0.4 What is cultural economy?  (Page 5/6)

How could the adoption of a system for producing a credit score be responsible for this disaster? Poon demonstrates that what lay behind the predatory lenders and the greedy investment bankers was a new calculative infrastructure that created the investment subprime—“at once a class of consumers, a set of ‘exotic’ mortgage products, and a class of mortgage backed securities—as a visible and fluid network of high-stakes financial action” (2-3). This infrastructure, in turn, was produced when the mortgage industry as a whole adopted a single metric for evaluating the relative chance that individual borrowers would default on their loans. The FICO credit bureau score, a commercially available consumer risk assessment tool, was originally one among many such metrics; the three companies that market credit scores under the brands of Trans Union, Equifax, and Experian initially offered competing metrics. In 1995, however, Freddie Mac decided to adopt FICO in order to standardize underwriting practices in federally sanctioned lending. FICO was then adopted by other lenders and rating agencies (including not only the three companies I just listed, but also Standard and Poor’s, the equity rating agency), and by 2003 it had become the industry standard—in part because it could easily be operationalized through proprietary, automated underwriting software (Loan Prospector). With the adoption of FICO, credit-by-screening, or the case-by-case evaluation of potential borrowers as individuals, was replaced by credit-by-risk, an automated, quantitative assessment of risk pools that did not even require individual interviews. Once in place, the score scale FICO created not only discriminated between a group of loans designated “prime” and those designated “subprime”; it also made it possible for loan originators to devise products for which members of the second group could qualify. In Poon’s words, “once ‘creditworthiness’ is expressed through a statistical scale of gradated risk, a loan can be arranged for people who are of low credit quality; that is, for those who would not be considered particularly ‘creditworthy’ from a screening point of view. Screening is a risk minimizing strategy; statistical lending is a risk management strategy, that is, one that embraces risk” (14). With lenders embracing risk and packaging (and pricing) mortgages according to risk pools, the pieces were in place for investment banks to buy up, then bundle and slice these pools of mortgages, and then to use them to collateralize their own heavily leveraged bets.

Poon’s conclusions are sobering. “It is not quantification, model building, or numerical expression as information per se , that should be linked to increased channels for high-risk investment in the mortgage industry,” she writes. “Nor can responsibility for the changes be flatly pinned on the [government-sponsored enterprises, like Freddie Mac]. . . . It is the pioneering journey of FICO scores throughout the industry that has integrated, assembled, and aligned different market agents. The integrity of the chain . . . is what has rendered these diverse agents capable of engaging together in a distinctive and coherent, globe spanning circuit of productive subprime real estate finance” (17). Then she concludes: “In this view, the protracted globe-spanning credit crisis . . . should be studied first and foremost as the temporary achievement of a tightly calculated system of financial order, not as disorder” (19).