically, how should we think about reforming the financial system to avoid the problem the financial crises? The question is one of the most central to regulation in general, and has been a preoccupation of policymakers ever since the last such crisis. Many look to forestall financial crises with institutional reform.  In the case of banking safety and soundness, that dictates regulation designed to strengthen the balance sheets of banks. Since 2010, American banks have been required to hold more money on hand so that they are ready for shocks, to limit their proprietary trading, to hive off their derivatives arms, and so on. Each of these requirements, of course, have been the subject of regulatory battles and industry pushback.  But all of them are about banks as institutions.

But what if the solution is not to change what banks do, but rather to change what bankers do?

Regulators have taken some steps in this direction recently. They are emphasizing the importance of ethical behavior in banks, set by a “tone at the top”, or unimpeachable conduct in the boardroom.  Regulators haven’t really defined what the tone is, or listed the ethical requirements they find to be important, but there has a been a change in perspective.  Banks are being scrutinized not merely as institutions with balance sheets, but as ones with cultures, and cultures but need improving.

 

Hill and Painter are interested in boardrooms too.  They have condemned the lack of ethics among bankers, but their solution is much less diffuse than the idea of imposing ethical standards and hoping for the best.  Hill and Painter argue that bankers should “be personally liable from their own assets for some of their banks’ debts” and “personally liable from several years of their past, present, and future compensation for some portion of fines and fraud-based judgments (including settlements) against the bank.”

The book is great, and the solutions are intriguing ones. As Hill and Painter observe, current compensation and contractual arrangements within banks lead those bankers to take lots and lots of risks. To change the culture in any bank, the incentives must change as well. Hill and Painter’s elegant solutions looks to incentives to instill a culture that would discourage excessive risk taking and illegal behavior and embrace the sort of behavior that we want to see from our bankers.

Will that lead to safer banks?  I worry about the instability inherent in financial intermediation – many financial crises have macroeconomic causes, rather than causes rooted in financial misconduct.  But there is financial misconduct as well, and if instability inheres in anything, you’d like to promote caution.  Hill and Painter’s solutions would certainly be a step in that direction.

DAVID ZARING

 

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Better Bankers Book Symposium: Forget “God’s Work,” Just Do your Clients’

If Oliver Stone made another Wall Street movie, he might include Goldman CEO Lloyd Blankfein’s remarkably tone-deaf quip about his bank doing “God’s Work”. This quote has come to represent just how out of touch and unscrupulous Wall Street has become. Talk like this is what made the modern pitchfork wielders excoriate the whole banking enterprise. Stephen Colbert, after repeating the quote called the bank Goldman Calf. Matt Taibbi called Goldman “the great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Many people have demanded that bankers go to jail, disgorge their bonuses, and that banks should be broken up. It’s either Golden Calves or God’s work—greed is good or it is evil.

Hill and Painter’s Better Bankers, Better Markets comes in like a grownup to this squabble to describe banks not as vampire squids, but as a collection of people motivated by the same things that motivate you and me. Hill and Painter are not naïve nor do they sugarcoat the banks’ collective bad behavior. The first few chapters of the book thoroughly outline the misdeeds from the specific (LIBOR manipulations) to the general (putting lipstick on worthless assets). The book is valuable if only for the thorough and well-explained cataloguing of the ways in which banks as a collection of individual decision makers defrauded clients or otherwise engaged in unethical behavior.

Hill and Painter accept that bankers and shareholders are motivated by personal profit, they’re  just asking that they don’t “rip their clients’ eyeballs out.” This book is firmly grounded in reality of modern banking industry without excusing or soft pedaling the problematic behavior of those banks. And they are clear that there is a big problem. Hill and Painter explain the genesis as the investment banking world’s shift from the partnership structure to the shareholder structure. In other words, there is no skin in the game, they aren’t eating their own cooking, the incentives are all wrong. It seems to me that Hill and Painter are joining (though not explicitly) a growing chorus of critics who doubt that market discipline can properly reign in Wall Street excess.

While most other reform proposals focus on changing the banks’ incentives—making them smaller, higher capital, more skin in the game—Hill and Painter look to change the individual bankers’ incentives. They are realistic enough to not suggest that we go back to partnerships, but they want bankers to feel some obligation or duty to the firm and to their clients. Hill and Painter suggest that the best way to do this is through covenant banking: to impose both contractual obligations and fiduciary duties, make banking to be a professional enterprise like law or medicine—a career with ethical boundaries, codes, and consequences for violating those.

Hill and Painter’s proposals are both traditional in that they want banking to return to the days when bankers felt duty-bound to both the firm and their clients, but also forward-thinking in that it recognizes that current activity restrictions and bright line rules in banking can easily be averted and real reform happens only insofar as the bankers’ and the publics’ incentives are aligned. The strength of the book’s argument is that the authors are not suggesting radical change, rather a look back to what worked in the past and distill those lessons to meet the needs of the present. While the bankers of the past are not perfect, perhaps there is comfort in the fact they were never accused of being vampire squid.

 

 

 

 

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Essays of Warren Buffett (Fourth Edition)

The following is a review by Nick Murray of the new (fourth) edition of The Essays of Warren Buffett: Lessons for Corporate  America, which he kindly is allowing to be shared beyond the subscribers to his fine investment newsletter.   

cunningham buffett 4e cover
To mark the fiftieth anniversary of Berkshire Hathaway under the leadership of Warren Buffett, the redoubtable Lawrence Cunningham—in his own way, Buffett’s ablest biographer—has released a new fourth edition of his classic book The Essays of Warren Buffett: Lessons for Corporate America.
As with the earlier editions, it is something to be treasured by the evolved advisor, not merely in her role as a capital allocator but as a philosopher of the economy and even as a moral leader to clients.
In addition to a perceptive and nuanced understanding of Buffett’s annual letters, the genius of Professor Cunningham has been to edit the material thematically, so that we may find related observations down the years brought together. This is not merely a collection of Buffett’s Greatest Hits, but a systematic and rigorous examination of his important themes.
Nor does Professor Cunningham fail to honor his subject as a prose stylist, though this is by far Buffett’s least appreciated gift. In his own unaffected, colloquial, Midwestern style, Buffett at his best is an essayist on a par with Emerson and even Montaigne, and this quality shines through The Essays as it does nowhere else.
The enduring irony of Warren Buffett’s career as perhaps the greatest capital allocator who ever lived is that he remains at once the world’s most admired and least imitated investor. Professor Cunningham’s is thus a book to be read slowly over time—to be tasted and pondered by the advisor almost as a program of daily reflections. I cannot recommend it too highly.

A Review of The Black Box Society

I just learned of this very insightful and generous review of my book, by Raizel Liebler:

The Black Box Society: The Secret Algorithms that Control Money and Information (Harvard University Press 2015) is an important book, not only for those interested in privacy and data, but also anyone with larger concerns about the growing tension between transparency and trade secrets, and the deceptiveness of pulling information from the ostensibly objective “Big Data.” . . .

One of the most important aspects of The Black Box Society builds on the work of Siva Vaidhyanathan and others to write about how relying on the algorithms of search impact people’s lives. Through our inability to see how Google, Facebook, Twitter, and other companies display information, it makes it seem like these displays are in some way “objective.” But they are not. Between various stories about blocking pictures of breastfeeding moms, blocking links to competing sites, obscurity sources, and not creating tools to prevent harassment, companies are making choices. As Pasquale puts it: “at what point does a platform have to start taking responsibility for what its algorithms go, and how their results are used? These new technologies affect not only how we are understood, but also how we understand. Shouldn’t we know when they’re working for us, against us, or for unseen interests with undisclosed motives?”

I was honored to be mentioned on the TLF blog–a highly recommended venue! Here’s a list of some other reviews in English (I have yet to compile the ones in other languages, but was very happy to see the French edition get some attention earlier this Fall). And here’s an interesting take on one of those oft-black-boxed systems: Google Maps.

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Better Bankers, Better Banks

bbbbAnyone seeking a fresh and compelling assessment of global financial stability should consider the forthcoming book Better Bankers, Better Banks, due out later this month.  The simple central thesis is that banks fail because bankers fail and the logically inexorable prescription is covenant banking, meaning getting banker’s to assume personal liability for bank failures.  U. Minnesota business law professors Claire Hill and Richard Painter offer a work of elegant simplicity, as reflected in the book’s Table of Contents:

Part I: The Problem

1 Irresponsible Banking  

2 How Banking Became What It Is Today
3 Explaining Banker Behavior  

Part II: Solutions
4 Law and Its Limits
5 Covenant Banking
6 Responsible Banking

The sub-title suggests an intriguing twist on the normative thrust: “Promoting Good Business Through Contractual Commitment.”  I discussed the book and its themes with the authors on several occasions and read some draft chapters. I am now eager to devour the final.  My guess is the read will benefit not only policymakers and scholars but bankers as well.  Kudos to Claire and Richard.