2.3 Derivatives and American Financial Power
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A University of Sussex DPhil thesis Available online via Sussex Research Online: http://sro.sussex.ac.uk/ This thesis is protected by copyright which belongs to the author. This thesis cannot be reproduced or quoted extensively from without first obtaining permission in writing from the Author The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the Author When referring to this work, full bibliographic details including the author, title, awarding institution and date of the thesis must be given Please visit Sussex Research Online for more information and further details Deriving a normal country Italian capitalism and the political economy of financial derivatives Andrea Lagna Submitted for the degree of Doctor of Philosophy in International Relations University of Sussex January 2013 UNIVERSITY OF SUSSEX ANDREA LAGNA – Doctor of Philosophy in International Relations DERIVING A NORMAL COUNTRY. ITALIAN CAPITALISM AND THE POLITICAL ECONOMY OF FINANCIAL DERIVATIVES Summary The financialisation literature is an invaluable resource to explore the expansion of finance in modern capitalism. However, the debate focuses on the US and the UK extensively, whilst being too general with regard to other contexts. This inattention hinders a proper understanding of financialisation in its di↵erential nature across societies. To rectify such limitation, this thesis advances a theoretically controlled and historically informed study about a striking instance of financial excess outside the Anglo-American scenario: derivatives in Italy. The work argues that scholars are inattentive to the heterogeneous nature of financialisation because they conceptualise the power of finance as entrenched in socio-economic structures. As a result, they underplay the actors who adopt finan- cialised practices di↵erentially. Premised on this critique, the thesis advances an agency-centred approach that analyses power from the perspective of agents. In so doing, it examines the diverse traits of financialisation in relation to the specific power struggles in which actors are involved. Drawing on this method, the work shows that financialisation studies fail to ap- preciate how key social forces deployed derivatives for political-strategic purposes in the Italian context. During the 1990s, a neoliberal-reformist alliance of pro-market technocrats and centre-left politicians got to power and pushed for Italy to join EMU. This project functioned as an external limit on the domestic political-economic es- tablishment which relied on high public debt, the vast state-owned enterprise and the opaque corporate-governance regime. In brief, citing a slogan widely used in those days, the neoliberal-reformist coalition attempted to make Italy a ‘normal country’ in Europe. Derivatives were crucial in this regard because they helped the Italian government comply with the EMU admission criteria. First, reformists encouraged hedge funds to arbitrage the interest-rate convergence between Italian and German bonds via OTC derivatives markets. Second, they arranged a currency swap that window-dressed the 1997 deficit. The thesis concludes by examining how other actors adopted derivatives to deal with the neoliberal-driven modernisation of Italy. It studies how the Agnelli family used equity swaps to secure ownership over FIAT and how municipalities manipu- lated budget restrictions through interest rate swaps. Acknowledgments During my years at Sussex, I have been so fortunate to benefit from the supervision of Samuel Knafo and Benno Teschke. They have helped me unpack the complexities of finance and critical thought with endless patience. I am truly grateful to them as they both represent a source of inspiration for my future works. Without them, this thesis would not exist. Furthermore, I have had the pleasure of assisting Kees van der Pijl in teaching Inter- national Political Economy. He has inspired me and generations of students with his intellectual achievements, political commitment and friendship. He is an example to follow. The Department of International Relations and the Centre for Global Political Econ- omy at Sussex represent hubs of knowledge from which I have benefited enormously. I thank: Ben Selwyn, Kevin Gray, Andreas Antoniades, Fabio Petito, Kamran Matin, Justin Rosenberg, Louiza Odysseos and Anna Stavrianakis for their very much ap- preciated help in my research and teaching activities. The working group on Political Marxism and the Social Sciences has provided thought-provoking meetings which have stimulated the writing of many aspects in this thesis. I am filled with gratitude for all its participants. Of course, my stay in Brighton has been very lively and unique thanks to an in- credible group of D.Phil. colleagues. I thank: Yuliya Yurchenko, Clemens Ho↵mann, Maia Pal, Ste↵an Wyn-Jones, Matthieu Hughes, Richard Lane, Cherine Hussein, Synne Laastad Dyvik, Sam Appleton, Adam Fishwick, Nuno Pires, Andrej Gomez, Miguel Riveira, Luke Cooper, Bhabani Shankar Nayak and Lena Nare. A special acknowledgment goes to: Duncan Wigan, Earl Gammon and Or Raviv for their se- nior mentoring; Ishan Cader, George Moody and Mike Drymoussis for sharing the everyday life of Roedale Road. Ialsowishtothank:SonjaCoquelinformakingmydaysmorerevolutionary;Sarah Cummins, Annie Kay and Anna Bernstein for such fun moments in Windlesham road; Hardy Bazyani for hosting me with great Kurdish food and far-sighted com- ments; Ernesto Gallo because, after all, he was the first one suggesting me to go for this D.Phil. programme. Besides the people at Sussex, this thesis has also benefited from external support. The COST Action IS0902 “Systemic Risks, Financial Crises and Credit – the roots, dynamics and consequences of the Subprime Crisis” has allowed me to discuss parts of my work. I thank all its members and particularly: Oliver Kessler, Bob Jessop, Charlie Dannreuther, Pascal Petit, Marc Lenglet, Mathis Heinrich, Benjamin Wil- helm and Reijer Hendrikse. I am especially grateful to the committee of this COST Action for sponsoring my research period at the Copenhagen Business School. Here, IhavereceivedthehelpofnumerouspeoplefromtheDepartmentofBusinessand Politics. Over the course of the doctoral research, I have also benefited from feedback at several workshops and conferences. In particular, I thank: the securitisation work- shop in Amsterdam – organised by Manuel Aalbers and Ewald Engelen (October 15-16, 2012); the IIPPE working group on financialisation at the joint conference AHE, IIPPE, FAPE in Paris (July 5-7, 2012); the EAEPE Ph.D. school in Rome – organised by Pasquale Tridico and Sebastiano Fadda (July 4-8, 2011). Finally, I am truly indebted to my parents, Anna and Giuseppe, for their uncondi- tional support. To them, I show my deepest gratitude. Of course, my biggest love goes to Mirjam B¨udenbender who blossoms in my life as the most beautiful flower. Brighton, January 2013 This thesis is dedicated to the memory of maestra Elisa Melica who taught me how to use poetry as the measure of things. Contents List of Figures i List of Tables ii List of Abbreviations iii Introduction 1 The argument .................................. 3 General contours of the work ......................... 6 Technical excursus: a primer on derivatives 11 Definition, types of instruments and markets ................. 11 Forwards and futures .............................. 16 Why do derivatives exist? Who are the actors using them? ......... 18 Options and warrants .............................. 21 Swaps ...................................... 23 Securitisation and asset-backed securities ................... 26 Conclusions ................................... 28 1 Accounting for the distinct traits of financialisation 29 1.1 The debate on financialisation ...................... 31 1.1.1 The macroeconomics of financialisation ............. 33 1.1.2 Financialisation and the exploitation of labour ......... 39 1.1.3 The everyday life of financialisation ............... 45 1.2 A methodological turn in the financialisation debate: from structural to agential power ............................. 54 1.2.1 Structural power and financialisation .............. 57 1.2.2 Agential power and political-economic praxis .......... 59 1.2.3 Applying the agency-centred approach to the case of deriva- tives in Italy ............................ 62 1.3 Conclusions ................................ 64 2 Derivatives-based risk management in the United States 66 2.1 The origins of derivatives-based risk management ........... 69 2.1.1 Futures markets and populist politics in the Gilded Age .... 70 2.1.2 Adjusting society to the probable ................ 74 2.1.3 The Federal regulation of commodity futures: from the Pro- gressive era to the New Deal reforms .............. 79 2.2 American finance and the management of financial risk ........ 82 2.2.1 Derivatives in the post-war period ................ 83 2.2.2 The Chicago Board Options Exchange and the International Monetary Market ......................... 85 2.2.3 Financial economics: isolating the risk of volatility ....... 89 2.2.3.1 Markowitz’s portfolio theory and Sharpe’s capital as- set pricing model .................... 90 2.2.3.2 The Black-Scholes-Merton pricing formula for a call option .......................... 93 2.2.4 The internationalisation of American finance .......... 95 2.3 Derivatives and American financial power ................100 2.3.1 The early years of financial derivatives .............101 2.3.2 Swaps, index derivatives