Deliberate Exposure: Banks as Risk-Sensors

One of the most noticeable trends in the normal way in which financial crises have been problematized has been to put the blame of banks, bankers and the financial system with the investment banks as the end-point. The bank is the main culprit, the system of finance is the main culprit, according to critics. However, we must begin to posit the investor himself as the culprit if we are to deal with the problem of the financial system today; we have to consider that the investor did not suffer from the crisis not because of his money but with his continuous intervention and dialogue with the financial system; the investor has replaced the government as an intervening force in the financial system, but his interventions are even more overbearing than the government's. Rather, we cannot even say that there ever existed a financial system without the investor accounted as being in dialogue with it. We usually associate the investor only with his money, but he also makes strategic decisions with regards to how his money transmits through the system. In other words, we have to look at the strategic position of banks, their evolution in time with regards to these positions, and thereby begin to see how the investor himself is in charge of finance by commanding the different functions and positions of banks. No matter if the finance market these days is worth trillions, it is still the big investor who is in control of the whole financial system; the trillions are a systemic generation with no real value while the investor's billions matter. Even if the complexity in which the financial system has been publicized to us in the media may make it seem that no one is really in charge, and the closest thing to authority is the investment banker himself, this may well be a way in which the investor has deliberately cast himself in the shadows, safe from the spotlight. Also, for the gaze of the big investor, the financial system may not look as complex as it does to the rest of us. And when we consider those media documents which have simplified the crises and the system for us, then we know that there are those big investors with accurate and long-term models of the financial system which can quite accurately predict crashes and failures. In the logic of the investor, investment banks are the nodes in the network through which the entire financial and 'main street' system is controlled...the investor seeks the control of many main street institutions through the medium of the financial system. Different entities within a social system aren't 'just connected' because we live in a 'inter-connected world,' but, they are connected because of the investor's decisions and strategies, the investor is the linkage between the financial system and the social system. When unemployment occurs as a result of a financial crisis, it is not because there is an abstract connection between the financial and the non-financial, but a very real connection facilitated by the investor, who has sought to encroach upon the non-financial through the financial. 

One way to understand how the investor is still in charge is to account for his fluid mobility. The investor is a person (and not a numerical equation), with real movement in and out of the bank, with real demands, real worries, and unpredictable actions/decisions. It can never be known whether he will decide to pull his money out, for instance, and potentially losing billions from an investor is still a big deal. Another important component of the investor is that he can be strategic. As a more powerful man among powerful men, he can move about entire institutions to suit his interests; he even has political clout, cultural clout etc. The making of trillions can thereby be contextualized within the logic of the investor, whose billions are actual wealth in the sense that they can be actually spent by the person (and here we also begin to see that spending wealth, primarily in the form of consumption, is important to keep the financial institutions in check). It is not for protecting the bank against the investor that new, more complex ways of generating money are being developed, but rather, the investor is in charge even of these operations. Indeed, it is in his name, ultimately, that trillions are made. Trillions are only measures to justify certain financial institutions and instruments for the big investor to be assured of investing his money through that bank. Trillions are made to keep the channels lubricated, to keep the staff in check, and, most importantly, to show that the risky is not an occurrence to the bank just yet...to inspire confidence in the investor. Another thing is that the investor makes what can be called 'affirmative decisions': he does not need to act ostentatiously as controlling the financial system, but his money, the way he places his money, does the talking for him. In a simple example, if he puts a billion in a bank and five hundred million in another one, he has connected the two banks without saying a word. It is how he invests his money that controls the financial institution, as well as his direct commands and non-money decisions. 

The big investor is ever aware of the fact of risk, but he may not be aware of the level of activity which animates the risky, or what the implications of risk are to his money; there are a lot of components to the risky which are not known, but risk as it is is inevitable; the financial system inevitably brushes against the risky. We define the risky as anything which is not created by the financial institution and the investor; as everything which the investor cannot control for in his financial model...the unpredictable and the external, but, at the same time, assumed to be static and stable, in the sense that it is considered to be a enclosed entity with the same observable reactions to similarly located institutions. The investor does not so much have faith in those components of the financial system which identify and study risk, but the investor positions those with the most knowledge about risk right next to the risky itself; or rather, those who are next to the risk continuously develop more knowledge regarding it, and continue to demonstrate symptoms due to their exposure. These components of the financial system are to be deliberately exposed, even if there is protection available; indeed, the investor spends as much of his time making sure that these institutions do not get protection as much as others do; there is a great rivalry between the big investor and the investment banker of an exposed bank on this issue. The investor has a motto: one way to avoid risk is to go towards it, to know and feel it, before it can act on oneself. The simplified strategy for the big investor is risk-avoidance (rather than capitalization on risk): how to invest your money, get as close to the risky threshold, but avoid losing money. What we mean is that the risky is an inevitable occurrence in time, it will inevitably come up time and again. Due to this inevitability of risk, the investor has been steadily involved in the compartmentalizing of the world based on risk: for instance, some territories are promising and risk free, but others are riskier. He has studied and looked at risk, but always from a distance, without coming into real contact with it. The investor's main expertise is to anticipate risk and then act in ways in which to completely avoid it. Anticipation and complete avoidance imply two things: that the risk should in some ways be known through contact with an institution of the investor, but that 'the risky' should be localized to that institution only.

It is because of the need for anticipation and avoidance that one of the most important institutions regarding a risky environment is the investment bank. We have always felt that the investment bank has a high degree of autonomy, but we do not consider that investment banks are also highly limited institutions because of their positions with regards to risk; their movements are more carefully monitored than one may think; they do not gamble as much as one would assume.  We come to believe the media which posits the investment bank itself as protected from risk. But, if the investment bank is protected, then what is in contact with the risky? How does the financial system know when it is close to the risky? Basically, the theory we propose here is that there are a few investment banks in the world which have been deliberately positioned in such a way as to have maximum exposure to the risky. They are to have this exposure to the risky so that they become indicators and alarms for when risk levels get too high. It is equivalent to a small part of the investor's institutions committing a gradual suicide to save the rest; or, certain investment banks walk a tight rope. This would have been quite fine, but for the fact that the recent financial crisis will make more and more banks deliberately exposed, as the investor gets more wary of risk, but less aware of how to avoid it. We predict a lot of mini-crises to come in the future frequently, as more and more exposed banks sound their alarms, or rather more banks are deliberately posited beside exposure, and the investor gets closer to the risky but  is overdependent on the model of risk-sensing...what this could do, however, is discourage a lot of potential investors, smaller investors, even entrepreneurs, from having faith in the financial system. There is the possibility of collapse of the financial system as people seek more direct ways towards the investor. There is a lack of trust in banks; people do not know which ones are exposed and generally are disappointed by any degree of exposure. We do not have financial crises because one crises triggers another one 'naturally' as part of a domino effect, but because of real investor decisions that take place between the two crises. People assume that nothing takes place in between the nodes of a financial system, but the investor is continuously transforming the system, so much so that what appears as a system has only been marketed as such for the people to let them feel a sense of security.    

Investors control the strategic position of banks, regardless of national boundaries that delineate which banks belong to what populations. The investor is not interested in sharing the accumulation of wealth between banks, but each bank occupies a different symbolic position, a fact which does not become clear to the public who hears only the words 'investment bank' attached to each bank; each bank is in fact particularized and unique. Moreover, each bank or financial institution, in isolation, is more important to preserve because it is a micro-model of a working system. So, the investor does not want to have a exposed arm/entity within a bank, which when lost will fragment the bank and never give the bank a sense of stability, but he will rather have a whole bank, a whole institution, as exposed to the risky. The investor's role in connecting banks could explain a peculiar occurrence in the 2008 financial crisis: when the American bank Lehman Brother's was failing, the bank Barclay's from England was around to supposedly buy the bank and save it from collapse. Why was Barclay's in a boardroom comprised of bankers from the American financial system? What allowed Barclay's, a bank all the way across the world in England, this unprecedented access to knowledge that Lehman was failing? Precisely the investor, who had linked the two banks. (Any system is in contact with non-systemic elements, such as the investor, who facilitates a process between the elements of that system...the non-systemic, the investor, is partially within the system, not as a node but as a distortion of the lines) Lehman's failure was only expected due to its exposure, designed deliberately, to the risky. Barclay's wasn't going to buy Lehman's, we believe, but only check to see what the risky exactly was, that is, to know the content of the risky, and then to act accordingly to save the investor his money. The investor who had connected two banks, now disconnected them, and in this act of using his agency, the financial crisis contained a human element which many do not account for. The important thing for the future is that the investor will once again form financial institutions that are deliberately exposed to risk, to serve as risk sensors, but the problem is that risk sensors themselves are becoming very big and perhaps even more sensitive. The financial system, in an ironic way, has become more fragile the more risk-sensors that are in place.