Janine Wedel - Unaccountable - How Elite Power Brokers Corrupt Our Finances, Freedom, and Security

Technology, The Decider

Technology and automation have played a role in both creating Frankenstein financial instruments and in fostering unaccountability in still other ways. Complex derivatives, collateralized debt, and anything termed “exotic” would have been nearly impossible to generate and proliferate without computer technology doing the slicing, dicing, collating, and near-instantaneous transfer of information.

In removing the human dimension and the accountability it can provide, the computer models used in the financial industry (while promising to minimize risk) may actually have introduced risk into the system, some analysts argue. 17As Tett writes, the “opaque and complex” tools bankers used, and the very way they “disbursed risk across the system,” actually increased risk. 18The so-called Value at Risk (VaR) proprietary models were devised to assess risk within a financial organization and came into wide use to help satisfy regulatory regimes. 19VaR was the preferred risk measure adopted by the so-called quants (short for quantitative), mathematicians and other pedigreed number-crunchers who held sway in the decade leading up to the financial crisis. As the smartest guys in the room, quants believed that they could accurately predict risk; but as we know now, this was one test they flunked. As the New York Times puts it, “VaR’s great appeal, and its great selling point to people who do not happen to be quants, is that it expresses risk as a single number, a dollar figure, no less.” But hedge fund billionaire David Einhorn summed up VaR as “. . . relatively useless as a risk-management tool and potentially catastrophic when its use creates a false sense of security among senior managers and watchdogs. This is like an air bag that works all the time, except when you have a car accident.” 20The 2008 crash was the car accident. 21

Since 2008, some critics have argued that letting the banks use their own proprietary models caused them to underestimate risk and shut out the more subjective assessments based on experience and “gut.” In fact, one firm averted some of the problems that plagued others by putting human agency back into the equation. The company asked top managers in 2007 how things “felt.” Their gut said “danger,” and the firm, Goldman Sachs, began pulling back on risky securities. 22By contrast, despite calls to rein in VaR, faulty VaR models are blamed in part for JPMorgan Chase’s multi-billion-dollar loss in 2012 (thanks to the trader nicknamed the London Whale). 23

The decisionmakers in this unaccountable system have their reasons and rationalizations, often cloaked in the silo-speak or lingo of their own bailiwicks. Indeed, in this era of unmatched complexity and ever-permuting technologies, the worlds of high finance and other such realms are too difficult for us lay people to understand; the experts will take care of it for us then. While both were invented by (and ostensibly for) humans, you wouldn’t know that from the insiders. Tett describes bankers at an exclusive conference thusly: 24

The way they talked about credit was to emphasize the numbers and to quite deliberately exclude any mention of social interaction from the debate and discussion. In the first couple of days I sat there, they almost never mentioned the human borrower who was at the end of that securitization chain. They were also very exclusive. There was a sense that “we alone have mastery over this knowledge.”

This “complexity narrative,” as one anthropologist of finance calls it, 25

[is one] that empowers the [bankers and their lobbyists] who can say, “listen Congress, listen policymakers, we’re the ones who know what’s going on. So just back off. There’s no way you can understand unless you have a degree in advanced math or advanced physics.”

Damning evidence of this kind of hubris can be seen in a statement to Congress in 1998—when the derivatives time bomb might have been defused—from then-deputy Treasury Secretary Lawrence Summers. He clearly internalized the idea that the Wall Street pros knew best: 26

. . . the parties to these kinds of contract are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies.

I spoke in 2014 with Sony Kapoor, a finance think-tanker and adviser to governments and global institutions. He talked about the “technocratic competence idea” that reigns supreme. This can be seen here in Summers insisting that only the parties being regulated (banks), and those like himself who have direct experience with the regulated, are the ones “eminently capable” of doing the regulating. 27

Players like Summers no doubt believe they have unique information, expertise, and the personal integrity to act on our behalf, even when their actions leave accountability in the dust. But with such players obviously not worthy of our trust, we, the public, know not where to turn.

Deniability

Unaccountability can thrive wherever responsibility can be denied. When lines of authority are clear; when players wear one hat, not ten; when systems are less complex and have fewer silos, it is much harder for those involved to insist “It wasn’t me” when things go wrong. But none of those conditions exist any longer. We are dealing with systems that are complex on a mind-boggling scale. As William White, who observed the unfolding of the financial crisis up close, put it to me: “Almost by definition, those contributing to [complex systems] can claim the failings of others are to blame.” 28

Accountability is at risk wherever deniability is built into the system. Computer models make it easier to deflect blame when those models fail to mitigate risk, as they did spectacularly in 2008. They take a large degree of human agency out of the all-important assessments of how much risk a firm is actually taking. And who is responsible here? It’s certainly easier to say “the computer model was wrong” than “I was wrong.” Human agency and moral thinking have been crowded out by technology.

Deniability is built in to the system in still other ways. Today’s endless delegation to contractors and subcontractors, and to people whose status as inside or outside the system is unclear, is custom-made for deniability. 29Accountability rules for government contractors are typically more lenient than for those employed directly by government. Yet outsourcing is a sizable part of how the U.S. government (and many other governments at many levels) gets its work done. 30

“Accountability” primarily to the volume of deals or to the checklist invites deception. High-finance bankers and even Carol in Ohio cannot be totally straight about the limits of their ability to answer to the client, even as they most likely have never given much thought to it. Neither is the investment banker always forthcoming about what s/he knows about the quality of the investment s/he is selling. Unlike the (anti-)sales clerks and bureaucrats of the communist era, who were often the antithesis of customer-friendly and sometimes even aggressively hostile, today’s functionaries are trained to appear to please and placate the customer even when they know they cannot help or when the financial package they are selling may do harm. The brash, or even bullying, attitude I witnessed under communism is, in effect, more honest. Deception, whether conscious on the part of the deceivers or not, can’t help but foment public distrust.

We have trouble wrapping our heads around this new unaccountability because Carol and others working in these organizations are not bad people and cannot be perceived as corrupt. But the system in which they operate, incredibly, is set up to be even less accountable than the byzantine communist bureaucracy of 1980s Poland.