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Analysts Analyzed: A Socio-Economic Approach to Emerging Markets and Financial Times 1

Paper for the Special Issue“States and Markets: Essays in Trespassing”

International Political Science Review (1999)

Javier Santiso

ABSTRACT. The reaction time of financial markets presently constitutes one of the majorchallenges facing the State. Using the results of a qualitative research study, the current workaims to formulate and to discuss a hypothesis concerning the short-termism of financial marketsby presenting an analysis of the temporal horizons and cognitive maps of actors who «make orbreak» prices on emerging markets. Behind the power of the market hides a multitude of actors,analysts, strategists, economists, and portfolio managers who constitute a veritable epistemiccommunity with its own dynamic of opportunity and constraint. Our aim in this paper is tounravel the various strands in the tapestry that weaves the interactions of those who «make themarket» together. It is not embroidered by the invisible hand of god, or the devil, but, moresimply, by the unceasing anticipations and interactions of a myriad of analysts and investors whodraw their breath from Wall Street.

«But, because crises can be self-fulfilling, sound economic policyis not sufficient to gain market confidence; one must cater to heperceptions, the prejudices, and the whims of the market. Or,rather, one must cater to what one hopes will be the perception ofthe market. In short, international economic policy ends uphaving little to do with economics.”

Krugman (1998)

In few years, emerging markets have become the new El Dorado of international

finance. Their emergence is certainly not new; in fact, most Latin American stock exchanges

1 This study is the prolongation of an initial study effectuated for the Centre d’Etudes et de RecherchesInternationales at the Fondation Nationale des Sciences Politiques (See Santiso, 1997). I would like to thank thefollowing individuals for their commentaries, critiques, and sharing of documentation during the duration of thisresearch: Andrés Bajuk, Christian Brachet, Olivier de Boysson, Judith Chevalier, Christophe Cordonnier, MehdiDazi, Barry Eichengreen, Carlos Elizondo, Guy Hermet, Tarek Issaoui, David Jestaz, Jean Leca, NorbertLechner, Frédéric Lordon, Julia van Maltzan, Megan Metters, Joseph Oughourlian, Luisa Palacios, RicardoRaphael, Andrew Rose, Andrei Shleifer, Robert Shiller, Marcelo Soto, Marie-Claude Smouts, Susan Strange,Alan Taylor, Nicolas Thévenot, Aaron Tornell, Philip Turner, Andrés Velasco, and Kent Womak. .

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date from the end of the last century2. However, Wall Street’s rediscovery of the gold mines

that are these emerging markets has been at the origin of one of the most incredible gold

rushes at the end of this century3.

Following the Latin American and Asian crises of 1995 and 1997, the international

community has learned that these financial paradises can rapidly transform into durable

nightmares as once prosperous gold mines turn into bottomless monetary abysses. Such

episodes join the long series of somersaults, panics, and bubbles that mark the history of

finance and also illustrate one of the most marked traits of the end of this century: the

constant tug of war between states and financial markets (Kindleberger, 1996). On the one

hand, states are faced with the ever-increasing inflows and outflows of capital that set the

pace for economic growth. Financial markets, on the other hand, unceasingly undertake

multiple choices, twenty-four hours a day, moving from one country to another in the search

for margins and profits. At the height of the Asian crisis, the diatribes that opposed the

Malaysian leader Mahathir Mohamed to financial wizard Georges Soros in 1997 symbolically

crystallize this conflict4. Soros has become one of the symbols of «market tyranny» over the

last few years after having launched several violent attacks on national economies, which then

proceeded to fall, one after the other, like dominos5.

2 As emphasized by Goetzmann and Jorion (1997), the Argentinean, Brazilian and Mexican Stock Exchangeswere created in 1872, 1877, and 1894 respectively, well before most of the Scandinavian Stock Exchanges. Inreality, these markets tend to appear and disappear; the 90s simply witnessing their latest and most spectacularreemergence. There is a notable difference today, however, when compared with the preceding decade, asfinancial volumes and the number of actors who currently intervene on financial markets are more important anddiversified.3 For a detailed analysis of the very notion of emerging markets consult the work of Antoine van Agtamel andKeith Park (1993). The International Finance Corporation (IFC) publishes the official statistics on these markets(which increased from 9 to 25 between 1980-95). See the International Finance Corporation, IFC indexes:Methodology, Definitions and Practices, Washington DC, IFC, 1995.4 Hedge Funds (such as those managed by Soros) were accused of provoking the crash of several Asiancurrencies in 1997 as well as the devaluation of the Mexican peso in December of 1994. Empirical analyses,however, tend to demonstrate that such a causal link is not founded, as evidenced by the test results of Brown,Goetzmann and Park (1998); and Barry Eichengreen (1998). In addition, the definition of capital flows as«destabilizing» must also be nuanced, if not minimized altogether, as suggests Dooley (1997) and Turner (1995),in light of the important asymmetries of information which exist in emerging markets, as well as the uncertaintygenerated by structural changes such as a rapid financial liberalization (in such a case, with a reduction inuncertainty, volatility tends to be reduced over time as investors obtain better, more trustworthy and lessasymmetric information). For more information, consult the works of Mishkin (1998a), de Bacchetta and vanWincoop (1998). The works of Obstfeld and Taylor (1998), on long temporal series reinforce these findings andallow us to place these capital flows, which were already significant at the beginning of the century towardemerging countries like Argentina, in historical perspective. Other works equally demonstrate that states candeal with market volatility by putting systems of capital control into place. See Valdés-Prieto and Soto (1997)who discuss the effectiveness of the capital control mechanisms put into place by the Chilean government.

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This apparent opposition between states and financial markets can be qualified on

many levels. It is important to remember that governments have historically been behind the

creation of financial markets. The first was created by the British Crown in an effort to raise

funds to finance the military exploits of the King (Carruthers, 1997)6. In addition, financial

crises are not solely the consequence of short-termist financial markets. The devaluation of

the Mexican peso in December of 1994, for example, was mainly the result of a complex

game of interactions between financial markets and government (Edwards and Naim, 1998;

Cameron and Aggarwal, 1996; Roett, 1996). This particular example demonstrates, in its

sequence and timing, the extent to which economic and political temporalities interact: how

much states are obliged to react quickly to financial markets and how much they seek to gain

time and to build long-term credibility (Santiso, 1997 and Santiso, 1999).

The financial crises of the last few years have highlighted the vital importance of the

temporal adjustments that face states. These crises have led to a questioning of the

temporality of financial markets and, in particular, of the cognitive maps of financial

operators, major actors at the origin of the temporal adjustments imposed on states. To

understand and to discuss the short-termism of financial markets and to test its acuity is to

question the very socio-economic dynamic of international finance, or, in other words, to

enter into the black box that is analyzing the analysts.

States are traditionally defined by territorial sovereignty. It is, however, in challenging

the monopoly of the Church over time, that the State consolidated itself7. Although markets

have certainly not become the clock-masters, they have considerably broken the State’s

sovereignty over time. During the 19th Century, the imperatives of industrialization --

including the coordination of the transportation of merchandise by rail and the organization of

important public works projects to be carried out by masses of workers -- imposed a

standardization of temporal norms. While it is true that markets have appropriated the

temporal norms forged by the State, they have recently imposed their own temporalities--

5 For further information on the diffusion dynamics of financial crises, refer to the works of Eichengreen, Roseand Wyplosz (1996).6 See the works of Fligstein (1996, 1997, and 1998) and Germain (1996 and 1997) on the institutionalization offinancial markets, and, more generally, Granovetter’s work on economic institutions as social artifacts (1992).The most current research of Neil Fligstein may also be consulted on the web site of the Center for Culture,Organizations and Politics at the Institute for Industrial Relations of the University of California at Berkeley:http://violet.berkeley.edu. In addition, among the most interesting work done on the interaction between statesand financial markets is by Susan Strange (1997).7 See the works of historians Arno Borst (1983) and David Landes (1987).

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composed of accelerations, speed, and crises-- through the financial sphere over the last few

decades. Each financial crisis launches a race between the international financial system –

called in urgency to address deep disequilibriums in order to rapidly stop market reactions –

and the inter-state system. Large sums thus mobilized with increasing rapidity (more than 50

billion dollars came to the aid of Mexico, more than 17 billion for Thailand, more than 58

billion for South Korea, more than 43 billion for Indonesia and more than 22 billion for

Russia) contribute to set the rhythm of this race.

Financial markets are no more the tyrants than they are the magicians, or the

omnipotent short-termists who critics claim arbitrarily impose their law or will on states, that

they were made out to be after the 1994 Mexican crisis and the Asian and Russian crises of

1997 and 1998. The temporal horizons of financial markets vary according to profession,

product, and the constraints and resources that restrain or enlarge the temporal horizons of

different actors. Going beyond the diabolization of financial markets in the person of Soros,

recent financial crises have shown how ripe a study into the sociological aspects of markets is,

and how important it is to analyze the analysts in order to understand financial dynamics.

Behind the power of the market hides a myriad of actors, analysts, strategists, economists, and

portfolio managers whose management styles and temporal horizons vary from one institution

to the next and even within the same investment bank or the same pension fund. In short,

these specialists constitute a veritable epistemic community with its own dynamics of

opportunity and constraint.

In order to imagine the importance of the influence that international finance operates

on national economic policy, it is first necessary to learn how financial markets think. This

study would like to emphasize the importance of analyzing information games and the

resulting anticipations which link operators and to question the cognitive regimes and the

temporal reference points which link traders, investors and other analysts whose anticipations

contribute to «make or break» market prices. Based on a qualitative inquiry carried out on 50

New York and Parisian investment bank analysts after the Mexican crisis of 1995, this

research is a first attempt to approach emerging markets with a socio-economic perspective

and shall be subsequently completed in a more quantified manner.

To proceed into the black box, or to analyze the analysts, also means to rid ourselves

of a persistent idea: that financial markets – whether efficient or inefficient – are not neutral

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homogenous entities that adjust themselves automatically to information or economic

variations. Their temporalities are made of sudden accelerations and ephemeral torpors, which

murmur along, often in a contradictory manner, emitting many background noises and

interferences which alter prices and many pieces of information which cloud, comfort, or

undermine the fundamentals. Emerging markets, less transparent and rigorous as far as

statistical information is concerned, are particularly sensitive to these antics.

Financial markets do not establish the reign of the invisible hand, but rather the reign

of implicit handshakes and, from time to time, explicit strangulations, as with the corrections

operated to the detriment of Mexico, Thailand, Korea, Indonesia and Russia between 1995

and 1998. Our aim in this paper is to unravel the various strands in the tapestry that weaves

the interactions of those who make the market together. It is not embroidered by the invisible

hand of god, or the devil, but more simply by the unceasing anticipations and interactions of a

myriad of analysts and investors who draw their breath from Wall Street8.

Implicit Handshakes and Explicit Strangulations:

The Socio-Economic Analysis of Financial Markets

The financial crises that have intervened over the last few years in Latin America and

Asia have given rise to multiple interpretations and analyses. One of the most remarkable

traits of this literature is the gradual displacement of its center of gravity. >From work

centered on the economic fundamentals of the crises succeeded a second generation of models

that insisted on the sensitivity of economic fundamentals to changes in the anticipations of

financial actors9. In other words, the literature has become increasingly interested in the

«sentiments of the market» (Eichengreen and Mody, 1998), in the mimetic rationality of

actors (Shiller, 1987 and 1990; Orléan, 1989), in asymmetries of information (Mishkin,

1997), and in the influence of self-realizing prophetic mechanisms and the diffusion of

8 For a general study on the financial community of Wall Street, see the socio-economic analyses of MitchelAbolafia 91996). The approach of Obalafia joins a family of socio-economic analyses in the tradition of Weber,who had written essays on the Stock Market as well as on the Ethic of Capitalism. The Bibliothèque du Citoyentranslated both in 1894-1896 in France. I would also like to mention anthropological works, in particular those ofEllen Herz (1998) on the Shanghai Stock Exchange.9 Concerning this evolution see Chang and Velasco (1998); Eichengreen, Rose, and Wyplosz (1996); Krugman(1996); Sachs, Tornell and Velasco (1996a and 1996b); and Dornbusch, Goldfajn and Valdès (1995).

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«noise» which effects financial markets (De Long, Shleifer, Summers and Waldman, 1990;

Shleifer and Summers, 1990; Shiller, 1995). In short: it is interested in the behavior of

financial actors, their anticipations and reactions to information and signals that are not only

emitted by the economic fundamentals but also by other actors10.

We have thus witnessed the blossoming of a body of research which aims to explain the

reactions of financial operators to risk analyses diffused by rating agencies (Reisen and von

Maltzan, 1998; Larrain, Reisen and von Maltzan, 1997; Cantor and Packet, 1995) and

brokerage firms (Womack, 1996). These works have proven the existence of market failures,

and institutional biases, while at the same time underlining a rating agency’s rigidity in

downgrading a country. Rating agencies are even more indisposed to downgrade countries or

corporations that are already clients. To lower a credit rating means to risk loosing clients,

especially if competitors adopt a more conciliatory out-look.

These works also underline the extent to which brokerage firms can be torn by conflicts

of interest, subjugated to a double obligation to offer the best services to their clients as well

as to sell the stocks it underwrites. The research of Womak, for example, shows that the

stocks recommended by underwriters perform poorly when compared with the «buy»

recommendations of unaffiliated brokers, thus proving the importance of these conflicts of

interest and the biases they occasionally introduce into the recommendations made by

brokerage firms11 (Womak, 1997). Cognitive biases can be maintained over relatively long

periods (Sobel, 1985) even when one is not confronted with manipulated information, in the

economic, not legal sense of the word. The credibility that the market attributes to a particular

analyst or institution may be as decisive as the information itself (Benabou and Laroque,

1992).

These works thus insist on market distortions by analyzing, for example, the strategies

followed by stockbrokers. One such strategy is «herding», or the tendency of money

managers to buy and sell the same stocks, often in a synchronic manner, in order to guarantee

10 For a synthesis of approaches insisting on financial behavior and on the limits of market efficiency see RobertShiller (1998). His web site, can be found at http://www.econ.yale.edu.11 Another explanation of these cognitive biases can be found in the «inside view effect» underlined by the workof cognitive psychologists such as Kahneman and Lavallo (1993) who demonstrate the extent to which scenariosand recommendations contain an element of inertia, founding themselves on past success more than on presentresults and on the fact that the analysts ignore other information which is susceptible of undermining theirevaluation.

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maintaining the same performance level as competitors (Lakonishok, Shleifer and Vishny,

1997; Sharfstein and Stein, 1990). Other works have come to analyze, in the line of North,

Coase and Thaler, the institutional effects and transaction costs inherent to financial markets.

Not all analysts are interchangeable, they argue, and not all make the market. Certain analysts

impose their own personal rhythms or contribute to accelerating or slowing mimetic

movements more than others. «The fact to belong to a certain firm, which towers above the

others in prestige or the volume of funds managed, gives more weight within the financial

community to information given by certain of that firm’s analysts», underlines a strategist of a

big New-York firm12.

Beyond the distortions that researchers have uncovered, this approach insists on the

diversity of behavior and the multiplicity of financial actors. Not only are there multiple

specializations within the finance profession, but behaviors can also vary within the same

specialization. Judith Chevalier and Glenn Ellison, for example, have carried out a detailed

analysis of the population of mutual fund managers, notably highlighting reputational effects

and the divergences in behavior between senior managers and junior managers who are the

first to face the incentive to herd (see also Lamont, 1995; Prendegast and Stole, 1996). These

works demonstrate the extent to which the investment decisions of fund managers depend on

the temporal horizons and the career projections of portfolio managers (Chevalier and Ellison,

1998, 1997, and 1996).

The Time of Finance:

For a Macro-Sociology of the Short-Termism of Financial Markets

Financial markets are therefore more a place of belief than of memory, where games

of affluence and influence are played out. In the midst of an unceasing bombardment of

information, traders and analysts must react in real time. In addition to ratings agencies,

(Moody’s, Standard & Poor’s, Fitch Ibca, etc.), large international organizations such as the

FMI, financial journals (The Financial Times, The Wall Street Journal, and The Economist),

central banks, finance ministers, and private economic intelligence institutions (The Institute

of International Finance, The Economic Intelligence Unit or the Business Monitor), are

12 Interview, New York, February 15, 1997.

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among a myriad of actors who participate in the process of accumulation and diffusion of

economic and financial information and the configuration of the main points of reference for

traders, analysts, money managers and other market makers. In the world of finance, agencies

of financial information such as the Bloomberg Agency (created in 1984 by a former trader of

Salomon Bros.) and the Reuters Agency (founded in 1851 by Paul Julius Reuter) are major

actors, veritable «makers of the market», who configure the reference points for thousands of

operators13. Their constant information flows literally establish the rhythm for the lives of

brokers who calculate their anticipations and their reactions partly on the results posted by the

promoters of these agencies.

Whether it be the quarterly reports of companies or the public accounts of

governments, each piece of information is awaited by a myriad of operators who are

unceasingly nourished by information that must be treated as quickly as possible and

occasionally in a matter of seconds when panic movements begin to set in. The central desk

of the Reuters agency alone furnishes as many as 25 dispatches per minute and 27,000 pages

of data per second. In less than a half an hour, the equivalent of a daily newspaper is

dispatched to more than 362,000 computer terminals located across the globe14. In the field of

emerging markets, and the Latin American market in particular, each operator follows the

macro-economic indicators of each country, awaiting the arrival of statistics at regular

intervals. Every bank thus has a daily calendar of events at its disposition. In the case of

Goldman and Sachs, for example, for the first 15 days of February 1997, no less than 30

economic (28) and political (2) events concerning the emerging markets of Latin America

were recorded (including 5 for Mexico)15.

Information and rumors, interconnected in continuous flows, are diffused at high

speeds, generating mimetic comportments where to imitate «the other» becomes an

imperative to staying in the game. Dynamics of self-validating mimetic contagion, often

disconnected from the fundamental facts, thus develop, making the collective opinion of

13 For the year 1996 alone the four principle agencies of financial information, Bloomberg, Reuters, Dow Jones,and Bridge made 4.4 billion dollars in sales. The annual cost in information technology can reach more than onebillion dollars for the largest banks. For information on finance technology see a survey published in TheEconomist entitled «Turning Digits into Dollars: A Survey of Technology Finance», The Economist, October 26,1996.14 With more than 15,000 employees and close to 2000 journalists across 91 different countries, this agencypossesses the second most important satellite network in the world, just after the Pentagon. Its story alsodeserves mention:

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participants as determinant as the anticipation of future revenues in charting the course of

stocks.

For André Orléan, one of the economists to have pushed this type of analysis the

farthest, understanding contagion movements requires an analysis of the strategic interactions

which form and disappear between different actors operating on financial markets. He aims to

uncover the sociological dynamic of financial markets by integrating interpersonal influences

into his analysis, by understanding the game of cross anticipations between different actors at

time t and also their future beliefs about the market at time t+1. Financial bubbles are not

simple mathematical artifacts but are rational mimetic bubbles. In order to make them

intelligible it is also important to understand the impact of market interactions. In such a way,

a fall in prices during a financial crisis, such as that of October 1987, is self-reinforcing,

containing an endogenous dynamic founded on the interaction between participants (Shiller,

1987). Actors also develop mimetic strategies because there is a certain risk in distancing

oneself from average opinion (Orléan, 1989a and 1989b). Actors give in to conjecture on the

behavior of other operators, integrating not only new information into their anticipations, but

also beliefs about the reactions that such anticipations will arouse in the behavior of other

agents (Orléan, 1990).

Financial markets do not consecrate the exclusive reigns of single-minded calculators closed in on

themselves. On the contrary, they constitute an open world in which the speed imperative is primary and where

anticipations are made and unmade at high speeds, operating via a wise dose of calculation and opinion. One

must know how to profit from windows of opportunity, which open and close at high speeds, more rapidly and

durably than competitors, especially when one is faced with the instability of emerging markets.

15 See «Calender of Events», Emerging Debt Markets Biweekly, Goldman & Sachs, Economic ResearchDepartment, February 4, 1997, p. 25.

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The Short-Termism of Financial Markets

This speed imperative is even more pronounced today than it was during the 1980s

and 1990s. International finance has experienced a series of major changes: new actors

appeared, innovations multiplied, new markets emerged, and, beyond institutional or

operational changes, we have witnessed a significant temporal acceleration.

The liberalization and the deregulation of bond markets in1979, and, with a time lag,

the stock market in 1986, accompanied the rapid acceleration of the financial sphere16. Thus,

between 1980 and 1992, the annual growth rate of the volume of financial stocks in OECD

countries attained a yearly average of 6%, which is 2.5 times higher than the growth rate of

fixed capital formation. One particular piece of data demonstrates the extent of the game:

every day, in volume, 40 times more financial than market transactions take place (Helleiner,

1996). The resulting profits are made in extremely short periods: it is estimated that more than

half of the total return on US equities during the 1980s was made in just 20 days.

One indicator that the pulse of the world economy is accelerating under the pressure of

finance is the increasing rapidity of the reconfiguration of financial stocks driven by the strict

performance obligations that are imposed on companies by institutional investors. This quest

leads to the ever-increasing instability of capital, which flies from investment to investment in

increasingly brief lapses of time. Between 1980 and 1987 the yearly rate of abandoned stocks

(obtained through fusions and acquisitions) passed from 20% to 75%. The turnover rate of

stocks on the New York Stock Exchange moved from 30% to 70% between 1979 and 1989

(Delmas, 1991:97).

Thanks to the rise in new information technologies, the interconnection of different

stock markets has been made at a rhythm that is too rapid and constraining for states. States

are faced with an incredible acceleration in capital movements. New computer technology

allows for arbitrations and corrections to be made in a matter of seconds. In one move

financial investors can rearrange their stock portfolios, hard currency, bonds, stocks, or

derivatives and carry out instantaneous arbitrations between different financial instruments

16 For information on the transformation of financial markets refer to the work of Frederic Mishkin (1998b);Barry Eichengreen (1996); Frederic Mishkin and Stanley Eakins (1997) and Maurice Obstfeld (1998).

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and parts of the market or between markets in different emerging countries whose currency or

company stocks they detain.

The globalization of finance has been accompanied by the preeminence of the time

factor over the space factor17. Space, as a major strategic dimension within a closed world,

has lost its preeminence at the end of this century, being bypassed by the perspective of a real

time made of acceleration, urgency and speed. One of the explicit objectives of deregulation

was precisely to shorten transaction times by reducing the administrative formalities that

inhibited market access to a minimum. For many companies, losing a few weeks or months

before penetrating a market can translate into considerable loses on the balance sheet,

especially because the life cycle of products is also reduced. In the computer industry, for

example, losing six months on a product with a life cycle of approximately 18 months is a

luxury that no company can afford. The acceleration of the economy can therefore be

measured by taking into account the shortening of waiting periods imposed by deregulation.

In the case of Mexico, administrative formalities concerning trade have been considerably

reduced and precise waiting periods have been fixed in order to avoid the interference of

unnecessary measures. Thus, commercial formalities limited by response dates have gone

from 13% of all transactions to 91% after the deregulation reforms. Moreover, the

percentages concerning trade have passed from 38% to 68% (Contreras, 1996)18

From a financial point of view, the innovation is not the increase in direct investments

but rather their volatility or reaction time. While volumes today are inferior in real terms to

volumes attained at the beginning of the century they have become much more volatile and

inclined to move rapidly from one point of the globe to another (Bairoch, 1996). In such a

way, shortly before the Mexican crisis, the market witnessed a spectacular run on the Mexican

peso to the height of 1,7 billion dollars in a single day according to the Wall Street Journal of

17 Space has not disappeared, however: the localization of Stock Exchanges, determined according to time lagsand the 24 service that they allow, are still pertinent. The end of geography actually designates the end of itsmonopoly or the quest for space as a vector of power. The main issue is no longer to expand a State’s territory orto push frontiers further, it is rather to accede, in record time, to significant market shares and to increase thespeed of the economy. For a discussion of the relation between space and time in international finance see NigelThrift (1994) and Benjamin Cohen (1998).18 The goal of deregulation mechanisms is, first of all, to reduce transaction costs, which should be 0 accordingto orthodox theory (zero transaction cost). The zero transaction cost theory supports a hypothesis which has beendemonstrated by the facts, as Ronald Coase has pointed out concerning exchanges effectuated without delays inan instantaneous manner. «Another consequence of the assumption of zero transaction costs, not usually noticed,is that when there are no costs of making transactions, it costs nothing to speed them up so that eternity can beexperienced in a split second» (Coase, 1998:15).

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July 6, 1995. The Mexican crisis of 1994 and the Asian crisis of 1997 led to capital flight

movements and provoked important contagion effects (concerning the Asian crisis see

Cordonnier, 1998; Goldstein, 1998; Radelet and Sachs, 1998; and Rehman, 1998)19.

In their annual report following the Mexican crisis the Bank of International

Settlements of Basle underlined the short- termism of economic agents, particularly those

who operate on the capital markets of emerging countries. «Funds of foreign origin,» explains

the BIS, «can be easily attracted to financial stocks in the hope of attaining a quick gain,

without being related to the underlying returns of real stocks» (BIS, 1995:157). The Mexican

crisis demonstrated the importance of paying attention to the composition of investments and

of clearly discriminating between those considered portfolio investments (particularly volatile

and able to be rapidly disengaged and those considered direct investments (less volatile but

with a higher liquidation cost. The last decade has been marked by a veritable explosion of

portfolio placements (composed of stocks and bonds) which, far from having suffered from

the Mexican crisis, have been reinforced (Folkerts-Landau, 1997; Calvo, Goldstein and

Hochreiter, 1996). Since the devaluation of the peso, portfolio investments have actually

shown a more than 50% increase, attaining 92 billion dollars in 1996 after two years of

consecutive regression immediately following the crisis. The 1996 levels have even bypassed

the record levels attained in 1993 (37% of total capital exchanges). Simultaneously, more

stable direct investment exchanges have contracted, passing from 51% of total net capital

flows towards developing economies in 1995 to 45% in 1996 (World Bank, 1997).

A new development imposed by the increasing use of telecommunications technology

is the disappearance of reaction times and the shortening of temporal horizons (Virilio, 1995).

Access to telecommunications technology not only abolishes both space and scope but also

duration by shortening delays for ever diminishing financial costs. Thus the cost, for example,

of a 3-minute telephone call from London to New York has been drastically reduced from

$245 dollars in 1930 to $3.30 in 1990. An increase in real interest rates has also contributed to

shorten the temporal horizon of financial operators. Interest rates, veritable barometers of the

future, are authentic measures of future prices. Their increase has been translated, over the

course of the last few decades, into a quest for short-term profitability to the detriment of long

term investment. The future has thus depreciated, being surpassed by an unending race for

19 Economist Nouriel Roubini has gathered all of the essential literature concerning the financial crises, and theAsia crisis in particular, on her web site at http://www.stern.nye.edu

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profits, which translates, in economic terms, into the fall in the value of the present currently

experienced during this century (Santiso, 1998a and 1998b).

The Temporal Myopia of Wall Street

The short-termism of financial markets can also be understood from a socio-economic

perspective by paying more attention to the actors who operate on the market.

It is important to point out that, when speaking about markets, one must dissociate

different temporalities and temporal horizons. Economic time, like historical time, contains

long continuous periods as well as the brief oscillations of momentary ruptures. A multiple

and contradictory time thus operates in different areas of the world economy: in the domain of

the market economy as well as that of financial capitalism20. If the market economy could be

called the train that transports the world on its quest for «speed»(measured in growth rates),

the financial sphere could be called its motor, or the accelerator that propels this race for

speed. The temporal horizons of these two spheres are notably different, the first primarily

anchored in the long term, the second, dominated by short-termist reactive inter-temporal

games. The tempo of the first is propelled by a commercial dynamic that does not escape

either chronological or meteorological time. Market activities are sometimes submitted to

climatic variations and economic conjunctures and to the return of seasonal cycles and

business cycles. It is widely known that economic activity fluctuates widely throughout the

year and that even seasonal patterns can help explain business patterns21.

In contrast, the temporality of financial capitalism (making an exception for

commodity markets) plays on climatic movements: its dynamic is volatile, requiring constant

risk-taking which sets a precedent for exchanges which are made in continuous time, without

delays or pauses. When seasons are not affecting emerging financial markets, calendars, clock

20 For more information refer to the Braudelian analysis of Randall Germain (1997 and 1996); and the Polanyi–inspired chart of the economy’s different temporal horizons by Robert Boyer (1996). Concerning economictemporalities also consult Javier Santiso (1998c).21 Economists are aware of seasonal patterns and also the fact that over the course of the year economic activityis highly volatile. Retail sales shoot up impressively in December, construction projects take off in the springand employment follows the rhythm of the school year. In a recent book an economist from Boston Universitywent farther in systematically analyzing these seasonal patters, see Jeffrey Miron (1996).

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times and seasonal moods are. Financial volatility is partly caused by the discovery of new

information by investors, such as announcements about government statistics that are released

during trading hours at specific days of the month or year. Some economists have confirmed

that while volatility is more sensitive at certain periods of the year it can also vary within the

same day; such as the unexpected peaks that are reached around lunchtime. The arrival of

lunchtime trading in New York, London, Buenos Aires, Mexico and Tokyo, has brought with

it a non stop flow of buy and sell orders and, hence, of private information made available to

traders. Studies have confirmed that private information has contributed to increasing the

volatility of lunchtime prices (Ito, Lyons, and Melvin, 1997).

Considering political time is essential to helping predict a portion of financial market

fluctuations. It is currently well known that the economy represents an important dimension

of the electoral process. If the economy is doing well, voters tend to reward the incumbent.

Moreover, even if the correlation is not always clear, budget deficits tend to deepen during

electoral time. In certain emerging markets political time and economic cycles are closely

linked: in Mexico and South Korea, for example, the recent crises occurred during

presidential election years, which are periods of high political uncertainty. In the case of

Mexico, the link between political time and financial crisis is even more recurrent: since 1970

each presidential election has been followed by an impressive financial volatility. In 1982 and

1994 this volatility led to two of the most important financial crises of this century (Santiso,

1999; Lustig, 1995; Frieden, 1995).

This plurality of time within the world economy is also in itself an inter-mixed

temporality. The timing of commercial markets is increasingly open and vulnerable to the

abrupt shifts in capital financial markets. The growing inter-linkages between these different

temporalities constitutes a critical conjuncture in the history of capitalism, similar to those

identified by Braudel during the XVII, XVIII and XX centuries when Amsterdam, London,

and then New York became the dominant centers of the world economy. Today, in a

convincing manner, the short-term timing of financial markets has an increasing impact on

market capitalism.

In the same way, temporal horizons vary within the different specializations that exist

within the financial profession. The temporal horizons of traders are limited to hourly

15

transactions that take place in real time on a day to day market22. Strategists, on the other

hand, dispose of more distance, forming anticipations that are anchored to a scale of several

months or years.23 The temporal horizon of portfolio managers, who manage pension or

mutual funds is, on the contrary, often limited to a fixed period of three months during which

the performance of their portfolios is evaluated, noted, and classified24. Certain managers

even develop long-term policies and management styles with a low portfolio turnover ratio,

focusing primarily on companies that are undervalued in relation to their shares or profits thus

enabling them to hold on to shares for a longer period of time25. Most prefer to play the

general tendency, or momentum that carries the market26. In general, managers show less

interest in the Annual Reports of companies, focusing uniquely on trimesterial profits. This

tendency is at the origin of the saying «the dictatorship of Quarterly Reports» that is at the

very foundation of short-termism. Short-termism further accentuates with the diversification

of portfolios, particularly on emerging markets. Anglo-Saxon institutional investors are thus

able to quickly unravel a given security as long as the rest of the portfolio stays ideally

diversified27.

The temporal horizons of economists must be analyzed based on a distinction between

market economists and research economists. Those in the first category, according to a

Parisian market economist, «aliment the traders, buyers and sellers from day to day. In an

economic research service, one has more time to look at a relatively distant past in order to

better understand a relatively near future, the accent is not put on the prevision of short-term

financial parameters. For the market economist, on the contrary, every political event, every

announcement of figures, every passage of a law, is a major event to which he must

immediately react, within a matter of seconds, in real time»28.

22 Interviews, New York, February 11 and 12, 1997, and Paris February 5 and March 6 and 12, 1997.23 Interviews, New York, February 13 and 14, 1997.24 Interviews, New York, February 12, 1997 and Paris, June 20, 1997.25 Interview, Paris August 21, 1997.26 Interview, New York, February 15, 1997.27 Such investors are thus able to rapidly release stocks or securities. In such a way, Fidelity, the first mutualfund in the United States, had gotten rid of a packet of 600 million stocks estimated at one billion dollars in oneshot on Monday, October 19, 1987, thus giving a push to the stock market crash. At the end of Black Monday,the Dow Jones had lost 508 points, or more than 22% of its value. The Mexican crisis of December 1994 wasmarked by the same type of mimetic behavior – the panicking of a first group of investors which is thenimmediately imitated by others—giving way to a tidal wave of massive withdrawals.28 Interview, Paris, March 12, 1997.

16

Finally, portfolio managers anchor themselves in trimesterial or semesterial results

and performances, recomposing their portfolios by taking into account the signals emitted by

the national or commercial accounts in which they have placed their trust. The temporal

horizons of these portfolio managers are equally restrained. Certain studies suggest that fund

managers are increasingly focused on short-term performance the younger, better educated,

and inclined to change banks that they are (Chevalier and Ellison, 1996). The remuneration

system of portfolio managers equally serves the function of a hazard pay which incites

investment positions that are increasingly risky the more rewarding they are (promising a

potentially larger bonus). The work of Tversky and Kahneman demonstrate that risk aversion

is variable according to the gains or losses implied by a particular decision: individuals

become risk-seekers, and not risk-averse, they show, when a decision implies a loss29. The

more that a potential loss is great, the more individuals are inclined to take risk, especially if

they are not playing with their own funds, as is the case in the financial world30. A

remuneration system founded on bonuses incites one to amplify risk-taking.

Employment turnover also contributes to configure the relatively turbulent market of

financial analysts where it is common to change several posts during the year (Khorana,

1996). This tendency is particularly strong within the community of investment fund

managers. Thus, according to statistics published in Forbes Magazine in August 1997, the

annual turnover rate of portfolio managers in firms like Fidelity, Putnam, or AIM is close to

15%, and up to 29% in an institution like Kemper, which has paradoxically based its

commercial policy on the motto «Long-term investing in a short-term world». This dynamic

has led to a game of musical chairs, provoking a salary increase race and an overbidding for

analysts and, sometimes, entire investment teams. Thus, in 1996, the Latin America

investment team of ING Barings, one of the most competitive on the market, packed its bags

in order to join a main competitor, Deutsche Morgan Grenfell. In total, close to forty

specialists have left the bank taking a portion of portfolio clientele with them. The preceding

year, Deutsche’s aggressive recruiting effort had equally provoked the defection of the Latin

America team of SG Warburg. Nearly 40 employees, analysts, traders and salespeople left the

bank. Certain stars of the Latin American emerging markets use these negotiating tactics.

29 For more information this topic, see the work of Daniel Kahneman and Amos Tversky (1979). The notion ofrisk is the object of multiple studies, one of the most stimulating and accessible is that of Peter Bernstein (1996).30 The works on financial behavior of Thaler, currently a professor at the University of Chicago, on financialbehavior show that individuals change their behavior depending on whether or not they are personally owners.

17

Moving from one firm to another often secures superior salaries that can reach the levels of

the strategists or economists of Morgan Stanley, Jay Pelosky, Tim Love of ING Bering or

Geoffrey Dennis of Bear Stearns, or up to one million dollars a year, as reported by the

specialized journal Latin Finance based in Miami. The rising fame of a number of

researchers, who are more «market makers» than others, has created a dual-level payment

structure in the financial industry with most analysts earning a salary of $100,000 a year and a

few chosen analysts (with much more media visibility) bringing in $500,000 or more.

Specialized magazines such as LatinFinance, follow the hirings of securities firms

monthly. Month after month, merger after merger, the stars and gurus of the Latin American

markets move from one firm to another, revealing the fierce hiring competition that opposes

top securities firms in their search for top analysts. «The rise of the star analyst – one with

enough clout to be able to take important clients and whole teams of analysts along in a move

– has given research firms the besieged air of a sports league during trading

season»(LatinFinance, 1996, 10). In this spirit, LatinFinance sponsors the Latin Research

Olympics each year. This ranking, based on a questionnaire sent to 4000 individuals at

investment firms that are active in the Latin America region, contributes to structuring the

Latin American analyst market. In 1996, for example, the gold Equity Strategist Medal went

to Robert Pelosky of Morgan Stanley and the Economist Medal went to the Uruguayan born

Arturo Porzecanski of ING Barings (one of the few to have foreseen the Mexican crisis).

The analyst market also experiences impressive turbulence after a financial turmoil, as

the Mexican, Asian, and Russian crises have shown. Since the Mexican crisis, Wall Street

research divisions have gone through a major revamping. Some banks such as the First

National Bank of Chicago exit emerging markets by closing down its emerging market

division and laying off, from one day to the next, more than 70 employees. Other banks close

down and are then bought, such as Peregrine, which was acquired by Santander immediately

following the Asian crisis. Others, like ING Barings or HSBC, restructured their Latin

American units only closing a portion of them. Following these crises, some of the top Latin

American researchers lost their jobs, such as John Purcell, a fifty year old managing director

who closed his career at the Saloman Brothers emerging markets research division after the

Mexican shock. Purcell was one of the pioneers in the Latin American emerging market

According to his famous «endowment effect», individuals have the tendency to sell what they own at a higherprice and to buy what they desire at a lower price.

18

history and one of the first to believe in the potential of the Mexican stock market. As a

Doctor in Political Science from the University of California at Los Angeles, he moved at

forty years old from the University to Wall Street where he proceeded to contribute to the

Mexican gold rush. As Andrés Oppenheimer reports in his book, «by the early nineties,

Salomon Brothers had placed more than 15 billion US dollars in Mexico, making juicy profits

for its clients. In the process, Purcell’s research department had grown from one person in the

office – himself-- to a staff of twenty-five»(Oppenheimer, 1996, 4).

The dance of the Golden Boys did not only concern the New York stock exchange,

even if it was particularly prominent at Wall Street. In London, competition between

investment banks is also particularly virulent, giving rise to an enormous salary race. Some

fund managers like the once fallen star of Deutsche Morgan Grenfell, Nicola Horlick, an

Oxford law graduate and now head of the London office of Société Générale Asset

Management earns between 1 and 2 million US dollars. In total, bonuses awarded by the 250

principal banks of «The City» between June 1995 and June 1996 reached close to 315 million

pounds. It is not rare that remunerations soar to more than 10 million francs per year.

According to a survey carried out by London consulting firm Monks Partners, the annual

salary (bonus included) of a director of an investment bank can easily pass 2.5 million francs

per year for those in charge of financial markets, corporate finance or derivatives, not to speak

of traders, whose salaries can easily soar to up to 1 million US dollars.

It is important to underline that this system of remuneration is not without

consequences for the functioning of financial markets. The bonus system improves the

performance of traders, analysts and portfolio managers but also contributes to the brutality of

changes in anticipations and short-termist or follower positions which are adopted by many

operators who are forced to either distance themselves as little as possible from median

market performance, or to out-perform the market in order to touch an even more important

bonus. It is interesting to note that during the devaluation of the peso during the Mexican

crisis of December 1994, the market correction was amplified during January of 1995. The

timing of the market’s overreaction to the devaluation of the peso on December 20th reveals

an important bias introduced into the market by the bonus system: only the operators who

were able to liquidate their positions in December without altering their average performance

for the current year (and therefore their bonus) did so, the others had to resign themselves to

19

differing liquidation until January . A bonus also serves as veritable «hazard pay» as operators

are obliged to take maximum risk if they hope to make maximum gains.

According to the facts, risk-taking varies from one individual to another, with a wide

majority being inclined to limit it. The hypothesis of Tversky, Kahneman and Thaler, that

individuals are fundamentally loss-averse, invites us to investigate this point further. Loss

aversion is a concept that plays a central role in their descriptive theory of decision-making

under uncertainty, or prospect theory (Kahneman and Tversky, 1979 and 1992). It refers to

the tendency of individuals to be more sensitive to reductions rather than to increases, or to

losses rather than to gains, in their levels of well being (Tversky and Kahneman, 1991). In

fact, the choice of risky asset by individuals, they argue, will depend on the time horizon of

the investor. «The longer the investors intend to hold the asset, the more attractive the risky

asset will appear, so long as the investment is not evaluated frequently. To put it another way,

two factors contribute to an investor’s unwillingness to bear the risks associated with holding

equities, loss aversion and a short evaluation period»(Benartzi and Thaler, 1995: 75). Thaler

and Benartzi refer to this combination as «myopic loss aversion». In their investment model,

the frequency of portfolio evaluation structures a large part of the temporal horizon of the

investor. If the portfolio is evaluated every year, the temporal horizon of the investor will also

be annual31.

In general, the temporal regimes of financial markets are singularly dominated by a

short-term and immediate memory. The horizons of traders, for example, do not go beyond

the square horizon of prompters and stock market floor screens which continually display the

highs and the lows, or the promises of gains and losses, in a world devoid of delays and

antipodes, where tomorrow abolishes today and the distant confounds itself with the

immediate. «Which temporal horizon currently dominates financial markets? The time frame

in which most exchanges take place is actually less than a day. Most traders keep a position

for a few hours and limit or close them that same night or on the weekend» (Frankel, 1996).

31 We then face several agency problems: while pension funds, for example, are indeed likely to exist as long asa company remains in business, the pension fund manager does not expect to maintain his position for longperiods of time. This short-term temporal horizon creates a conflict of interest between stockholders and pensionfund managers. The importance of the presence of this short temporal horizon in finance is stressed by Shleiferand Vishny (1990).

20

The timing of financial operators can be equated to a world without memory where

events pass by without leaving a trace unless it be for outlining what may come tomorrow32.

These operators are the lookout men or forward-looking anticipators of the future33. In a

world without memory, an instantaneous history made of an unstoppable chronology

dominates. Each event erases that which preceded it; a new crisis makes one forget the old.

The world view of financial operators could be best described using the metaphor employed

by historian Fernand Braudel of a «firefly world» which glows for a few instants before being

relegated to the realm of forgetfulness; he says: «I remember, one night, close to Bahia, I was

enveloped by the pale fire of phosphorescent fireflies; their pale light shined, burned out,

shined again, without truly piercing the clarity of night. In such a way, events, behind their

glimmer, remain obscure». (Braudel, 1969, 22). The world of international finance operates in

a similar way: once consumed, in a fraction of a second or several hours at most, the fireflies

that are financial markets burn out and the interest of analysts zaps to other emerging markets

where other fireflies shine just as brilliantly.

Financial Markets: Or Memory of the Future

The temporal paradoxes inherent in the functioning of financial markets should be the

object of an in-depth study. One such paradox would involve bringing an unexpected

response to the question of physicist Steven Hawking, who, in the introduction to one of his

essays, asked why one remembers the past and not the future? (Hawking, 1988).

In many cases, financial markets, by the game of anticipation, remember the future.

They have the capacity to transform a hypothetical and far-off future into the present,

crushing immediate temporal horizons, treating problems that were supposed to arise in a far

off future at the instant, in real time. Financial markets are unique in their capacity to

32 Every investment bank or financial institution develops prevision models for speculative crises and earlywarning systems. Academics have equally tried to furnish predictive models. In a work of the FMI, Berg andPatillo (1998) have evaluated the productive capacity of three of the models created before the Asian crisis: theirresults show that none of them would have signaled the crisis in a sufficient manner. As Kaminsky, Lizondo andReinhart (1998) have pointed out, in the best case scenario, the strongest indicator out of a total of 16 macro-economic indicators tested during 76 different crises (based on a real exchange rate) only gave good anticipatorysignals one out of four times.

21

dismantle the most long-term anticipations, thus immediately dismantling present

synchronizations. No where else can anticipations potentially be so immediately and radically

put into action (Lordon, 1997). They run into one another, at a rhythm which is close to

tachycardia, emerge and then disappear, replaced by new anticipations. Markets transform

themselves into worlds without memory, which suffer from amnesia. «The market is a giant

autism,» underlines one analyst, «the games of opinion are as much deforming games of

mirrors where rumors race at the speed of the humors of a handful of makers of the market

who lose confidence, then lose their footing»34. In this world, the speed of forgetting is

extremely high. «Actors are faced with a tidal wave of interconnected relations which, by

their reverberations, aliment an enormous game of reflections that economists and analysts

maintain by setting the tone of the times».

As an economist of a large Parisian investment bank beautifully stated, «the memory

of the past» is overshadowed by «the memory of the future». The most flagrant example is the

issue of 100-year bonds by companies like Coca-Cola or Disney who commit themselves to

pay investors the borrowed interests over the course of 100 years. In this case, the company

makes a gamble that the bonds will still be there in 100 years and the investor makes a gamble

that this promise for the future will be held.

Projecting into the future through the formation of anticipations is not specific to the

financial world. It is, in fact, part of any human undertaking. However, it is not as much

opening up to the future, as it is one’s capacity to tear himself away from the past that is in

question. In a real economy, an inert productive infrastructure requires a longer adjustment

dynamic that could be counted in decades. A political project is equally confronted with the

weight of institutional structures, constitutional synchronizations, and the strain of social

relations. The State, contrary to the market, imposes itself as the master of slowness and not

of speed. The financial market, on the contrary, has the power to rapidly transform a far-off

hypothetical future into an immediate present. The problems which could potentially arise

from the consolidation of the European Union, as of 1999, are brought in to the present

moment in order to be treated immediately here and now. In addition to this can be added a

large capacity for amnesia: a five year worry that puts the market in a trance can be forgotten

33 The behavior of economic agents is oriented toward the future, which they scrutinize through the looking glassof rational, maximizing anticipations. See the work of Gary Becker (1996). On the temporal horizons ofeconomic agents also consult Backer and Mulligan (1997).

22

in half a day. An anticipation then has a short life expectancy being inevitably pushed toward

the realm of forgetfulness by another anticipation. The Mexican crisis has already been

forgotten thanks to worries about the crisis in Thailand and the acceleration of the Dow Jones

which passed the 7000 dollar mark in February of 1997 and then the 8000 mark in July of the

same year before establishing a new record in April 1998 by passing the 9000 dollar mark.

Conclusion: An Invitation

The importance of the time factor in economics and politics is certainly amplified by

the approach of the end of the millenium. In the economic and financial sphere, time is more

than ever the synonym of money. A study carried out by the New York investment bank JP

Morgan estimated the potential increase in the volume of business after the year 2000 to be

between 80,000 and 160,000 million dollars35.

The temporal analysis of financial markets merits more in-depth research. Economists

in general are hesitant to integrate the time factor, even in light of abundant research on the

subject36. Numerous works, notably in the field of political economy, are interested in

international arbitrations and the redistributive policies carried out by governments whose

temporal horizons are relatively short because they are linked to the election cycle.

Economists are particularly concerned with budgetary questions: the choice of financing

through taxation, or through borrowing. The weight of these appeals to raise supplementary

capital particularly holds the interest of economists in the United States.

The new classical macro-economics has made serious efforts, under the influence of

economists such as Lucas, Kydland, Prescott, Sargent, and Wallace to reintroduce a dynamic

perspective into economics and to inscribe the economy in a temporal perspective.By

focusing their attention on the inter-temporal anticipations of economic agents, the existing

asymmetries between the unlimited temporal horizon of the state and one limited by the life

34 Interview, Paris, February 5, 1997.35 See The study of Terrence Tierney and William Rabin, «The Year 2,000 Problem», Equity Research, JPMorgan Securities, May 15, 1997. The study is available on the web site http://www.jpmorgan.com . Certaininternet sites are totally consecrated to the question of the «Great bug»of the millenium, see, in particular,http://www.year2000.com (American site) and http://www.themis-rd.com (French site).36 Consult the works of anthropologist Alfred Gell of the London School of Economics for an approach on thetime conceptions of economists (1992).

23

span of households, the problem of the credibility of political policy whose optimal short-term

solutions often bring about long term losses in well-being (the problem of temporal

incoherence).

An approach that combines a temporal and sociological analysis equally furnishes

precious analytical tools, which are of yet unexplored, although, this paper calls for more in-

depth empirical analyses. There are too few empirical studies concerning the reconfiguration

of the temporal horizons of entrepreneurs. Managers of large companies, major actors on the

international scene and important contributors to national economic development, should take

the fluctuations of the international economy as well as the plans of the representatives of

institutional investors into consideration when developing strategies. What does the growing

presence of pension funds and mutual funds within corporate governance structures signify

for the governing of a company? What is the effect of eventual polarizations on the results

and the quarterly distribution of dividends? Is the very hypothesis of the short-termism of

pension funds and mutual funds empirically founded?

In total, American institutional investors manage more than 10,000 billion dollars and

invest in other national markets where they buy stocks in local companies (such as Calpers

who has placed 20% of its resources outside of the United States). Acquiring shares in these

companies then allows them to impose their own management criteria and short-term profit

objectives. One of the major consequences of this corporate governance system is precisely to

establish the shortening of the temporal horizons of companies who have become increasingly

submitted to management control procedures which are founded on the distribution of

quarterly dividends37. When the short-term profit objectives of institutional management

organisms become the decisive parameter, companies are increasingly submitted to financial

criteria38. No country today can escape this tendency as evidenced, for example, by the rise in

power of foreign stockholders within French capitalism39.

37 On the transformation of capitalism, and North American capitalism in particular, consult the works of NeilFligstein (1990).38 Companies contribute to maintain this short-termism by investing in financial markets and, in particular, inderivative markets, where several have suffered heavy losses like the German company Metallsgesellschaft(1340 millions dollars in losses), the Japanese company Showa Shell (1580 million) or the British companyBarings (900 million). See the survey «Too Hot to Handle. A survey of Corporate Risk Management»publishedin The Economist, February 10, 1996.39 For certain companies like Valeo, Elf Aquitaine, Total, Accor, AGF, and Lafarge, the share of total capitalheld by foreign investors oscillates between 40 and 47% according to statistics collected by Dealer’s Book forl’Expansion. Among the most active Anglo-Saxon funds are Franklin Templeton, Commercial Union, Calpersand Fidelity. The entire survey is available on the internet site of l’Expansion: http://www.expansion.tm.fr

24

The hypothesis of the short-termism of investors who operate on financial markets

deserves, to borrow the phrase of Albert Hirshman, to undergo a certain autosubversion. From

financial wizard George Soros to billionaires and businessmen like Sir Templeton, numerous

actors have multiplied long-term actions by establishing permanent foundations that carry

their names and also aim to attack long-term problems40. One of the most significant

examples is, without a doubt, donations that have been made in the (long-termist) field of

education. The funds collected from private operators by North American universities attest to

this fact. Certain schools, such as Stanford University’s Business School, raise up to 45% of

their 44.2 million dollar annual budget in gifts and donations. The results of a survey of 100

of the largest British companies in 1998 has contributed to temper the notion that short-

termism is inherent to all financial markets: 98% of the leaders of the British firms consider

that investors are long-term investors41. These examples invite us to further segment financial

markets and to more finely differentiate the temporal horizons of actors depending on

profession (and even within the same profession) and reputational and institutional effects.

In addition, can we forward the hypothesis that markets are essentially short-termist in

opposition to states that are more long-termist? This question deserves to be explored; the

Mexican example underlines how much short-termism does not seem to only be a prerogative

of the market. The Mexican state, in emitting the famous tesobonos, or the «malditos bonos»

as baptized by Arturo Porzecanski, not only sought to gain time, but also inscribed its act in a

prolonging short-termist strategy in order to elude a devaluation and a correction of the

economic trajectory before the deadline of December 1994. The immediate and brutal market

correction, in fact, contained a benediction in disguise, as remarked an operator of a New

York bank: it contributed to immediately stop any prolonging impulse of the government,

forcing it to face the situation here and now42. They could not postpone the problems,

relegating them, in an indefinite manner, to a more or less far-off future. By sanctioning

Mexico and Thailand, financial markets put an end to the economic derivations of political

40 Ted Turner, billionaire and manager of several companies, gave one of the most recent donations: 1 billiondollars to the UN (which represents close to 50% of the annual budget of United Nations development programsand more than three times the budget of the United Nations Population Fund). See the Wall Street Journal,September 22, 1997, p.3.41 See The Financial Times, April 27, 1997, p.17.42 Telephone interview, New York, September 23, 1997.

25

leaders who are themselves occasionally squeezed by the short-termist vice of the political

calendar.

An analysis of the temporality of financial markets deserves to be extended to other

fields of research. The dynamic of the Euro, for example, with its calendar and deadlines,

furnishes a significant field of inquiry. Investment banks, in New York, Paris, London, and

Frankfort, have all put their safety net into place, such as the calculator of JP Morgan

published regularly by the Financial Times that gives the weather report of financial

anticipations concerning the probability that certain countries join the Monetary Union by

1999. At monthly intervals, the Wall Street Journal, in collaboration with the London

consulting firm Independent Strategy, publishes a table summarizing anticipations concerning

the entrance of certain European countries in the Monetary Union. The convergence criteria

and the final deadlines have become familiar parts of the European landscape and vocabulary.

How are they apprehended by financial operators? What are the cognitive regimes through

which traders and analysts understand the construction of the European Union? How do

financial operators adjust their anticipations to different announcement effects or to the

rescheduling of the launch of the Euro? What beliefs and presuppositions underlie these

anticipations?

Concerning emerging markets, this analysis only sketches the decor, leaving a number

of faces in the shadows. A more systematic analysis of the world of analysts with their frames

of reference and temporal preferences, as well as a study of the rotation of traders and an

analysis of the temporal horizons of portfolio managers permit us to ground the hypothesis of

short-termism sociologically. Following the sequence of a financial crisis from day to day

should allow us to confront or refute the analysis that was effectuated in this study

retrospectively.

This investigation was founded on ex-post interviews carried out after the crisis and

not on impressions that were captured «live». In many respects, the change is not a parade

that we can watch pass, as underlined by anthropologist Clifford Geertz in his Memoirs

(Geertz, 1995). Like the American cavalry, we always arrive too late, irreparably after the

facts. To seize the sequence of a financial crisis and the anticipations of operators, analysts

and traders before, during and after it, however, is not out of reach.

26

The life of financial markets, we hoped to show, can only be understood by focusing

on the game of actors. Financial markets are neither the Far West of the Golden Boys devoid

of faith and law, nor a place where a perfect autoregulating invisible hand reigns. Implicit and

explicit norms regulate markets where games of reputation and trust are as influential as

turnover. Behind the supposed tutelary power of markets hides a myriad of actors -- fund

managers, economists, strategists, and analysts—who constitute a veritable epistemic

community with its own codes, rules, prohibitions, and dynamics of opportunity and

constraint. Following the example of Geertz looking into the myths and rites of communities

in Morocco or Indonesia, an in-depth study of the life of financial markets should integrate a

little bit more anthropology.

Acknowledgments.

This research was prepared for the Centre d’Etudes et de Recherches Internationales of the Fondation Nationale des SciencesPolitiques. I also would like to acknowledge for the documents and papers transmitted: François Benaroya (Direction desRelations Économiques Extérieures, Ministère des Finances, Paris) ; Guillermo Calvo (Department of Economics, Universityof Maryland at College Park) ; Barry Eichengreen (Department of Economics, University of California at Berkeley) ; JeffreyFrankel (Department of Economics, University of California at Berkeley) ; Marc Hartpence (Latin America CorporateBanking, Banque Paribas, Paris) ; Carlos Quenan (Institut des Hautes Etudes sur l'Amérique Latine and Caisse des Dépôts etConsignations, Paris) ; Helmut Reisen (Head of Research Division, OECD Development Centre, Paris) ; Andrew Rose (WalterHaas School of Business, University of California at Berkeley) ; Robert Shiller (Deparment of Economics, Yale University) ;Andrés Velasco (Department of Economics, New York University, New York) ; Andrew Warner (Harvard Institute forInternational Development, Harvard University, Cambridge, Mass.).

Interviews(New York and Paris, from December 1996 to October 1997)

Ricardo Almada (Secretaria de Hacienda y Crédito Publico de México, Mexico) ; Juan Amieva (Director General de AsuntosHacendarios Internacionales, Secretaria de Hacienda y Crédito Publico de México, Mexico) ; Carlos Asilis (Chief EconomistLatin American Emerging Markets, Oppenheimer & Co, New York) ; Philippe Boin (Deputy Head of the Latin AmericanDivision, French Treasury Department, Paris) ; Omar Borla (Senior Vice-President Latin American Economist, Flemings, NewYork) ; Olivier de Boysson (Emerging Markets Chief Economist, Economic Research Department,, Banque Paribas, Paris) ;Christian Brachet (Manager of IMF Paris Office, Paris) ; Seno Bril (Business Development, Banque Paribas, Paris).

Christophe Cordonnier (Emerging Markets Chief Economist, Country Risk Credit Department, Banque Crédit AgricoleIndosuez, Paris) ; Mehdi Dazi (Assistant Vice-President, Scudder, Stevens & Clark, New York) ; Jean-Louis Daudier (LatinAmerica Country Risk Analyst, COFACE, Paris) ; Geoffrey Dennis (Managing Director, Global Emerging Markets Strategist,HSBC James Capel, New York) ; Bernard Dufresne (Country Ris Specialist, Financial Division, COFACE, Paris).

Richard Flax (Latin America Research Economist, Morgan Stanley, New York) ; Lacey Gallagher (Director Latin AmericaSovereign Ratings, Standard & Poor's, New York) ; Juan Carlos Garcia (Research Director, Santander Investment, New York) ;Larry Goodman (Head of Latin American Economic Research, Salomon Brothers, New York) ; Cynthia Harlow (Director,Latin America Equity Research, Credit Suisse First Boston, New York) ; Carlos Hurtado (Mexican OECD Ambassador,Permanent Representative, OECD, Paris).

Bénédicte Larre (Head of Mexico Desk, Economics Department, OECD) ; Guy Longueville Emerging Markets ChiefEconomist, Economic Research Department, Banque Nationale de Paris, Paris) ; Claudio Loser (Director WesternHemisphere, International Monetary Fund, Washington) ; Jorge Mariscal (Vice-President & Manager of the Latin AmericaEquity Group, Investment Research Department, Goldman Sachs, New York) ; Stefano Natella (Research Director, CreditSuisse First Boston, New York) ; Jim Nash (Latin American Chief Economist, Nomura Securities, New York) ; Francis Nicollas(Senior Economist, Economic and Financial Research Division, Crédit Lyonnais, Paris).

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Patrick Paradiso (Director of Economic Research, Deutsche Morgan Grenfell, New York) ; Denis Parisien (Vice- President,Bankers Trust Securities Corporation, New York) ; Robert Pelosky (Research Director & Strategist, Morgan Stanley, NewYork) ; Jesus Perez Trejo (Secretaria de Hacienda y Crédito Publico de México, México) ; Arturo Porzecanski (ManagingDirector & Chief Economist, Head of Fixed Income Research, ING Barings, New York) ; Florent Prats (Head of LocalMarkets-Trading and Resarch Emerging Markets, Capital Markets Division, Société Générale, Paris) ; John Purcell (ResearchDirector, Salomon Brothers, New York).

Nabiha Saade (Economic Adviso, Mexican Delegation with OECD, Paris) ; Gary Schieneman (Vice-President Global EquityResearch, Corporate Strategy and Research, Merrill Lynch, New York) ; Eric Schimmel (Latin America Fund Manager,Morgan Stanley Asset Management, New York) ; Nina Ramondelli (Moody's Investors Service, New York) ; José Maria de laTorre (Latin America Emerging Markets, JP Morgan, New York) ; Daniel Zavala (Manager, Emerging Markets, BanqueWorms, Paris).

Bibliographical Note

Javier Santiso is a Research Fellow at the Centre d’Etudes et de Recherches Internationales andAssociate Professor at Sciences Po (Foundation Nationale des Sciences Politiques). He is alsoLecturer on Latin American Emerging Markets at HEC School of Management and on Latin AmericanPolitical Economy at the John Hopkins University Bologna Center. He was awarded the Stein RokkanFellowship by the International Political Science Association in Berlin in 1994. He spent the 1995/97academic years as a senior associate member of St. Antony’s College at Oxford University. He iscurrently working on the temporal dimensions of economics and politics in Latin America. Previousand forthcoming publication: (with Andreas Schedler), «Democracy and Time» and (with PhilippeSchmitter), «Three Dimensions to the Consolidation of Democracy», International Political ScienceReview, 19 (1), January 1998, pp. 5-18 and pp. 69-92; «The Fall into the Present: The Emergence ofLimited Political Temporalities in Latin America», Time and Society, 7 (1), 1998, pp. 25-54; « WallStreet and the Mexican crisis : a temporal analysis of emerging markets », International PoliticalScience Review, vol. 20, n° 1, 1999, pp. 49-71. ADDRESS: Centre d’Etudes et de RecherchesInternationales (CERI), Fondation Nationale des Sciences Politiques (FNSP), 4 rue de Chevreuse,75006 Paris, France. E-Mail: jsantiso@cybercable.fr

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