Friday, February 17, 12-2
Erik Van Deventer
A Political Economy of Investment Banking Leverage: Implications for Financialization
Observing that sociological literature on finance amply describes the financial sector without conceptualizing its laws of motion, while the literature on financialization continues to search for mechanisms and causes, this paper proposes a reexamination of finance from the standpoint of profit as addressed in political economy, and by reference to the strategies of particular firms, in this case investment banks. Theoretical work in political economy shows that leverage is made possible by the difference in profit rates between invested and money capital. The paper argues that this more fully conceptualizes leverage than neoclassical finance in economics. The latter, by methodologically excluding profit in favor of risk, is instrumental to financial actors in maximizing leverage under given levels of risk. Leverage statistics therefore represent a conservative estimate of the success of financial managers’ efforts to make use of as much money capital as possible relative to the equity available to them. This behavior of firms, it is argued, is enforced upon them by competition. Inspection of the SEC filings of five major US investment banks reveals that leverage makes available greater volumes of investment, and new kinds of arbitrage, hedging, and speculation. The paper therefore suggests that the use of capital through leverage should be considered in discussions of the distribution of profit in the economy, dynamics of financialization, and concentrating wealth through financial markets.