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Private-Public Puzzles: Inter-firm competition and transnational private regulation

2006; Taylor & Francis; Volume: 11; Issue: 2 Linguagem: Inglês

10.1080/13563460600655524

1469-9923

Daniel Mügge,

Global Financial Regulation and Crises

Click to increase image sizeClick to decrease image size Notes 1. A. Claire Cutler, Virginia Haufler & Tony Porter (eds), Private Authority and International Affairs (SUNY Press, 1999). 2. On the theme see, for example, Susan Strange, The Retreat of the State (Cambridge University Press, 1996). 3. Prominent works include Richard Higgott, Geoffrey Underhill & Andreas Bieler (eds), Non-state Actors and Authority in the Global System (Routledge, 2000); Karsten Ronit & Volker Schneider (eds), Private Organizations in Global Politics (Routledge, 2000); Daphne Josselin & William Wallace (eds), Non-State Actors in World Politics (Palgrave Macmillan, 2001); Rodney Bruce Hall & Thomas Biersteker (eds), The Emergence of Private Authority in Global Governance (Cambridge University Press, 2002). 4. John Braithwaite & Peter Drahos, Global Business Regulation (Cambridge University Press, 2000). 5. For finance, see, for example, Richard Herring & Robert Litan, Financial Regulation in the Global Economy (Brookings Institution, 1995). 6. Cf. George Stigler, ‘The Theory of Economic Regulation’, Bell Journal of Economics, Vol. 2, No. 1 (1971), pp. 113–21. 7. Tony Porter, ‘Hegemony and the Private Governance of International Industries’, in Cutler et al. (eds), Private Authority and International Affairs, pp. 257–82. 8. Cf. endnotes 1 and 3. 9. Karsten Ronit & Volker Schneider, ‘Private Organizations and Their Contribution to Problem-Solving in the Global Arena’, in Ronit & Schneider (eds), Private Organizations in Global Politics, p. 8. 10. Roderick Martin, ‘The Concept of Power: A Critical Defence’, British Journal of Sociology, Vol. 22, No. 3 (1971), pp. 240–56. For international relations, see Stefano Guzzini, ‘Structural Power: The Limits of Neorealist Power Analysis’, International Organization, Vol. 47, No. 3 (1993), pp. 443–78; Stefano Guzzini, ‘The Use and Misuse of Power Analysis in International Theory’, in Ronen Palan (ed.), Global Political Economy (Routledge, 2000), pp. 53–66. 11. Hugh McLachlan, ‘Is ‘Power’ an Evaluative Concept?’, British Journal of Sociology, Vol. 32, No. 3 (1981), pp. 392–410. 12. See Steven Lukes, Power: A Radical View (Macmillan, 1974). Drawing on Lukes, Fuchs has also applied this threefold distinction. Doris Fuchs, ‘The Role of Business in Global Governance’, in Stephan Schirm (ed.), New Rules for Global Markets (Palgrave Macmillan, 2004), pp. 133–54. 13. Winfried Ruigrok & Rob Van Tulder, The Logic of International Restructuring (Routledge, 1995), ch. 7. 14. Jean-Christophe Graz, ‘How Powerful are Transnational Elite Clubs? The Social Myth of the World Economic Forum’, New Political Economy, Vol. 8, No. 3 (2003), pp. 321–40. 15. Cf. Sobel's distinction between international (here, transnational) and multi-domestic markets. Andrew Sobel, Domestic Choices, International Markets: Dismantling National Barriers and Liberalizing Securities Markets (University of Michigan Press, 1994), p. 17f. 16. Stephen Krasner (ed.), International Regimes (Cornell University Press, 1983). 17. A. Claire Cutler, ‘Private International Regimes and Interfirm Cooperation’, in Hall & Biersteker (eds), The Emergence of Private Authority in Global Governance, pp. 23–40; A. Claire Cutler, Virginia Haufler & Tony Porter, ‘The Contours and Significance of Private Authority in International Affairs’, in Cutler et al. (eds), Private Authority and International Affairs, pp. 333–76. 18. Stigler, ‘The Theory of Economic Regulation’; Gary Becker, ‘A Theory of Competition among Pressure Groups for Political Influence’, Quarterly Journal of Economics, Vol. 98, No. 3 (1983), pp. 371–400; Sam Peltzman, Michael Levine & Roger Noll, The Economic Theory of Regulation after a Decade of Deregulation, Brooking Papers on Microeconomics (1989), pp. 1–59. 19. Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups (Harvard University Press, 1965). 20. In financial and business services, the millions Wall Street firms spend on lobbying support this intuition. For an analysis of service providers' role in financial regulation, see Sobel, Domestic Choices, International Markets; Stephen Harris, ‘Regulating Finance: Who Rules, Whose Rules?’, Review of Policy Research, Vol. 21, No. 6 (2004), pp. 743–66. 21. Neil Fligstein, ‘Markets as Politics: A Political-Cultural Approach to Market Institutions’, American Sociological Review, Vol. 61, No. 4 (1996), pp. 656–73; Neil Fligstein, The Architecture of Markets: An Economic Sociology of Twenty-First Century Capitalist Societies (Princeton University Press, 2001). 22. Fligstein, The Architecture of Markets, p. 5. 23. Note that, as used here, ‘conception of control’ does not refer to the control of (parts of) a firm through corporate networks – a usage popularised by Ruigrok and van Tulder. See Ruigrok & Van Tulder, The Logic of International Restructuring. 24. For an excellent empirical illustration of these mechanisms in financial services, see Augar's insider account of British investment banking since the early 1980s. It shows how both informal rules and the prevailing market order were widely accepted and remained unchallenged until upset by the Big Bang. Philip Augar, The Death of Gentlemanly Capitalism (Penguin Books, 2000). 25. Michael Clarke, Regulation: The Social Control of Business between Law and Politics (Macmillan, 2000), p. 40. 26. Arguably, much business regulation history can be read this way. Cf. Braithwaite & Drahos, Global Business Regulation. 27. Ibid., p. 144ff. 28. This includes the privately set terms of extra-judicial settlement procedures, such as in commercial disputes. Firms will only support such mechanisms as long as the benefits of staying out of the public domain in general outweigh the costs of facing disadvantageous settlement results. 29. On the ambiguity of regulatory solutions in financial markets, see Henry Laurence, Money Rules: The New Politics of Finance in Britain and Japan (Cornell University Press, 2001), p. 26ff. 30. To give examples, Deutsche Bank maintains DB Research, a sizeable ‘think tank’. Deloitte, the auditing firm, manages what is acknowledged as the best online resource on International Accounting Standards, http://www.iasplus.com, where opinions, policy advice and information become indistinguishable. 31. Rod Rhodes, Understanding Governance (Open University Press, 1997). 32. James True, Bryan Jones & Frank Baumgartner, ‘Punctuated Equilibrium Theory: Explaining Stability and Change in American Policy Making’, in Paul Sabatier (ed.), Theories of the Policy Process (Westview Press, 1999), pp. 97–115. 33. Clarke, Regulation. 34. Stephen Haggard & Beth Simmons, ‘Theories of International Regimes’, International Organization, Vol. 41, No. 3 (1987), pp. 491–517; Andreas Hasenclever, Peter Mayer & Volker Rittberger, Theories of International Regimes (Cambridge University Press, 1997). 35. Porter, ‘Hegemony and the Private Governance of International Industries’. 36. Frank Partnoy, ‘The Siskel and Ebert of Financial Markets: Two Thumbs Down for the Credit Ratings Agencies’, Washington University Law Quarterly, Vol. 77, No. 3 (1999), pp. 619–712. The original accreditations were given in 1975. The few accreditations the Securities and Exchange Commission gave later (for example, to the investment bank Duff & Phelps in 1982) never allowed new entrants to even dent the market leadership of the three incumbents. 37. I am indebted to one of the anonymous referees for drawing my attention to ‘monitored self-regulation’. 38. Obviously, many protectionist measures are in this category. However, the majority of them are irrelevant to this discussion. Even if negotiated bilaterally or multilaterally (rather than imposed unilaterally), these measures do not apply to the integrated marketplace but to individual countries. They are not incorporated in the general rule set applying transnationally. Therefore, they are outside of the scope of transnational regulation as understood here. In contrast, those ‘protectionist’ measures that are relevant here are those that are reflected in the rule set as it applies to all cross-border market activities in a given segment. 39. For example, Marc Busch, Trade Warriors: States, Firms, and Strategic Trade Policy in High-Technology Competition (Cambridge University Press, 2001). 40. One case roughly fitting this description is International Accounting Standards (IAS) and their application in the EU. But IAS are neither product nor production standards and would therefore not be expected to fit the logic described here. 41. As pointed out, the stability of a population of producers and of the conception of control are closely linked. They are therefore not two independent variables. 42. Porter, ‘Hegemony and the Private Governance of International Industries’, p. 258. 43. Ibid., p. 264. 44. Technically, the term ‘underwriter’ refers to its pledge to buy the bonds it cannot sell to third parties itself at the price previously agreed. In practice, ‘underwriter’ is used as a label for investment banks offering all the mentioned services. Eurobonds are bonds (tradable chunks of debt) sold outside the issuer's home country. Normally, the currency is different from the issuer's ‘home’ currency and ‘professional investors’ are the only eligible buyers. The Eurobond market originated in 1963 when S. G. Warburg raised $15 million for the Italian Autostrada in London. Before the year's end, $148 million of such deals were to be completed. By 1968, the market had risen to $3 billion. Since then, yearly issuance has come to be measured in hundreds of billions per year. Ingo Walter & Roy Smith, High Finance in the Euro-Zone: Competing in the New European Capital Market (Pearson Education, 2000), p. 68f. 45. Ingo Walter, Global Competition in Financial Services (American Enterprise Institute/Ballinger, 1988). 46. Similar, if less extreme, patterns prevailed among other important players such as Nomura, Banque Paribas, Daiwa, Nikko Securities, Morgan Stanley and Salomon Brothers. 47. For the 1985 and 2003 figures, see Walter, Global Competition in Financial Services, p. 93; Thomson Financial, ‘All about Equities’, press release, New York, 30 September 2003. For comparison, Citigroup has ‘inherited’ the position of Salomon Brothers which it acquired and incorporated (by then as Salomon Smith Barney) in the late 1990s. In the sample period, the first nine months of 2003, ‘international bonds’ accounted for more than half of the global debt issues on capital markets. Thomson Financial, ‘Slip and Fall’, press release, New York, 30 September 2003. 48. Eric Helleiner, States and the Reemergence of Global Finance: From Bretton Woods to the 1990s (Cornell University Press, 1994). 49. I owe this point to one of the anonymous referees. 50. Gary Burn, ‘The State, the City and the Euromarkets’, Review of International Political Economy, Vol. 6, No. 2 (1999), pp. 225–61. These ‘offshore’ financial flows are offshore in the sense that they remain strictly separated from the regular local financial flows, that is are handled through a different set of accounts. UK authorities could then waive oversight of such funds on the grounds that these never entered the British financial system – even if a City bank managed them. As capital mobility restrictions have been successively eased over the two recent decades, the practical relevance of the offshore-onshore distinction has decreased somewhat. 51. Maggie Urry, ‘New advisory body for issuers seeks to add order to the market’, Financial Times, 19 February 1985, p. 21. 52. Cf. Frank Partnoy, Infectious Greed: How Deceit and Risk Corrupted The Financial Markets (Times Books, 2002). 53. Urry, ‘New advisory body’. 54. Barry Riley, ‘Weighing up the Eurobond market’, Financial Times, 10 July 1985, p. 15. 55. Simon London, ‘Small firms welcome approach by OFT’, Financial Times, 18 July 1991, p. 23; Simon London, ‘Euromarkets put brave face on unwelcome questions’, Financial Times, 22 July 1991, p. 19. 56. For clarity, it should be emphasized that the rule-making processes for international accounting standards are distinct from those for auditing standards, even though both are arguably dominated by the Big Four accounting firms. 57. As of 2004, of listed US companies with sales of over $250 million, a full 97 per cent were audited by these four. All top 100 British companies are audited by them, and they are believed to hold a hefty 70 per cent of the European auditing market by fee income. To give an impression of the size of the market: average 2003 revenues of each of the Big Four firms were a little more than $13.7 billion; on average, each had more than 110,000 employees. The Economist, ‘Called to account’, 18 November 2004. 58. Cf. ‘Crime and punishment’, The Economist, 25 June 2005. Ironically, the US situation has reached a point where an indictment of an accounting firm is becoming unlikely even in the case of serious wrongdoing. As William Donaldson, the head of the Public Company Accounting Oversight Board admitted, he has ‘no clue’ what to do if another firm were to collapse as Arthur Andersen did. The latter's demise, however, was triggered by the criminal indictment it received (long before any conviction) that had triggered an exodus of clients. Thus, when KPMG was under scrutiny in August 2005 for selling tax evasion schemes conflicting with US law, both the firm and the justice department were at pains to find a form of penalty that would circumvent criminal charges. In effect, KPMG's former employees (rather than the firm itself) were charged. KPMG itself was put on ‘probation’ but still ended up paying almost $456 million in fines. Ironically, market concentration thus forms an impediment against the kind of punishments for malfeasance that could lead to a firm's disintegration. Barney Jopson, ‘Threat of “Big Four” collapse baffles regulator’, Financial Times, 28 September 2005, p. 26; Andrew Parker, ‘10 more charged in KPMG tax fraud case’, Financial Times, 18 October 2005, p. 30. 59. ISA are not legally binding. With national accounting associations as its members – many of which are also involved in national standard setting – standards developed in the IAASB cascade down to the national level. More recently, however, ISA have been integrated in the ‘Compendium of Standards and Codes’ of the Financial Stability Forum. 60. At the time, those eight companies were KPMG, Price Waterhouse, Coopers & Lybrand, Ernst & Young, Grant Thornton, Arthur Andersen, Deloitte Touche Tohmatsu and BDO International. Jim Kelly, ‘An independent line’, Financial Times, 28 November 1996, p. 12. 61. ‘Top firms agree European audit blueprint’, The Accountant, January 1997. 62. ‘Commission backs self-regulation for auditors’, European Accounting Bulletin, 27 May 1998. 63. ‘Firms told to clean up audit’, Accountancy, 31 July 2000. Actually, because Price Waterhouse and Coopers & Lybrand had merged in the meantime, the GSC had seven founding members, rather than the eight of the ECG. 64. Gary Hinks, ‘Shifting the balance of power’, Accountancy Age, February 2000, p. 7. 65. See http://www.ifac.org/TransnationalAuditors/index.tmpl (accessed 15 March 2005). 66. Financial Stability Forum, Ongoing and Recent Work Relevant to Sound Financial Systems, Basle, 2 April 2004. 67. PIOB members include the World Bank, the International Association of Insurance Supervisors, the Financial Stability Forum, the Basle Committee of Banking Supervision and the International Organization of Securities Commissions. 68. Fédération des Experts Comptables Européens, ‘FEE Calls for European Co-ordination of Oversight of the Audit Profession’, press release, Brussels, 15 September 2003. 69. Andrew Parker, ‘EU urged to set up an audit watchdog’, Financial Times, 13 September 2003, p. 21. 70. Derivatives are financial instruments whose interest is ‘derived’ from another asset, such as stocks, commodities or government bonds. They include future contracts, options, swaps and myriad combinations of these. Derivatives come in two groups – exchange-traded ones and over-the-counter (OTC) derivatives. The former are highly standardised. OTC derivatives, in contrast, are basically direct contracts between two parties, custom-tailored to their needs. This section focuses on the former variety and the services provided to traders through listing, quoting, potentially clearing and supervising trading activity. 71. The third large but recognisably second-tier player in Chicago is the Chicago Board Options Exchange (CBOE). 72. Deborah Hargreaves, ‘Chicago giants fight to keep their share’, Financial Times, 2 July 1990. 73. Jan Wagner, ‘Chicago exchanges shake off electronic reluctance’, The Banker, February 2003. 74. Vincent Boland, ‘Chicago exchanges to fight Eurex’, Financial Times, 20 June 2003, p. 29. 75. Committee of European Securities Regulators, ‘U.S. Commodity Futures Trading Commission and the Committee of European Securities Regulators Announce Trans-Atlantic Cooperation Initiative and Statement of Intent to Develop an Action Plan on Cross Border Issues’, press release, Paris, 21 October 2004. 76. Commodities and Futures Trading Commission, ‘The U.S. Commodity Futures Trading Commission and the Committee of European Securities Regulators Met to Facilitate Transatlantic Derivatives Business and to Appoint Task Force to Develop Further Efforts’, press release 5049–05, Chicago, 14 February 2005. 77. Committee of European Securities Regulators, ‘CESR Chairman Visits US CFTC Chairman and Attends Global Markets Roundtable’, press release, Paris, 14 December 2005. 78. HM Treasury, ‘EU and US Agree Priorities for Future Cooperation on Financial Markets Regulation’, press release, 2 December 2005. The importance of a transatlantic arrangement regarding trading venues has been underscored by the European Commission. Confidential interview with a EU Commission official on 9 December 2005. See also European Commission, White Paper on Financial Services Policy 2005–2010, Brussels 2005.