The Global Financial Crisis: Learning from

Regulatory and Governance Studies

CHRISTOPHER ARUP

Regulatory and governance studies help locate power and responsibility in the
global financial crisis. I argue that corporate and state power worked together in
centers like New York and London to shape regulation and that power was spread
around the world. In the response to the crisis, responsibility for regulation will
remain largely systems-based rather than centrally directed. However, those
systems should be located in the culture of the elites, which are socially and
spatially based, as much as in the economics of the markets or the cognition of the
firms. And that responsibility has limits, so there should be greater democratic
control of finance and less dependence on finance capitalism for essential services,
social security, and environment protection. lapo_322 363..381

The global financial crisis (GFC) has been devastating for many people and
has revealed the instability of the world economy. Yet it would seem the crisis
has allowed some people to profit, and it appears likely that large risks will
remain in the system (International Monetary Fund 2009). The GFC
has raised many issues of concern, the greatest overall being the governability
of the financial system. How might regulatory and governance studies help
policymakers and citizens to think about that systemic issue?1 My forum
piece, drafted in the early stages of the GFC “meltdown,” pursues this
question and suggests where those studies might and might not assist.
My premise is not a novel one; the prospects for reform of regulation can
only be assessed once we locate power and responsibility within the financial
system. Corporate and state power often work together. Thus, we must
consider whether the responses to the GFC recognize that configuration of
power well enough to reform financial regulation. My main suggestion is that
the cultures of the elites are as important to that reform as the economics of
the markets. The piece has a rather pessimistic conclusion: if elite cultures
cannot be encouraged to reform, democracies should reduce dependence
on finance capitalism for housing, essential services, social security, and
environmental sustainability.

Address correspondence to Chris Arup, Department of Business Law, Faculty of Business

and Economics, Monash University, PO Box 197, Caulfield East, Victoria, Australia 3145.
Telephone: +61 3 9903 1026; E-mail: christopher.arup@buseco.monash.edu.au.

LAW & POLICY, Vol. 32, No. 3, July 2010 ISSN 0265–8240
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I. LOCATING POWER

In this first section, I rehearse ways to think about the governance of power
to regulate financial systems. Recent theories of regulation and governance
can help us to locate power among corporations and states. I take up the
tools of this theory, first with regard to the experience of regulation in the
financial center of New York and second with regard to the means by which
the power of this center was spread through the world.

A. THE RELEVANCE OF REGULATORY AND NEW GOVERNANCE STUDIES

If regulation is the capacity to influence the actions of others (Baldwin and

Cave 1999), then many actors may be said to be involved in regulation of
the financial system. Similarly, many different people are responsible for
the global financial crisis, including bankers, fund managers, investors,
sellers, advisors, householders, consumers, economists, journalists, politi-
cians, and government officials. Regulatory studies has been especially
enlightening in showing how private actors regulate along with public agen-
cies, mapping all the different directions in which regulation operates and
characterizing the variety of forms regulation assumes (Picciotto 2008;
Scott 2009).
There is much merit in theories that accommodate such a multiplicity of
actors and relations. After all, our first task is to comprehend. Yet this sense
of pluralism does not necessarily tell us a lot about the distribution of power
among the relevant actors and relationships. When the framework is accom-
modating like this, it is tempting to think that power must be decentered and
transferable. If responsibility is to be encouraged, policymakers must grasp
this complexity and fluidity of power in financial markets, so that they can
focus and apply pressure where it is most productive to do so—where it
counts the most (Braithwaite 2009). We should avoid conspiracy theories, yet
still be prepared to hold people responsible for their actions, nominally at the
very least.
In new governance theory (King 2008), the concept of the “node” assists
understanding of how power is shaped and exercised within key systems.
The structure of nodes is important; the way they are set up is likely to
favor certain actors (Shaffer 2004). Yet the theory is dynamic and progres-
sive in its expectations. Influence is attributed to agency and action—the
power of ideas and conversations—so outcomes can be altered and even
structures and cultures transformed (Sell 2003). A crisis might be a catalyst
for change.
I believe this insight is crucial to how we assess the potential for reform of
the financial system. Of special relevance is the notion of metaregulation—
that those within the system might be given encouragement and guidance to
think better of the consequences of their actions for others (see Parker 2002).
If regulation is to further social responsibility, it must be smart regulation

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that employs soft responsive and reflexive techniques to enlist the support
of those with power. The combination of corporate and state power is not
necessarily a negative.
Yet the query should be raised: does governance or systems-based regula-
tion really offer such potential (Santos and Rodriguez-Garavito 2005)? Some
people seem habitually on the receiving end of regulation, while others enjoy
the benefits of legal freedoms and entitlements. It is possible that those with
power do not desire to take responsibility for regulation and contribute to its
coordination, except perhaps temporarily when they overreach and endanger
their own interests. While destabilizing, a crisis may be the opportunity for
them to profit from others (Harvey 2006). At first blush, the GFC seems to be
like that.

B. CORPORATE AND STATE POWER IN THE UNITED STATES

How was power organized in the period leading up to the GFC, particularly
in the financial center of New York? This subsection suggests that corporate
and state power were concentrated together. Contrary to what many com-
mentators suggest, neoliberal policies did not lead to deregulation, reduction
of state power, and the dispersal of corporate power. Instead, corporate and
state power combined in financial centers such as New York and was then
projected outwards to other parts of the world. Philosophies were influential
here, such as the efficient markets hypothesis, but also influential were the
interests of powerful market players who benefited from the changes in the
configuration of power on a global scale.
The dominant account of the GFC portrays it as the result of deregulation,
a largely Anglo-American governance phenomenon in which the state
relaxed its controls on the activities of the financiers and the supervision of
their trades. Now the crisis raises the prospects for reregulation. Provoca-
tively, Panitch and Konings (2009) describe this as a myth—part of what
Slavoj Zizek (2009) calls the battle for interpretation of events. Neoliberal
commentators say that deregulation just went a little too far and that now a
sympathetic fine tuning will eradicate the excesses and correct the failures of
finance.
The situation was always more complicated than this dominant account
allows (see Pistor and Milhaupt 2008). Among their virtues, regulatory and
new governance studies downplay the demarcation between public and
private in characterizing how these systems work (Scott 2009). Theory re-
cognizes that law is involved in constructing and legitimating markets
(Bordieu 2006), not just in containing them. Markets are not “presocial.”
They are not a natural phenomenon in which law and other kinds of regu-
lation simply interfere. This is especially true of financial and other “paper”
markets (Huault and Le-Montagner 2009).
Granted, there was something of a standoff between corporation and state
in the strategies that the banks employed to avoid prudential requirements.

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In the United States, the corporations successfully lobbied Congress and the
Bush administration to repeal the Glass-Steagall Act and collapse restrictions
on their lines of business. The banks and other financiers gained greater
freedom to exploit the fact that some financial activities did not have to meet
capital adequacy requirements. They could rapidly move money between
markets, hugely increasing volatility and magnifying risk. This led to regu-
lated products being repackaged and moved off the books.
The financiers also “innovated,” creating new instruments to pass on risks.
That gave them confidence to increase their lending and borrowing dramatic-
ally. Securitization and collateralized debt obligations (CDOs) enabled the
risk of loan default, such as subprime mortgages, to be spread around to
other parties (depending on the buy-back conditions), and they formed the
subject matter of secondary and further markets (for example, CDOs on
CDOs) (Tett 2009). Initially used for hedging on commodity prices, deriva-
tives greatly expanded—notably to credit, permitting bets to be taken on
virtually any price going up or going down. In addition, they spawned
secondary markets such as credit default swaps. Through these devices, the
banks did not just attract other investors; they created an apparatus of
shadow banks and special purpose entities, such as structured investment
vehicles, to offload and offshore risky “assets.” Hedge funds multiplied dra-
matically in number and placed most of their funds offshore. There was
extensive exploitation of legal forms, the corporation, and the trust; Lehman
Brothers utilized some 2,985 legal entities.
Yet these risky practices did not escape the attention of regulators. Trade
in some products was routinely reported to the public agencies. The agen-
cies also had the capacity to scrutinize the newer instruments. Crucial deci-
sions were taken to let the banks monitor their own activities. It is true
some of these decisions came in the form of legislative rules. The Com-
modity Futures Modernization Act of 2000 was sponsored by Republican
Bank and Finance Committee Chair Phil Gramm in Congress and accepted
by the Clinton administration late in its second term (Stiglitz 2009). Faith
in free markets was one reason for its passage, but the dependence of U.S.
lawmakers on political donations from corporations was an influence, too
(Talbott 2009).
Moreover, financiers were given crucial administrative clearances to
operate after presenting arguments to agency officials that they could
manage the risks themselves. Some decisions, particularly those most
evident when the crisis broke, were based on quite intimate informal con-
versations. Federal officials met with bank executives in New York in
weekend sessions to broker solutions (Tett 2009; Cohan 2009). Yet, if these
deals seem extraordinary, there were also crucial moments of collaboration
during the incubation period as well. One such collaboration was the deci-
sion of the Federal Securities and Exchange Commission (SEC) in 2004 to
allow banks to increase their leverage dramatically by minimizing the
capital they had to keep in reserve against the risk of the CDOs (Tett 2009;

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Taibbi 2009a). It seems regulators had learned little from the massive
bailout of the Long-Term Capital Management Fund back in 1999 (Lewis
2006).
Should these events be characterized as deregulation or something else? I
suggest that the GFC is a story about who prevails within the elite financial
institutions themselves (Tett 2009) and about the dominance of particular
public agencies aligned with elite interests. Some of the agencies had been
established for different tasks (e.g., the Office of Thrift Supervision and the
Office of the Comptroller of the Currency), and the government’s complais-
ance includes failing to rationalize and coordinate them, while at the same
time obstructing the exercise of supervision by the authorities at the state
level. Yet, other agencies, more central to power in financial markets, notably
the SEC and the Federal Reserve Board, maintained close relationships with
the financiers. In prominent remarks, they gave their blessings to the inno-
vations (see Stiglitz 2009).
Why might they have done so? In the United States, the practice of political
appointments gave the Bush administration the opportunity to change regu-
lators. Perhaps one reason was the belief they were not needed—efficient
markets can be left to make the right decisions. It is possible, however, that
material interests were being considered, too, not just broad philosophies.
When the Bush administration came to office, critical officials were fired,
including the vocal Brooksley Born at the Commodity Futures Trading
Commission (ibid.). Fresh appointments were made from the industry. This
practice was not new, but the selections did change substantially.

C. INTERNATIONAL GOVERNANCE

Once financial trades straddle borders, regulators are faced with the problem
of coordination between home and host jurisdictions. Given the complexity
and volatility of financial flows, coordination has a challenging technical side
to it (Picciotto and Haines 1999; Davies and Green 2008). But the expert
work on regulation in the last two decades—on consolidated accounts, for
example—has not been enough. Political economy is the reason why the key
home jurisdictions have not cooperated. Financial interests benefited as
states sought to attract their trade and commerce. Many countries have
worked assiduously to host finance, while the countries of origin relinquished
controls on capital movements and floated exchange rates. Now the flow of
speculative money far exceeds direct foreign investment in firms and plants.
The genie is out of the bottle.
The complicity of states involves not just the marginal states that offer
money laundering and tax-evasion opportunities (some bankrupt Pacific
Island states, for example), though structured investment vehicles and hedge
funds were located offshore for this reason, too. The states have included
small nations seeking to prosper from flows of speculative money by offering
high interest rates, low taxes, steady revenue streams, and investor confiden-

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tiality, states such as the European principalities, Switzerland, the Baltic

States, Iceland, and the Republic of Ireland.
The UK governments (both Conservative and New Labour) have played
an especially critical role, supporting the City of London with light-touch
regulatory regimes, coupled with visas and services for wealthy people
(Augar 2009). On one view, the British elites have given up on manufacturing
industries and plumped for high-end services supply, making London a
global center for professional services (such as financial, legal, and medical
services) and for luxury goods and services. In addition, Britain has main-
tained an ambivalent relationship with offshore jurisdictions (Kochan
2006); some of the most popular locations include British dependencies, the
Channel Islands, and the Caribbean islands—Antigua, Barbados, Bermuda,
and the Cayman Islands (Brittain-Catlin 2005). They have been havens for
tax avoidance, too. Some 80 percent of hedge fund money is lodged in the
Cayman Islands (Picciotto 2009).
Where governments have sought to retain control over financial flows,
inwards and outwards, they have been pressured in international forums to
liberalize. The United States and Western European governments have had
the major say in shaping International Monetary Fund (IMF) and World
Bank policies. These organizations made liberalization the condition for
assisting Asian nations in their financial crises after global traders, especially
the hedge funds, withdrew money at a rapid rate. The target of the reforms,
it was said, was crony capitalism and administrative sclerosis (Krugman
2009). But the impact was broader. These countries were not permitted
to bail out local businesses, and there was widespread hurt (Buckley
2009). Resistance was portrayed unfavorably (e.g., the stance taken by the
Malaysian government).
State power has also been applied in favor of finance through bilateral
investment treaties (BITs) and the investment chapters of the new free trade
agreements (FTAs) that the United States and the European Union (EU)
have been pursuing vigorously with smaller and developing countries. While
the FTAs do vary in content somewhat, the U.S. model pursues an expansive
definition of investment that runs beyond foreign direct investment to take in
speculative trade (Schneiderman 2008). Like BITs, such FTAs provide pro-
tections once investments have been made—guarantees of fair and equitable
treatment and protection from indirect expropriation. Some go further now
and grant preestablishment rights too—that is, rights of entry or access to the
host country’s investment markets.
Such treaties follow up with provision for international arbitration, the
rights of investors to take complaints directly against states to international
tribunals. Argentina is defending a number of cases arising out of its response
to an earlier debt crisis. Arbitration tribunals are developing jurisprudence
governing the extent to which these investor rights and protections can be
squared with the state’s power to take emergency measures or to persist with
general public regulation. Yet, it should be noted the membership of the

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World Trade Organization (WTO) has kept the liberalization of investment

largely out of its multilateral agreements, and the global history of invest-
ment regulation includes the failure of the Organization of Economic
Cooperation and Development (OECD)-sponsored multilateral agreement
on investment (MAI) (Arup 2008).
My own research focuses on liberalization of “trade” in such professional
services as legal, accountancy, and financial services (ibid.). Exporting home
countries have followed various legal routes, including negotiations under
the General Agreement on Trade in Services (GATS) of the WTO and the
FTAs, to encourage host countries to liberalize market access for foreign
financial services suppliers. It is clear from the GFC that the service suppliers
do not merely respond to the demands of clients and consumers; they create
financial instruments and trade in their own right—they are both intermedi-
aries and principals.
The exposure to international financial markets has placed pressures on
governments in other ways, too. They have been pushed, for example, to cut
back on social services and sell off public services in the cause of reducing
budget deficits and public debt, while private borrowing in Western coun-
tries, especially the Anglo-American economies, has expanded greatly. The
private credit ratings agencies threatened to downgrade governments if they
did not introduce austerity measures. At the same time, they were triple-A
rating the new financial products of their private clients in a huge conflict of
interest.
In Australia, for instance, state governments have favored public-private
partnerships to source transport, energy, and water projects, even when
government borrowing and tender for construction would have been
cheaper. Financiers gained commissions engineering such projects. Yet, most
often the risks were not privatized; the government gave financial guarantees
and remained liable politically to provide the services. Another example is the
national air carrier, Qantas. Already privatized, it was the subject of a take-
over bid from a U.S.-based private equity fund. The deal failed at the last
minute, and this fund later collapsed during the GFC.
I have detailed this liberalization because it shows that law has actually
undermined the regulatory autonomy of national governments. It has helped
to create global markets. Liberalization has produced an extra layer of
international regulation. Some of that regulation is prudentially minded
(Picciotto and Haines 1999). While Basel I was a norm produced by a
functional regulators network, the Basel Committee for Bank Supervision,
and not a hard law international treaty, it gained considerable legitimacy
among national governments. Yet this layer of regulation changed, too. While
Basel II embraced more financial instruments at the same time the committee
was persuaded to adopt a systems-based approach, allowing the banks to use
their own internal processes of risk assessment to determine the level of capital
holdings needed to guard against default or a liquidity crisis—that is, all their
obligations being called in at the one time (Davies and Green 2008). The U.S.

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government was slow to accept Basel II, partly because some thought the
approach would weaken requirements (Picciotto 2009).

II. GOVERNING REGULATION

This section offers an assessment of the responses to the GFC. Proposals for
reform of regulation are identified. It appears the focus will remain with
systems-based regulation, so it is vital that we review the nature of those
systems. In doing so, we should move beyond a preoccupation with cognition
and calculation to a concern with cultures and values. How, though, can
value systems be affected? Is this reorientation just a recipe for despair?

A. BACK TO THE STATE?

When the crisis broke, some commentators saw it as undermining the legiti-
macy of neoliberalism and providing a case for reform of regulation. Reform
proposals included bringing the newer instruments within the capital
adequacy regimes, increasing liquidity requirements, and stiffening proce-
dures to protect consumers. For such regulation to work effectively, it would
have to be coordinated between jurisdictions. Yet, the international response
to the GFC must raise doubts that regulation will change in this way. Instead,
the government responses reveal a reluctance to coordinate regulation. So
far, the responses are marked by a series of temporary and piecemeal mea-
sures. After two years, executives and legislators are still talking.
The Bush administration’s first aim was to save the big banks. It bears
repeating that hundreds of billions of dollars were involved. Officials nego-
tiated directly with executives from the stronger institutions to take over
those about to collapse (except Lehman Brothers). Together with massive
injections of public funds, this agency of the state has produced even bigger
institutions. These have gathered a greater share of investments from the
markets, the commercial banks in particular profiting at the expense of the
smaller and more local institutions. More centralized and fewer in number,
they provide a clearer contact point for government regulation, yet they have
more market power and they have become, even more so, “too big to fail.”
The change in the U.S. administration should mean greater reform. The
government began to take equity in the institutions it was saving. Nonethe-
less, officials were at pains to reassure markets that the institutions would be
reprivatized as soon as they were returned to profitability. Moral hazard was
created when the funds were directed to those who had caused the crisis. For
example, most of the billions of bailout funds for the American Insurance
Group (AIG) went back to Goldman Sachs (Taibbi 2009b). Although
Goldman Sachs experienced losses, the allegation is that it also made money
from shortselling AIG.2 Some of the institutions were able to refuse the

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funds; lately, others have been returning them to avoid satisfying the condi-
tions. Joseph Stiglitz (2009) suggests they might have become too big to be
restructured.
The Obama administration is seeking to reform regulation of the trading
markets. Yet, its proposals soon met resistance, as the experience with efforts
to regulate derivates illustrates. Industry quickly warned that reform should
not stifle innovation and undermine the sector’s advantages for the national
economy. Core industry groups such as the International Swaps and Deriva-
tives Association and the Credit-Default Swap (CDS) Dealers Forum
lobbied hard to limit requirements (Morgenson and Van Natta 2009). The
reforms for regulation of derivatives trading distinguished standard deriva-
tives from those characterized as privately negotiated and customized. Stand-
ard derivatives would be traded on public and transparent exchanges; they
would be subject to clearance requirements to manage their impact. Private
derivatives, on the other hand, would bear only some recording and report-
ing requirements. Frank Partnoy (2009) has argued that such a distinction
would create an enormous loophole—an error perpetrated only a decade
earlier when the Commodity Futures Modernization Act was enacted.
Fragmentation of authority to regulate was a weakness that financiers
exploited to avoid regulation. Even if it is able to get some version through
the Congress, the Obama administration may fail to integrate regulatory
responsibility domestically. Internationally, a real test is the resolve of the
G20 governments to coordinate international regulation. In its July 2009
communiqué, the G20 (2009) agreed to pursue reforms. Since then the Basel
Committee for Bank Supervision (2009) has been working on Basel III.
Progress is being made. Under Basel III, more financial instruments are to be
covered by capital-asset ratios. On the capital side of the ratio, Basel III
would tighten the definition so that only pure equities are counted. On the
asset side, Basel III would rely less on the financiers’ own assessment of the
riskiness of the assets.
Yet, it is not agreed how high the ratio should be for prudential regulation
(Briefing 2010). A similar controversy surrounds the liquidity coverage ratio.
The committee will probably make recommendations and leave the final
arrangements once again to the discretion of the national systems. Mean-
while, the Obama administration has taken another tack, focusing on
restricting the activities of the deposit taking government guaranteed com-
mercial banks (Chan and Dash 2010; see further below). Consequently, there
is a divergence between European and American approaches; at Davos this
January, the executive officer of the Bank for International Settlements,
Jaime Caruana, criticized the Obama proposals.3
Another test is the coordination of regulation against tax avoidance. Tax
avoidance was one reason financial funds went off balance and off shore. The
Bush administration had put a stop to U.S. cooperation with the OECD’s
harmful tax practices initiative. The Financial Stability Forum backpeddled
on action against offshore havens (Davies and Green 2008). While tax havens

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are part of the G20’s reform agenda, it is likely the strategy will remain one
of “naming and shaming” the most outlandish states.
If the crisis does not bring more coordination, it might lend impetus to
those regulators who are seeking to enforce existing laws. We can expect
pursuit of the most egregious frauds, such as Bernie Madoff’s Ponzi scheme
(Seal 2009). Initiatives that strike deeper, challenging the principles of the
system, look less likely to succeed. A litmus test is the fate of the U.S.
Department of Justice case against the UBS bank seeking to crack Swiss
bank secrecy. This secrecy is backed by Swiss laws; the Swiss government has
come out in UBS’s defense, saying cooperation under a recently concluded
tax treaty will be sufficient. Some names of American investors have been
volunteered in a settlement of the case. Each of these victories is likely to be
hard won.

B. MORE SYSTEMS-BASED REGULATION

Not all, though, is negative. New governance and regulatory studies see value
in combining state with corporate power. It is plain to see that financial
systems are too complex and fluid to rely on single-minded state-centered
directives. Even those in favor of reform suspect that elaborate reregulation
will lead to further innovations in financial instruments and markets. Some
will be devoted to working around the rules. While it is galling to be told
that safeguards will be avoided, the technical fixes do lack credibility. To be
effective, regulation must enlist the cooperation of those with power. Experi-
enced industry figures are needed to help with design and to get the industry
on the side of regulation.
Certainly, given the evidence, it is unlikely the GFC will provoke a shift to
any kind of command-and-control regulation. Yet, neither does it seem likely
that accountability will come as a result of civil law actions, even though civil
law is the most private, market-based form of legal regulation. Despite the
injunctions of the economics textbooks, threats to the “system” have taken
priority over moral hazard. Those left in the lurch, household and local
investors, are contemplating protracted and uncertain litigation.
Therefore, indicators suggest that the focus will remain with systems-based
regulation. But what definition should be given to those systems now, if
regulation is to influence how the actors within them think and choose? An
economic account is the most obvious explanation for the risk taking that
precipitated the crisis. Convergence heightened competition, and the manag-
ers and traders were driven by the demands of owners and investors. Much
has been made of moderating the economic incentives they received: the
performance bonuses and stock options that motivated them to maximize
returns in the short term.
Yet, when the crisis broke, the public was warned against a show of anger
towards such practices. For example, one industry leader counseled that the
crisis should not become a crude morality tale (Guardian Weekly, April 3,

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2009). Inside the logic of neoliberalism, such practices are natural and
rational behaviours. Policy analysts are turning to behavioral economics,
organizational sociology, and crowd psychology to understand why many of
the participants seemed to misjudge even their own interests. George Soros
(2008), for example, suggests the answer lies in the mutually reinforcing
reflexive behavior of the herd; Robert Schiller (2008) finds it in irrational
exuberance and the play given to animal instincts.
While an advance on rational actor theory, these characterizations seem to
relieve individuals of accountability to others for the consequences of their
actions. They can be quite forgiving, even fatalistic, for they stress cognitive
failings. Another such benign reading of the events has the financiers search-
ing, idealistically, for systems that can, finally, eliminate risk, but building
such systems on abstractions of mathematical formulae (the “quants”) and
on computer technology. In a virtual world, loss of personal contact, speed-
up, loss of affect, and decontextualization, all cause financiers to overlook the
human variable in how markets behave. There has been a general shift in
cognition; it is happening to driving on the roads, too (Ballard 1973). In this
competition for interpretation of the events, neuroscience is gaining ground.
Susan Greenfield (2003), Oxford professor of synaptic pharmacology, now
recommends a focus on the thought processes of young male traders brought
up on computer games; a related explanation stresses the role of dopamine,
a chemical in the brain.

C. BUT WHAT SYSTEMS?

I think this question holds the key to thinking about reform of regulation. I
shall argue that the cultures of the elites are as important to that rethinking
as the economics of the markets. Because it is hard to identify the shape of
systems that are based on culture and even harder to find points of attach-
ment and influence, the argument appears to rest on shaky ground when
compared to the alleged certainty of economic method. Approaches focusing
on cognition and calculation have the virtue of modesty. How, after all,
would we, the commentators, have acted in such circumstances? Nonetheless,
the GFC suggests our research needs the help of other disciplines, such as
anthropology, criminology, and gender studies, to gain insight into these
systems. Law and policy studies have deployed their insights in other fields.
I would draw a comparison with ethnographic studies of dangerous driving,
youth gangs, family violence, looting, and vandalism—Jean-Pierre Hassoun
(2005) does so to understand financial trading. Trying to explain the reckless
and destructive behavior of the GFC, the accounts of the insiders and jour-
nalists gravitate towards these interpretations. One of the best, by Financial
Times writer Gillian Tett (2009), credits her social anthropology studies at
Cambridge for many of her insights. Certainly, one interpretation that comes
through the literature is that macho men (madmen?) are to blame for the
foolhardiness of the GFC; accounts of behavior at Bear Stearns and Barclays

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Bank (Burrough 2008; Cohan 2009), and even across the country of Iceland
(Lewis 2009), would seem to support this thesis.
My recommendation is further research into the norms and values of the
financial elites. The sociological studies of Bell (1976), Lasch (1995), and
Sennett (2006) show the way, indicating how, at least under certain condi-
tions, capitalist elites tend to wield power without taking responsibility for
the people and communities they affect.4 In his response to the GFC, Presi-
dent Obama cites such a “culture of irresponsibility.” If these systems are to
be regulated, it is necessary to break the lines between the economic and
cultural—to look again at the conditions under which such elites live and
learn. In culture we might find the explanation for the irresponsibility—
maybe, too, a point of attachment for regulation. From this viewpoint, such
conduct is not the product of an impersonal economic machine; it results
from the ethical and lifestyle choices that influential individuals make
(Jennings 2002).
These choices can be located both socially and spatially. Of course, there
was subprime home lending in smaller towns and improvident investments
by local municipalities. But demand only really took off, and the risks per-
vaded the system, when the bankers in the core invented the secondary
markets to avoid their own responsibilities. Likewise, the critical failure is
not the conduct of the day traders who were paid performance bonuses but
that of the owners and executives who devised these incentive systems. It
is not the accommodation offshore that counts but the decisions taken
onshore in the metropolitan home jurisdictions to go offshore (Cameron
and Palan 2004).
Spatially too, these events show how tightly clustered decision making has
been. From the accounts of the GFC, it can be seen how quickly meetings
between bank executives and government officials could be convened; social
networks are alive. While globalization allows activities to be dispersed
across physical space, such design and management decision making is still
concentrated in key cities (Sassen 2002, 2005; Parr and Budd 2000). Most
hedge fund managers are located in the urban regions of London and New
York.5 New York and London are physical proximities, desirable places to
live and congregate, where regulation is governed face to face. Even techno-
logical advantages may accrue. With high-speed computer trading, banks are
said to gain a split-second advantage by having a giant server located right
next to the New York Stock Exchange.

III. PROSPECTS FOR REFORM

A. REFORM OF FINANCIAL INSTITUTIONS

How, then, could these networks be regulated? Points of attachment should

be cultural as much as economic. To encourage responsibility, we have

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somehow to enter the elites’ own networks (Riles 2000; Appelbaum, Gessner,
and Felstiner 2001; Dezalay and Garth 2002). John Braithwaite (2009) is of
this mind, I think, when he recommends we apply his techniques of restora-
tive justice to the elite firms. Reasserting personal liability might encourage
more responsibility, too (Picciotto 2009). It might also be necessary to look
beyond the firms—for often this is too late—to the formative cultural influ-
ences on the financial elites: to private schools, graduate business programs,
professional associations, research centers, arts and philanthropic founda-
tions, style and opinion leaders, and finance media, perhaps even to gentle-
men’s clubs, where people congregate and socialize and which they respect as
their points of reference. If this sounds old-fashioned, consider a related
sector—the Warhol economy in New York. To understand how this oper-
ates, Currid (2007) identifies nodes of creative exchange, the role of nightlife,
formal institutions, and the social production system.
Perhaps a start would be to encourage continuing education, community
service, and the promotion of a professional ethic. Braithwaite (2009) also
advocates a strategy of negative licensing, the power to take away the finan-
ciers’ rights to practize. Yet, it is hard to see where that regulation could be
attached, for finance does not have the same professional definition as law;
only slowly are financial advisors being subjected to licensing. The repeal of
Glass-Steagall made it harder to find control points. The right to operate a
commercial bank is one such point, and one U.S. government response has
been to require the other institutions to become such banks if they want
support, then to restrict the activities of these banks once again—to “narrow
banking.” This has become the thrust of the Obama administration pro-
posals (Chan and Dash 2010). Another system narrowing proposal is for
structural separations, or “living wills,” through which banks will be required
to keep their assets and liabilities apart, so that the failing parts can be shut
down without threatening the whole, especially the deposit-taking core.
Perhaps banks should be limited in size overall. In another reference to the
governance of the past, the parts of a bank might be separated on a national
basis—creating subsidiaries, then, rather than branches.
There are technical objections to these proposals. How easy is it to distin-
guish core commercial bank functions from more risky activities such as
proprietary trading, running hedge funds, and investment in private equity
funds? Wasn’t the problem with lending and borrowing rather than with
these activities? Weren’t the activities of the investment banks just as great a
threat to the stability of the system? Furthermore, if corporate and state
power are wedded together, who is going to wield the stick of negative
licensing against the top bankers (King 2008)? Who is going to break up or
close down their banks? Rather, the penalty, somehow, has to be the loss of
the social privileges of such a life, not just an economic practice, but the loss
of the enjoyment of the amenity and affinity of these places. Better still, an
ethos must be established in which such irresponsibility is not an aspiration
and social sanctions such as shame and ostracism apply to discourage it.

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376 LAW & POLICY July 2010

Greater transparency would be a start; many of these transactions are done

remotely or through third parties.
I think this conclusion is logical, yet many will think it optimistic, even
naïve, to expect cultural change. If, with the best of intentions, cultural
change is hard enough to obtain, some doubt the potential for reform alto-
gether. Urban geographer David Harvey (2006) takes a fundamentally
darker view. He argues it is in the nature of global capitalism for crises
periodically to be provoked (see also Klein 2007). Corporate power is
flexed repeatedly. Consider the destabilizing role the hedge funds played in
the Asian financial crisis. State power comes to the party as well. For
example, the Federal Reserve acted as a catalyst for the crisis, abruptly
putting up interest rates and increasing the attraction of investment back
in the United States, and then, in the lead-up to the GFC, the Federal
Reserve dramatically reversed course. Harvey (2006) claims such disruption
is an opportunity for elites to reassert power. The moment can be used
to clean out rogue traders and recalcitrant officials, buy up weakened
competitors, and dispossess communities of their assets. If this interpreta-
tion is accurate, it might not be possible to expect regulation to prevent
another crisis. If bona fides cannot be assumed, what is to be gained by
trying to encourage the elite networks to think better of the effects of their
activities?
The distinguishing characteristic of the GFC is that it hit hard in the
homelands. When other bubbles inflated, action was taken to burst them. It
seems that Greenspan thought the housing bubble could be managed this
way, as the dot-com bubble had been a decade earlier. Perhaps the situation
was misjudged and the system got out of control. Sometimes, systems theory
is likened to an old theory of sociology, functionalism. Yet, systems theory
understands that systems are not always in equilibrium and that they have
the potential to disintegrate. Harvey (ibid.) says this is true of regional
economies; capitalism moves on. Geopolitical alliances of state and corpo-
ration go into decline, even if they have been strong for a long time. Others
emerge to take their place. Unless Anglo-American elites alter their practices,
they might be superseded by other varieties and sites of capitalism (Ferguson
2008). Shifting discussion of international regulation from the G8 to the G20
is some recognition of this prospect.

B. DEMOCRATIC CONTROL OF FINANCE

Finally, the focus shifts away from the power brokers of finance capitalism.
Not all solutions can be found in more sophisticated governance relation-
ships between corporation and state, certainly not in regulation to correct for
market failures. It is vital to reduce dependence on financial markets. If
communities have to rely wholly on it for the supply of essential services, such
as housing, food, health, transport, and energy, the failures of finance
capitalism will be magnified.

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 Arup THE GLOBAL FINANCIAL CRISIS 377

Such a critique is not revolutionary. It does not dispense with capitalism,

for financial markets and institutions clearly have their uses. Venture capital
helps start up innovative businesses; hedges can be a safeguard for food
producers; bankruptcies restart moribund businesses. Still, crucial social
questions should always be asked whenever markets are being “constructed”
(Bordieu 2006). For example, we might ask, to what extent is the creation of
secondary markets socially desirable? If water rights are to be traded, should
purchase be confined to those who actually use water? Though there were
other reasons, one reason for the rapid rise in food and energy prices during
2008 was the role of speculators in the markets (UNCTAD 2009; Cable
2009).
It has to be an exaggeration to say everyone benefits from financialization.
If the claim was that the new finance technologies would eliminate risk
altogether, a more conventional interpretation is that risks were being
shifted. Such risk shifting seems a feature of post-Fordist capitalism. For
instance, employment is once again placed on an insecure casual basis or
outsourced to contractors. Most pointedly, members of pension and super-
annuation funds are moved from defined benefits to benefits that fluctuate
with markets, and other workers are required to fund their own retirement. If
aspiration or greed attracted some households to the new financial products,
to become minicapitalists (Marazzi 2008), others also made such moves
because their wages declined and they saw no public or civil sector alternative
for securing housing or retirement (Panitch and Konings 2009). Further-
more, when the crisis pervaded the system, it penalized many who were not
represented in the foolhardy financial transactions—workers and businesses
in the real economy—because the financiers were no longer extending credit
or were only doing so on prohibitive terms.
A longer-term solution would find a better balance between finance and
industry, between private and public service provision. It would seek a
political settlement, not just an economic shift. Democratic capitalism relies
on a certain empathy and cooperation between the social partners. Missing
from the corporate-state equation are small producers, workers, unions,
local communities, consumer groups, nongovernment organizations, and
philanthropies. Yet, they figure in law and society studies (Morgan 2005;
Kelsey 2008) and in the inspiring examples Santos and Rodriguez-Garavito
(2005) bring together in studies of globalization from below.
To reembed markets (after Polanyi 1957) and to reconfigure essential
services as public goods requires very locally focused, yet at the same time
globally coordinated, action. Partly, it is the return of the public sector, for
example banks in public hands. Moreover, it depends on public-private
partnerships being formed to work on food, health, and environmental chal-
lenges. And these partnerships benefit from a supportive legal framework.
Thus, work is being done to fashion treaties that civilize trade and invest-
ment. Such treaties raise the status of public goods like social security and
environment sustainability relative to the freedoms and rights that traders

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378 LAW & POLICY July 2010

and investors have obtained (Drahos 2005). They attach requirements that
traders and investors pay respect to more conventional forms of regulation,
such as the requirements for prudential financing and corporate social
responsibility (Picciotto 2009).
Perhaps one final note can underline the point. The world is responding to
a bigger challenge than the GFC, the destruction of the natural environment,
with the creation of another financial market, the carbon emissions trading
system (Taibbi 2009b). Again, our fate is tied to financial instruments,
trading for profit and risk shifting. Yet, it is an enterprise in which we are all
truly implicated; eventually no one can escape the consequences of global
warming. If market mechanisms have their part to play, it is necessary to be
thinking also of clean regulatory technologies such as a tax regime. Better
still, rather than rely on financial incentives proving effective, we must try to
alter production and consumption practices to minimize emissions alto-
gether. Zizek (2009) cites the modesty of Buddhism, culture again. Buddhism
might also reduce the demand for financial credit.

NOTES

1. This piece stems from a miniplenary at the 2009 Law and Society Association
Meeting. We were asked to reflect on the distribution of power between corpora-
tion and state in the wake of the GFC: “In the wake of scandals such as Enron’s
and the collapsed market of secondary mortgages, the Mini-Plenary will ask about
the emergence of self and private regulation, the accountability deficit, the
adequacy of ‘new governance’ as providing solutions to crisis of citizenship,
democracy and growing inequality” (Law and Society Association 2009, 75).
2. In April 2010, the SEC launched a civil fraud suit against Goldman Sachs for
recommending products to clients while it and another of its clients were short
selling them (betting against them).
3. Of course, these plans do not exhaust the proposals that have been made. Propos-
als have come from all directions, and one issue is why some (the United Nations,
for example) seem to have been sidelined.
4. Thus, the creation of secondary markets distances the financiers from responsibil-
ity for the success of the mortgages they have generated, unlike the bank manager
Mr. Deeds, who is embedded in his local community.
5. Including Greenwich, Connecticut.

christopher arup is Professor in the Faculty of Business and Economics, Monash

University, Melbourne, Australia.

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