Dancing the arrhythmia of financial derivatives

I've just started to dip into Gillian Tett's 2009 narrative Fool's Gold: How unrestrained greed corrupted a dream, shattered global markets and unleashed a catastrophe. Tett's book tells how J.P Morgan bankers "developed an innovative set of products with names such as 'credit default swaps' and 'synthetic collateralized debt obligations' which fall under the name of credit derviatives" in the 1990s and 2000s. Ok, the subtitle is a bit 'tabloid screamer' and any 'dream' in the world of financial capital is hardly going to be pure or innocent prior to its corruption by 'bad people'. But I'm interested in gaining a better understanding of contemporary finance and financial derivatives, in particular, and Tett--whose PhD was in social anthropology--has written a book that comes with a reputation for offering graspable explanations of phenomena in the arcane world of credit derivatives.

At this early stage of reading, I'm getting my head around the definitions.

As the name implies, a derivative is [. . .] nothing more than a contract whose value derives from some other asset -- a bond, a stock, a quantity of gold. Key to derivatives is that those who buy and sell them are each making a bet on the value of the asset. Derivatives provide a way for investors to protect themselves, for example, against a possible negative future price swing, or to make high-stakes bets on price swings for what might be huge payoffs. At the heart of the business is a dance with time.

Say, on a particular day, the pound-to-pound exchange rate is such that one British pound buys $1.50. Someone who will be making a trip from England to the US six months from now and thinks the exchange rate may become less favourable might decide to make a contract to ensure that he can still buy dollars at that rate just before his trip. he might even enter into an agreement to exchange 1,000 [pounds] with a bank in six months' time, at $1.50, no matter what the actual exchange rate is by then. One way to arrange the deal would be to agree the deal must happen, no matter what the actual exchange rate is at the time, and that would be a future. A variation would be that the traveller agrees to pay a fee, say $25, to have the option to make the exchange at the $1.50 rate, which he would decide not to exercise if the rate actually became more favourable. (10-11)

In this next set of quotes, Tett is recounting the emergence of "a bold new era of derivatives innovation" "in the late 1970s" (11).

[T]he best way to insulate against such volatility [in currency prices and inflation, as was present in the post-1970s period of the breakdown of the Bretton Woods system of pegged exchange rates and inflationary pressures caused by the OPEC oil shocks] was to buy diversified pools of assets. If, fore example, a company with business in both the US and Germany was concerned about swings in the dollar-to-Deutschmark rate, it could protect itself by holding equal quantities of both currencies. Whichever way the rate might swing, the losses would be offset by equal gains. But an innovative way to protect against swings was to buy derivatives offering clients the right to purchase currencies at specified exchange rates in the future. Interest rate futures and options burst onto the scene, allowing investors and bankers to gamble on the level of rates in the future.

Another hot area of the derivatives trade [. . .] was the highly creative business [. . .] known as 'swaps'. In these deals, investment banks would find two parties with complementary needs in the financial markets and would broker an exchange between them to the benefit of both, earning the bank large fees.

Say, for example, two home owners have $500,000 ten-year mortgages, but one has a floating rate deal, while the other has a rate fixed at 8 per cent. If the owner expects the rates to fall, while the other owner expects them to rise, then rather than each trying to get a new loan, they could agree that each quarter, during the life of their mortgages, they will 'swap' their payments. The actual mortgage loans do not change hands, they stay on the original banks' books, making the deal what the bankers call 'synthetic'. (12)

And the final quote for the time being concerns what is the central concept of contemporary finance capital: risk. For any British readers, you'll probably already hearing that a hung parliament and minority government are bad for business because business doesn't like uncertainty: it proposes too great a risk. Coming from Tasmania--a small state at the far south-east end of Australia--our proportional representation system of voting has recently allowed a symmetrically hung lower house parliament to be voted in: 10 Labor [sic], 10 Liberal [cf. American Republicans and British Tories] and 5 Green.

Prior to the election, voters here were warned that a hung parliament would be bad for business and the delay in establishing a minority Labor government with Green support was met with cries from business groups that capital investment in the state was being lost due to this uncertainty. But if, as Foucault cogently argues, neoliberalism is that form of governmentality in which the human being is recast as an entrepreneur of him or herself, then it should follow that the rewards from investing one's own human capital in such a system are commensurate with the level of risk involved. Surely, successful entrepreneurs are those best able to live with and take advantage of risks and uncertainty?

According to Tett, however, capital wants it both ways:

Players also had different motives for wanting to place bets on future asset prices. Some investors liked derivatives because they wanted to control risk, like the wheat farmers who preferred to lock in at a profitable price [when making a futures contract]. Others wanted to use them to make high-risk bets in the hope of windfall profits. The crucial point about derivatives was that they could do two things: help investors reduce risk or create a good deal more risk. Everything depended on how they were used, on the motives and skills of those who traded in them. (14)

This doubleness in the function of derivatives and in the discourse of contemporary finance capital reminds me of one of Zygmunt Bauman's key ideas in his long sociological essay Liquid Modernity [Link here is to a pdf file, containing a lecture by Bauman, where he writes on the idea of liquid modernity. See here, for the book]. For Bauman, the power of the global elite resides not just in their finance-enabled capacity to not get stuck in any one place; to move quickly and flexibly around the world, making lightening-fast investments, exploiting opportunities before others even know they exist, able to avoid legal systems. Their power lies also in how dense and solid they can become, how they can materialize and make the world material to their needs, desires and drives. Neoliberal techniques of flexibility and fluidity are, in Bauman's understanding, complemented by something like a business sublime: an awesome, monolithic, material power that digs itself into a territory, which it defends and advances.

Is it the capacity to do both, to be both solid and liquid, to seek to eliminate risk and cultivate it, that makes contemporary capitalism so disorienting and difficult to understand? Coming to terms with the conceptual form (their temporality, in particular) of what I think are neoliberal capitalism's leading instruments--financial derivatives--should help to better grasp the present conjuncture and ways out of and through it. If, as Tett writes, "[a]t the heart of the business is a dance with time", then perhaps it is the rhythms of these forms that we need to hear and feel in order to play them differently; in ways that take the pulse of all those times that are, have and will be abjected.