1The infrastructure liberalization  policies adopted at beginning of the 1980s reveal a curious paradox. They were devised on the assumption that competition was the best method for allocating resources and improving performance, and that the firms which held the monopolies retained too much power.  This led to the privatization of public companies and the unbundling of monopolies into smaller, independent companies. Consequently, supply was organized in a new fashion and the power of incumbent managers was weakened, to the advantage of markets and regulators. Although this phenomenon has been studied in depth,  very little attention has been paid to a concurrent phenomenon: the rise in power of global finance. General works on the politics of privatization do not even devote a chapter to it.  Finance’s responsibility with regard to the 2001–2002 crisis has scarcely been mentioned.  And yet, its role began with the conception of these policies and has over time constantly reasserted its power. For more than twenty years, global finance was able to mature without attracting any significant attention. It was not until the major crisis of 2007-2008 that its power was recognized and that studies began to be published. 
2This paradox whereby too much attention has been paid to one half of the equation (infrastructure managers), but none has been paid to the other (financiers), calls for analysis. How is it possible for an industry to consolidate itself and gain considerable power at a time when the logic of competition – which, incidentally, it encourages – is touted to reform other industries? Perhaps the sociology of interest groups can venture an explanation: what are the interests of these financial actors and their formation, as well as the resources and action repertoires that they employ?  Thus Joseph Stiglitz explains how, during his role as economic advisor to President Clinton, he witnessed the attempts of global finance to resist any and all forms of regulation. Global finance succeeded in making the very principle of its self-regulation credible  – trust us – at least until the end of the following cycle and the catastrophic events that happened in the autumn of 2008, when several central governments were forced to intervene in order to avoid general bankruptcy. But ultimately, this explanation merely prompts us to find whose visible hand is at play in all these matters. The argument put forth in this article is that the power of global finance has only belatedly been recognized not because political leaders and scholars were “tricked” or less than vigilant, but rather because they were confronted with the expression of a new form of power that did not fit into the usual categories. Public policy knows how to deal with power when it exhibits a visible shape, with a defined subject, a center, and limits. We see here a connection to Jean Leca’s definition of the act of governing.  With global finance, on the contrary, we face a discrete, invisible power, spread out rather than centralized, and whose actors are coordinated less by their integration into hierarchical structures than by the usage of shared higher principles and instruments. This type of power recalls the question asked by Pierre Favre in his discussion with Jean Leca: who governs when no one is governing? In this case, there is no center of authority that decides on large investments and gives instructions to messengers scattered across the five continents. It is a question of power shared among numerous individuals who converge during the execution of transactions because they share instruments as well as information. Global finance has thus introduced a new form of power: informational power.  In reality, the power of global finance does not only take one form and this is why it is so difficult to comprehend (and, likewise, to reform). In some aspects, the power of finance is visible, direct, as can be seen in property rights and management roles. The most important financial actors own quite visible assets in major first-world cities: prestigious office buildings, shopping centers, and technical networks. But in other ways this same power is vague, indirect, and oblique. If global finance has influence over urban public policy, it is not because it owns all the buildings or hires all company managers, but rather because it monitors and evaluates a great number of projects, and because its instruments and their associated criteria have been widely disseminated and now have impact well beyond their sphere of direct intervention. In other words, the problem posed by global finance is that it has introduced a shift in the usual types of analysis. Public policy knows how to deal with phenomena that have stable and visible origins: the power of property, the power of management. Firstly, global finance introduces a more vaguely defined form of power – informational power – and secondly, it changes shape and can belong to one or more categories of power depending on the nature of the transaction. The study of global finance thus presents a challenge to observers who must approach it comprehensively in order to perceive its unity, while taking into account the basic unit of action: the transaction.
3It is in studying the infrastructure sector and deregulation policies that we became aware of the ascendance of this industry. Cities present an especially interesting subject of study. Historically, they entertained a distant relationship with finance and markets thanks to the importance of public policy and building systems dominated by small companies. In this arrangement, finance manifested itself through public, savings, and retail banks. A major transformation took place in the 1990s, when several sectors were liberalized and the economy became globalized. This text is structured by three questions. First: how did global finance enter the urban arena? The liberalization policies of network industries acted as a catalyst, breaking open a vast new territory. New institutional arrangements emerged, and cities consequently found themselves at the center of global finance’s meteoric rise. Second: how is the power of finance manifested in cities? Here, we have a clear illustration of the role instruments play in public intervention. Our approach follows in the footsteps of the work done by institutional economists and political scientists who have closely examined how key financial players are outfitted in order to act.  This investigation has revealed the astonishing complexity of these modes of action, with their own rules, norms, accounting standards and ratio calculations. Consequently, functioning as the highest order of economic institutions, global finance is able to exert its influence over the entire structure, down to the retail banks that participate in the elaboration of medium-sized urban projects. Third: how can finance be considered truly global? The usual understanding of finance that focused on banks must be revised to encompass a broader notion: the finance and consulting industry. This means that other players now shoulder the work of banks, and that this vast configuration as a whole forms an industry. What then are its unifying factors and whence does it derive its power?
Global finance and the city
4The emergence of finance in urban environments is not an entirely new phenomenon. Merchants and bankers contributed to the development of cities during the Middle Ages and the Renaissance.  At the end of the nineteenth century, the growth of real estate companies was inseparable from banking.  At times, the two activities were intertwined, as was the case with the Pereire brothers and the Bank of Indochina; the post-World War II era did not disown this intimate relationship.  The development of large infrastructure projects under concessions – railroads, canals, electricity networks, water supply systems – was always associated with financiers, as a great deal of money had to be borrowed in order to undertake such ventures.  In 1853, the first Board of Directors of the Compagnie Générale des Eaux included a few names from the higher echelons of the Parisian banking sector.  A quarter of a century later, the Crédit Lyonnais sponsored the birth of the Société Lyonnaise des Eaux et de l’Éclairage. 
5Nevertheless, during this period the relationship was not yet close enough for finance to be considered an essential player in the fabric of urban society. It intervened in certain key projects but continued to be a minority player, compared to the large number of local real estate developers and small construction companies in particular. Power remained largely in the hands of political leaders and managers. Bankers intervened first and foremost as input – that is, capital – providers even if on occasion, some of them were somewhat more involved on the conceptual end of things. And in fact, urban research conducted in the 1980s found that the answer to the question “who creates the city?” was the following: landlords, real estate developers, construction companies, often the state, sometimes its inhabitants and rarely bankers.  This new process of urban financialization began in the 1990s and initially manifested itself in two ways: first, with the privatization of network industries, a new kind of asset emerged on the financial scene; second, innovations in financial techniques and the carrying of urban assets by exchangeable share structures (special purpose companies, real estate investment trusts, specialized funds) rendered these assets liquid. They escaped their traditional ties to territories and could be traded like other assets – stocks options, bonds and other forms of debt – thus entering into the great game of global exchange. In other words, privatization freed the market from an impasse and then securitization differentiated the core asset (a long-term and quite illiquid product) from its property in the form of exchangeable shares.
The domino effect of privatization
6The growing influence of finance on the urban landscape is inseparable from the policies liberalizing network industries, which opened up new markets. Until that time, the direct involvement of financial players was generally limited to corporate real estate in large industrial countries.  In 1984, the privatization of British Telecom and the entry into force of the court decision abolishing the 70-year old AT&T monopoly  kicked off a massive sales program. These changes affected all the technical networks: airports, highways, railroads, ports, telecommunications, electricity generation and distribution, gas transportation and distribution, cable networks, water supply and sewage systems. Over the course of the following decade, this policy was extended to every country in concentric layers. First, the two leading countries – Great Britain and the United States – debuted such policies; then they were extended to countries under their influence (Australia, New Zealand, Chile, Argentina, the Philippines); and then to Europe and the Communist countries who had entered the market economy after the fall of the Berlin wall in 1989. India and Africa followed at the beginning of the new millennium.
7Members of the financial and consulting industry were present at every step of this political negotiation but remained in the shadows, and consequently the majority of studies have focused on more visible players instead: political leaders, CEOs and regulators. And yet it is indisputable that financiers and consultants were heavily involved. They first participated in very important lobbying activities in the United States and England during policy development.  Key individuals and subject experts navigated between the big consulting firms and think tanks, assuming responsibilities in investment banks as well as in public institutions.  These individuals contributed to the design and preparation behind large-scale global privatization. Then, thanks to their skills, these figures of the financial and consulting world were also the first to benefit from the considerable uptick in transactions that ensued.  The big investment banks were very involved in the liberalization of the telecommunications, gas and electricity industries. In the telecommunications sector and the rise of new information technologies (the dotcom boom), these actors saw the possibility of a “new economy” that would combine technical innovation with institutional creation, allowing for unfettered and unlimited growth.  During the 1990s, teams from the largest New York banks – Credit Suisse First Boston, Goldman Sachs, and Morgan Stanley – played an active role in providing financial assistance and consulting advice to dotcom companies.
8These forms of privatization cannot be reduced solely to the sale of public companies, as they subsequently produced a domino effect. Let us first consider what precedes and what follows a sale. A policy of privatization begins with studies (conducted by banks or consulting firms); governments must establish priorities among the companies potentially for sale. Then assets have to be evaluated in order to establish their value when floated on the stock market. This is an important process whereby the bank thoroughly dissects the structure of the company to be sold: its organization, assets, investments, etc. This procedure reveals a great deal of information about the company as well as markets in the relevant country. Later, this information becomes a precious resource for the bank, allowing it to intervene in other transactions in the same country or sector.  And finally, after the company is listed, the usual market games can begin, with their permanent flow of buying, selling, and capital-raising, which all offer so many opportunities for the financial industry.
9Entry points for the financial sector to get involved in urban affairs also increased as the doctrine of privatization evolved. At first, governments sold public companies whole, without modifying their structure: public companies sold as monopolies simply became private entities. This choice reflected the economic theory of property rights which considers the existence of financially-interested property owners to be a major factor of performance.  After several privatizations, economists realized that this condition was not sufficient and that regulatory agencies could not counterbalance the power of these new managers. They thus recommended a more radical shift to competitive market structures. Policies in this vein were introduced in different ways in the telecommunications, gas and electricity industries.
10In this last sector, the existing model of vertically integrated monopolies was replaced with a division of functions:  some were opened up to the market (generation and retail), while others remained monopolies (distribution and transport).  This structural unbundling had considerable repercussions. Whole industrial configurations were divided into autonomous subsectors. As a result, sectors traditionally organized in the form of compact blocks that were difficult to acquire exploded into dozens of different publicly traded firms, all with potential exchange values on the stock market. Take, for example, the following case. In Europe in mid-2008, the capitalization of the largest electrical companies was about 150-250 billion Euros, for each of the three largest countries. With a reformed monopoly, France’s main player EDF was worth about 150bn Euros. In Germany, which had an oligopoly, Eon was estimated at 120bn Euros and RWE at 68bn Euros. In Great Britain, which chose a divided structure as a solution, the sector was organized among three historical producers and several independent players, a carrier, twelve distributors and several suppliers: the industry was thus split into many companies, each of which was worth only 5 to 10bn Euros. Most of these firms were eventually bought out; the leading British utility company, Centrica, was estimated at 22bn Euros. 
11By altering the structure of these sectors, reforms first provided an entry point for the financial industry as portfolio consolidators, creating the possibility of buying smaller assets than before. Then, the introduction of competition and reliance on the market, used as a coordination mechanism, allowed the financial industry to act as an agent in wholesale and retail markets, and to cover the risks of distributors who did not control their own supply (e.g., gas, electricity). In other words, when control of the value chain by integrated firms was challenged, this opened up the market to the financial industry in two ways; first, by permitting transactions involving smaller-sized firms, and second, by introducing new risks that would in turn require cover mechanisms. Up until that point, policies had been elaborated by managers and government officials, who were in turn advised by high-ranking civil servants. For other individuals and groups, this integrated world had remained largely opaque. The combination of privatization and the breaking up of structures opened up these industries and allowed finance professionals to compare performances, to arbitrate and to participate as new asset assemblers by means of policy development.
Who owns the “bricks” of the city?
12During the 1980s, a new type of investor emerged: private equity funds.  These specialized funds introduced a new approach that we will briefly attempt to describe here. An equity fund, not publicly traded and often created by the former managers of large investment banks,  buys a company. To do so, it constitutes a “specialized fund” that mobilizes capital coming from other financial partners (banks, insurance companies, pension funds, mutual funds, etc.), seeking to diversify their portfolios and increase their yields. With the capital raised and oftentimes the help of investment banks as well, the investment fund then targets poorly managed or under-evaluated companies with potential. Here, three innovations with regard to traditional investment techniques can be observed. First of all, instead of having a large number of minority shareholdings and no influence over management, these funds take over the management of companies, remove them from the stock exchange if they were previously listed and thus obtain complete freedom and control to restructure them as necessary.  Then the funds buy out these companies by combining capital and debt, often with a large proportion of debt.  During a low interest rate period, having recourse to debt allows for the multiplication of transactions with reduced capital injections. The debt is reimbursed by the operating profit of the bought-out firm. Finally, as they are not listed on the stock exchange, these investment funds are not subject to many regulations and their ensuing flexibility lets them quickly complete transactions. Once the company is viable, it is sold or floated on the stock market. The added value is shared between the investment fund and the investors in the specialized fund. 
13Since the 1980s,  this technique has been applied to a great number of industries. During that time, investors targeted companies on the brink of bankruptcy, which is why they quickly acquired an image as predators or “vulture funds”. At the end of the decade, the crisis of American savings banks allowed funds specialized in taking on high-risk debt to buy back real estate assets at attractive valuations. When the real estate bubble burst in Japan in 1991, a similar scenario was repeated with the same players: American banks and funds bought back assets by creating special vehicles and then real estate trusts (Reits).  Witnessing a drop in asset values combined with historically low interest rates, the 2001-02 crisis allowed private equity funds to gain traction. Many managers of traditional funds suffered losses when values fell and thus began to look for more productive investments elsewhere. Private investment funds started to look very appealing. This translated into very tangible numbers: in 2005, this industry raised 293 billion dollars.  The same figure became 400bn in 2006 and many experts even predicted 500bn for 2007, before the crisis hit. The size of specialized funds regularly increased, and industry professionals even started to refer to “jumbo funds”. In 1995, the maximum amount raised for a fund was around 5 billion dollars. In 2006, several companies launched funds of over 10 billion dollars. Blackstone broke the record by raising 15.6bn dollars at the beginning of 2006 for an operation originally estimated at 11bn.  In a conservative ratio of one to three between capital and debt, 10 billion dollars “raised” will generate about 40 billion dollars of purchasing power. These funds can thus participate in very large operations. This explains the increase in both the size and number of transactions. In 2006, this industry had already effected 2,992 operations with a total value of 723.2 billion dollars (see Table 1). Six private investment funds concluded transactions involving over 70 billion dollars: Texas Pacific Group (93.9); Blackstone (85.3); KKR (77.2); Bain Capital (74.7); Carlyle (72.9); and Goldman Sachs (72.5).
The ten first private equity funds in 2006
The ten first private equity funds in 2006Value of the transactions in billions of dollars; N = Number of transactions
The 5 funds with the greatest geographic diversity are listed in italics.
14At the end of the 1990s, this model was applied to cities by the Macquarie Group, an Australian investment bank.  Participating in the management of the country’s funded pensions – the Australian Future Fund – the Macquarie Group was seeking steady returns. Its leaders hit upon the idea of combining the debt assumption scheme with infrastructure management, which has traditionally generated stable operational results. And so Macquarie became involved in highways and airports, and then expanded to water and energy; in 2007, its urban management assets totaled about 50 billion Australian dollars. Rather quickly, a number of other companies imitated the Group.  From this point on, financial players were increasingly involved in all parts of the urban fabric. Thanks to the financial press, I was able to establish a database of transactions involving urban assets for the years 2000-2007 (first half of 2007). The 170 recorded transactions allow several results to surface (see Table 2).
Transactions in infrastructure involving investment funds
Transactions in infrastructure involving investment fundsThe period of time studied is bookended by two high points in the economic cycle. March 2000 corresponds to the dotcom bubble bursting; July 2007 marks the beginning of the subprime mortgage crisis. While monitoring urban companies, I recorded the transactions reported by the financial press (The Financial Times) and those which concerned urban assets. In every case, the buyer and the seller were known (and sometimes those who made losing offers). Regardless of the nature of the asset sold, we know the price of the transaction and sometimes the price of the preceding one. Comments also indicated why the owner was selling. Nevertheless, this method has its limits, as it does not cover all operations.
15The year 2002 was a turning point. During 2000-01, large operations were still primarily managed by the “incumbent” operators of network industries. Records exist of the takeover of Costal Natural Gas by El Paso (15.7bn dollars), the buyout of PowerGen by Eon (15.0bn), as well as RWE’s entry into the water sector with Thames Water (7.4bn) and American Water Works (8.0bn). During the 2001-02 crisis, network companies were pushed aside by private investment funds. After years of optimism, financial analysts and rating agencies called into question the debt of these companies, thus forcing the latter to revise their growth model. On the other hand, private funds – buoyed by investment banks – emerged as new players on the financial scene, benefiting from plenty of available capital, low interest rates and these impaired assets. Here in the great asset clearinghouse, we may glimpse the visible hand of these financial players: they did not encourage prudence during the bullish period and they reacted brutally when the cycle reversed itself and debt needed to be slashed. Financial actors therefore benefited from the policies adopted during both phases of the cycle.
16Several markers illustrate the boom-and-bust cycle quite well: a high point in 2000, a fall in 2001-02, then a continued upward trend until 2007. The number of annual acquisitions regularly increased during this period. The average value, situated in 2003 at a straight value of 1.1bn dollars, progressed each year to finally reach around 6bn in 2006 and the first two quarters of 2007. After having fallen to 4bn dollars in 2002, large transactions paused for a moment before picking up again; in 2005 the figure was raised to 20.5bn and then increased to 40bn or more during the two following years. 2006 was an especially fruitful year, witnessing several exceptional transactions that attested to the mechanism’s boom: the British airport operator BAA was taken over by Ferrovial and the investment fund of Singapore (GIC) for 15.6bn dollars;  Equity Office Property was bought by Blackstone for 38.9bn; and HCA (hospitals) was taken over by the association between Bain Capital, KKR and Merrill Lynch for 32.2bn. The first two quarters of 2007 were marked by KKR and the Texas Pacific Group’s massive take-over of the electrical company TXU for 44.5bn – this was the last large transaction before the cycle began its downward motion.
17A breakdown by sector and periods reveals that energy and large transport infrastructures (airports, highways, ports, railways) were the sectors to experience the greatest number of transactions (28 and 27, respectively). Then came telecommunications and water (the latter largely with regard to British companies), experiencing 20 transactions each. These operations were spread out evenly over the period of time studied. Real estate and hotels and leisure came in third place with 16 and 17 transactions respectively, commencing in 2004 and occurring primarily in the United States, Japan and Germany; this last country witnessed the transfer of ownership of large real estate plots by municipal governments and utilities. Among the less frequent transactions, we find cable networks, hospitals and retirement homes. Waste management brought up the rear with 6 transactions taking place mainly in 2006 or at the beginning of 2007.
18We can thus state that it was the instability of the deregulated telecom and energy markets that prompted investment funds to enter into this unfamiliar realm. At first, these companies were interested in utilities that were discarding assets to reduce their debt. Then investment funds expanded their sphere of activity to include real estate, recreational facilities, cable networks and hospitals,  all of which generated recurring revenue streams, while being less strictly regulated than public network services. Half of these transactions corresponded to assets equally split between the United States and the UK. In addition, a certain part of these were second-hand transactions: private equity funds resold their assets to other funds. Finally, we see Germany with 17 transactions, many of which were in real estate, and France with 14 transactions, including the assets of Vivendi, the Pages Jaunes, Saur, and a retirement home run by the CDC. Benelux witnessed 12 operations mainly effected in the Netherlands (cable, waste management). These countries accounted for three-quarters of all transactions.
Multiple urban consequences: what instruments do
19As suggested by Brender and Pisani,  global finance’s first contribution was connecting the savings capital available in certain parts of the world with projects situated elsewhere. It developed new instruments that expanded the banker’s traditional sphere of activity, which had been typically relationship-based;  in doing so, global finance freed the markets from their local constraints and multiplied the number of possible transactions. This contribution was very important for urban projects, which had long been constrained by their long-term nature, and their rootedness in a physical location. From then on, utilities managers and real estate developers had access to more diverse sources of funding and realized that new mechanisms allowed them to cover risk and exit failing operations if necessary. But is the role of this industry simply that of a neutral intermediary connecting available capital with demands for funding? What is at stake with the use of these new financial instruments? In reality, global finance does a lot more than just finance. It measures and compares, and in doing so evaluates assets, calculates yields and estimates risk. This coupling of risk and returns  acts as a guiding principle, informing choices from the outset, and it is embodied in the instruments of calculation used by the whole profession.
Global finance and the creation of institutions
20The finance industry promotes general principles that make the existence of global markets possible and allow for the combination of asset portfolios. In doing so, the industry contributes to the development of formal institutions: the respect of property rights, the existence of an accounting system that applies international standards and commits to transparency, as well as the existence of an independent and effective judicial system ensuring contract implementation at a low cost. Global finance sets its sights on open markets, constituted by a large number of publicly traded participants who all use the same accounting system; markets where it is easy to get in, make one’s mark, and get back out again. A preference exists for companies that apply the principle of “one share, one vote”, with independent administrators, and whose capital is not controlled by a shareholder’s agreement.  This vision is at odds with traditional urbanism, characterized by strong project management. It also disqualifies municipal enterprises and public-private ventures which are otherwise quite active in network industries and urban development.
21Global finance has also introduced new principles into urban affairs, such as Ricardo’s theory of comparative advantage and a push towards specialization, hitherto applied only in private firms. The analogy between companies and cities is not without repercussions for the urban landscape. First of all, it engenders bitter competition, thanks to new concepts such as the “first mover” advantage found in network industries and a “winner takes all” attitude developed in the domain of information technology.  The message sent to city leaders is often that there are not many opportunities in certain sectors, so the first companies to get involved will necessarily emerge as winners; it is thus important to dive in quickly and jockey for position. The same few examples – such as Bilbao’s renovation – are touted worldwide and serve as reference points. Another consequence: actors specialized in a handful of activities in which they are the market leader are now forced to outsource their other, less profitable, activities. But even if such a configuration were theoretically possible in the urban landscape, it would require a different political model. Can we imagine, for instance, a city that would sub-contract out all its non-essential planning activities? Such a strategic and specialized city would have to call upon second-tier external service providers for its secondary functions; that is to say, a labor force which would fluctuate according to economic conditions. We can observe some of these elements in the Dubai model: a development strategy elaborated in the hopes of positioning itself globally in a few sectors (finance, leisure, logistics); a number of projects which mostly require financial techniques; a dissociation of central activities and secondary functions, the latter performed by an immigrant workforce. This conception of a specialized city uniquely positioned within a global world and divided into a core and a periphery leads to a new political geometry, one in stark opposition to our urban heritage. Ever since the Middle Ages, European cities have been places of freedom (community charters) and a melting pot for different populations.
22When measuring asset values, the financial industry uses its own instruments and criteria to calculate values; such operations are anything but neutral, as there is always some degree of interpretation regarding the value attributed to risks or assets.  For a long time, project value was calculated according to costs and reference prices, and investors, primarily interested in added value, acted according to the logic of wealth preservation. Debt financing and the quest for profit led to greater emphasis on yields, simply defined as the relationship between revenue streams and invested capital. More precisely, investments are evaluated by considering the capital market and the project at hand. For the first, the cost of capital (CoC) is calculated according to the different countries, markets, risks and financial engineering required; for the second, operation surpluses are measured to determine the Internal Rate of Return (IRR). If the cost of capital is greater than the internal rate of return, according to market logic the project should not be undertaken. In order to be able to compare different projects over the same time period, these values are rescaled to obtain the discount rate.  All of these methods are highly mathematical compared to what was still being used thirty years ago, but although they are supposed to allow for an indisputable measurement of value, they are not free of loaded assumptions. First of all, what is a “reasonable” revenue? For a long time, 15% per year was considered reasonable. Secondly, the market prices introduced into the models are rather inept at evaluating externalities and calculating long-term value – two things on which urban development depends.
Tangible impacts on the city: projects, products and places
23Functioning as the connector between available savings capital and assets, global finance reorganizes circuits and exploits the mobility of capital to choose places and products;  it thus acts upon the geography and morphology of cities. The association of risk and profit leads to the selection of already established cities or ones with potential. A recent study conducted in France by Ludovic Halbert showed that more than 70% of investments had taken place in Paris and its inner suburbs. Similarly, in Japan 38 large real estate funds (J-Reits) own 1,831 buildings, 75% of which are located in the Tokyo region.  During the years 2000-07, investments were concentrated in the global metropolises of industrialized nations and in the major cities of a few developing countries, rising in the rankings: Shanghai, Bangalore, Macao, Dubai. Investments attract other investments – financial logic thus leads to the selection of a handful of locations that will attract investors and experience a rise in both rent prices and property values. A connection exists between the phenomena of metropolization and financialization. By endorsing certain major cities, global finance helps reinforce the quality of construction, networks and equipment in these locations. The gap between the selected metropolises and other cities grows wider. At the same time, these investments represent assets recorded on the balance sheet of the financial players. Even if the techniques of debt assignment have evolved, the fate of global finance and these metropolises is now intertwined; the latter’s performance guarantees the valorization of the former’s investments.
24Global finance also has an impact on urban form and design. It generally invests in large-scale operations, such as office buildings, large shopping malls, sports complexes, casinos, and medium-sized urban networks. The consideration of risk leads first and foremost to working on a project-by-project basis and obtaining ad hoc funding in special vehicles so that, in the event of a problem, the losses do not immediately affect the parent company. The city of finance is thus organized in legally autonomous and often morphologically separate “bricks”. Secondly, aversion to risk tends to privilege multi-functional projects. A grouping of activities allows for the combination of different cycles: if an office building does not do well on the rental market, its adjacent shopping center, parking complex or luxury hotel can stabilize the ebbs and flows in revenue. Moreover, these polyvalent configurations are always in use and draw large crowds, therefore also producing regular revenue streams. These multipurpose centers offer many kinds of services and take up considerable space in the urban landscape; they are also more attractive than isolated, specialized shopping destinations in local neighborhoods. In sum, a prime location and a diverse array of services offered in the same place guarantee the greatest number of customers.  All major world cities are organized in these large, disconnected blocks.  The introduction of new financial and legal engineering in urban planning has given birth to massive new configurations which have been called “paquebots urbains”  (literally, “urban cruise ships”). These structures are hypertechnical, integrated and multifunctional, possessing all the essentials of modern life in one installation. As these structures are divorced from location, they are emblematic of global modernity – they could be constructed in any city throughout the world.
25New tools have been perfected to undertake these projects, such as public-private partnerships (PPPs) and design/build/operate contracts. Such arrangements confer important responsibility to financial players at every step of the value chain. These transactions end up exerting a great deal of pressure on the initial assets.  One needs only to consider the long list of actors paying themselves from the “source” operation and its economic outturn account. The company purchased by a specialized fund must reimburse its debt and achieve results in order to remunerate the entire chain of participants, down to the retiree who placed his or her savings in a pension fund (see Table 3). This pressure to ensure added value is not without consequences. First of all, the short-term mindset of investors is opposed to the long-term needs of urban development; for the moment, no one is financing 35 to 40-year projects.  Secondly, these schemes assume that the project will find its own equilibrium – which implies having little risk and a certain level of solvency. These are conditions that are theoretically all present in industrialized nations but rather harder to satisfy in developing countries. The financial industry’s criteria of profit creation and risk aversion draw an invisible circle which excludes the most necessary operations, while conserving the easiest ones. The realist strategy of British water companies since 1999 illustrates this point. Half of this industry is now controlled by financial investors and almost all these utilities have withdrawn from international contracts by relying on hyperrealist reasoning: better to work on a regulated core that guarantees approximately 8% profit (in actual value) rather than take risks abroad. 
Stakeholders and gains
Stakeholders and gains
26We can benefit from a fair degree of hindsight when examining the bull market of the 1990s, which was followed by an initial jolt in 2001-02, a recovery and then finally a major new crisis in 2007-08. These different contexts allow us to discern the work of financial instruments and their effects. Globally, the principle of comparison between all asset classes with arbitrage (benchmarking) results, by definition, in portfolio shifts. On average, investment fund assets were kept for 3.5 years, and rarely for more than 7 years.  The financial industry injected a principle of movement into urban affairs that entailed changes in shareholders and strategies. The history of the electric power sector during 1992-2002 is an excellent example of this, even if it has been a highly structured sector, focused on long-term planning.  First of all, the liberalization policies largely supported by financial and consulting intermediaries challenged existing monopolies; utilities thus began to look for new sectors of development.  During the upward trend (1995-2000), global finance supported their internationalization and the multi-service diversification of the big European electrical companies. After the 2001-02 crisis, when the cycle began to invert, a new doctrine saw the light. Analysts radically changed their point of view, now saying that companies needed to focus on their core business. Said companies thus sold assets they had acquired just a few years prior, and which had been justified by a great deal of rationalizing. For the financial industry, these analytical changes also produced an uptick in their consulting, debt financing and purchasing activities.
27This principle of movement is supported by the type of financial engineering used during the set-up of operations. In order to establish a company’s value, analysts use a method called “sum of the parts”, which re-evaluates each part at its market value. This method tends to maximize prices. Since the purchase takes place in debt, if conditions deteriorate or the context changes, the buyer has no choice but to sell parts of the company. The story of BAA’s acquisition (the British airport operator) by the Spanish group Ferrovial in 2006 is an emblematic case of this scenario.  After buying at a high price, the group was forced to sell its subsidiaries, restructure its debt and transform its organization. The calculation method used for the first transaction engendered numerous other transactions.
28In the past, bankers lent money, financed loans thanks to the bank’s deposits and bore the risk in their accounts until the loans were reimbursed; investors retained their assets. Three innovations in financial engineering have modified this scenario. They concern the transfer of property, the transfer of debt and the transfer of debt risk.  Transactions have been structured with a high-debt multiple. In order to bear the load of its loans, such activity thus needs to encounter no problems. If problems do occur, companies that made debt-heavy acquisitions during the boom years are then forced to sell assets in order to repay them. This phenomenon was observed in the aftermath of the 2008 crisis.  According to a manager from Axa Private Equity, “Out of the $1,500bn raised by private equity between 2005 and 2007, we think a lot of these commitments will come on to the secondaries market in the next three to four years – at least 3 per cent – which would be $60bn a year.”  This means that the assets retained by the first investment fund are sold off to a second, or even a third, investment fund. These types of operations represent more than half of all transactions in Europe for the first two quarters of 2010; or 11bn Euros out of a total 19.7bn Euros.  Transfers can also apply to debt. A bank may sell its loan to a financial vehicle that, in order to purchase it, issues asset-backed securities. These bonds are subscribed to by deposit holders. Thus, the bank regains freedom in its ratio of loans and deposits and can once again extend credit.  And finally, transfers can apply to debt risks (i.e., exchange, non-payment, and interest rate risks). The derivatives market has experienced spectacular growth. New contracts  have been developed and currently change hands via two important circuits: clearing houses and over the counter (OTC) markets.
29Like Aesop’s tongue, these financial innovations often combine contradictory characteristics. On the one hand, they facilitate exchange and allow for smoother operations. On the other hand, however, by accelerating property rotation and risk transfers, these financial inventions make it difficult to determine who ultimately bears the risk and who owns the final property. Who is involved and responsible for the installations in the long term also becomes problematically vague. Since new buyers are themselves purchasing by means of debt, the whole mechanism participates in the creation of debt.
30In these operations, the financial apparatus appears to be more important, as a source of value, than the exploitation of the asset. A study conducted by a Swiss company examining 241 European private equity firms during the period 1989-2006 produced some very interesting results.  On average, the total value was multiplied by 2.71. This number can be explained as 0.87 by the gross operating surplus, that is to say, by management performance (80% of which was attributable to increased sales). The remainder, or a good two-thirds of the increased value, came from financial engineering.  This means that financial players are better off concentrating on the financial engineering aspect of transactions, as it allows for sizeable profits over a short time span, rather than spearheading industrial policies that can only produce mid-term results. This explains the indifference to the substance, and the extreme attention paid to procedure in the financial industry. My study of the Macquarie Group reached similar conclusions.  This investment bank raised capital in specialized funds; by combining its own resources and those of its specialized funds, it then purchased infrastructures. By monitoring its policies since the beginning of the 2000s, I have observed that a large portion of its high profitability – the bank is called “the millionaire factory” in Australia – was obtained by asset transfers. First, once an asset is secured, the bank sells a part of its shares in the asset bought to the non-listed specialized fund that it established: this is the first added value. Then, once activities reach “cruising speed” and if conditions are favorable, this fund can be listed or sold to other investors, and the rest of the bank’s participation is sold off: this is the second added value. This financial sequence takes precedence over industrial policies.
31Financial engineering is even more successful at generating value in a bull market. Two scenarios explained in the Financial Times demonstrate this.  Let us consider that during a bull cycle an investment fund acquires a company for a value of 100, 20% of which is financed by capital and 80% by debt. Two years later, this company is sold for a value of 140. The fund pays back its debt (80) and keeps 60; its capital has thus been trebled. During a bear cycle where credit is restricted, the same fund only has access to its own capital. It acquires, without debt financing, a company for a value of 50. Six years later, this company is sold for 100. The fund thus gains 50 and its capital is doubled over six years. The results are very clear: transactions happen much more easily during a period of optimism when the abundance of buyers allows for easy unwinding. Consequently, debt-based transactions lead to positive expectations and generate cyclical patterns.
The finance and consulting industry’s informational power
32In order to understand the true consequences of deregulation policies, we must examine the great economic crisis of 1929. Seeking to protect the economy as well as consumers from the power of global banks, the American Congress had at the time separated retail banks from investment banks (the 1933 Glass-Steagall Act); similar measures were taken in Europe at the time. The distinction made was a very important one. Publicly traded companies were required to follow rules of caution. The more risky activities were carried out by investment banks that used their own funds – the risks that they faced thus encouraged them to only participate in well-researched transactions.  In other words, the architecture of the banking system had introduced a principle of prudence and regulations for investment banks. This organization of the financial world remained in effect for about sixty years. When one referred to the financial industry, one generally meant banks and, at the very top, investment banks.
From large banks to the finance and consulting industry
33This industry experienced a number of important transformations that led to a new configuration. Two dates stand out as crucial turning points: 1971 and 1986. In 1971, the United States abandoned the gold standard established by the Bretton Woods agreement. This decision naturally engendered fluctuations in the exchange rates between currencies and led to the development of risk coverage techniques.  Investment banks began to offer currency and conversion arbitrage services, and additional services to the oil and raw materials markets, which were likewise now subject to important price fluctuations. These abilities would allow investment banks to later offer risk coverage instruments – derivatives  – to the gas and electricity markets once they were deregulated. In 1986, Great Britain deregulated its financial markets (the big bang); at the beginning of the 1990s, the United States modified its regulations, effectively putting an end to the separation established by the Glass-Steagall law. Formerly compartmentalized activities were now connected, giving rise to global banks with new tools and capabilities.
34The transformation of the financial industry can also be explained by the globalization of trade within the economy. This is the argument largely put forth by Rajan and Zingales to explain how the actors of global finance were able to circumvent the opposition of national interests: if a sufficient number of countries open up their markets, this forces other countries to likewise open up as a consequence of the resulting “holes” between borders (the grey economy, customs duty).  Therefore, in a now more open world, the large banks extended their networks over several continents, adapting to their increasingly international clients and offering services to newly liberalized economies. In order to intervene in new, less well-known countries, and to follow longer and longer value chains with more and more stakeholders, supplementary banking functions became necessary; among them, appraisals, feasibility studies, ratings and the account certification of global groups. In his book on consulting companies and the largest accounting firms, Christopher McKenna refers to these functions as “the world’s newest profession”.  The innovation brought about by globalization is that a small number of actors, derived from those already operating in each sector, have been able to intervene globally. This club of the “global and famous” acts as a network and forms a new industry: the finance and consulting industry. It is composed of the large investment banks, a few private equity funds, the four largest accounting firms, three rating agencies, several law firms and numerous consulting firms (see Table 4).
Major players of a new global industry
Major players of a new global industry
35The growth of this new industry can be traced back to the mid-1990s. At that time, the economy was rapidly developing, thanks to innovations in information technology and the opening up of China and the former Soviet bloc.  Privatization caused whole countries and new sectors to enter into the market economy. This trend was supported by three external factors that strengthened the role of intermediation. First of all, the management of funded pension schemes and the aging of industrialized populations created a recurring stream of resources to invest.  Secondly, the sharp rise in oil prices after the Iraq War (2003) was a godsend for the financial industry, as it increased the mass of capital seeking placement: “There are $2,500bn dollars investable in the Gulf Cooperation Council” (which groups together six Gulf countries), wrote the Financial Times on 26 July 2006. The world then discovered sovereign wealth funds.  Finally, the privatization of several industries and the economic growth of the 1990s engendered a new class of millionaires  who relied on specialists to manage their wealth.
36Nevertheless, the fact remains that if we wish to treat the finance and consulting industry as a collective actor, and therefore grant it a power greater than its role as the mere provider of capital, we must recognizing its unifying elements. This is not a simple task. Each industry is composed of a number of players spread out across different professions, each with its own technical specialization and particular procedures organized in accordance with national regulations. These players act globally and conclude a great number of transactions across many industries. They do not have right of ownership as shareholders (the spreading out of risk often entails an increase in minority participation), or power as managers; if we also concede that these individuals are, at least in part, in competition with each other, then it would seem that no unified order should emerge. It was thus that recently, the chief executive of Boston Consulting Group explained that the consulting profession “is so large and fragmented, most of the generalizations that are made about it are likely to be wrong… There are tens of thousands of players working in many different market segments”.  The finance and consulting industry thus appears as a vast ensemble, where a single project may see the confluence of specifically trained and independent individuals, one after another – a banker, a researcher, an accountant, a lawyer, etc. Fragmentation appears to be the norm. And yet, contrary to this accepted view of the field, I should like to put forth the notion that the finance and consulting industry has gained a very significant amount of power since the 1990s, power which is founded on information literacy skills and its concentrated operating structure with regard to strategic operations.
37This industry conserves its power because the strategic links that inform the execution of large operations rely upon a heavily concentrated, oligopolistic structure (see Table 4). A handful of actors influence these strategic links: first, as decision-makers (CEOs, ministers) at the highest levels of consulting firms, and second via established positions as analysts in the industrial and financial sectors. These positions are held by large consulting firms,  analysts for the important New York banks and a few public and private research institutions. The same twenty or so names always appear when the finance and consulting sector is discussed.
38Moreover, a handful of banks are simply inescapable – as soon as large-scale operations are envisioned, they pop up time and time again. Our study of the infrastructure sector confirms this: whether it is a matter of floating a Chinese public bank on the stock market or the sale of highways in France, of the buy-out of a British electrical company or a merger in the telecommunications sector, we always see the same players. Good year, bad year, ten or so investment banks manage the majority of mergers, acquisitions, and debt financing operations; among them, six are always ranked and all ten are located on New York’s Wall Street (see Table 5). The 2007-08 crisis only slightly modified these rankings. The physical concentration of a small number of banks in one small environment doubtless contributes to their informal coordination. One might think that an industry which works primarily with intangible assets would be freed from the constraints of location, as opposed to heavy industry, for example.  And yet, finance is in fact a hypercentralized industry: Wall Street and the City entirely dominate it. The same observation can be made regarding private equity funds: a large proportion of them are American (though not necessarily based in New York), the others all British or Australian.
1997–2001 rankings of the 10 largest investment banks
1997–2001 rankings of the 10 largest investment banksFigures in billions of dollars, $bn.
39Finally, this configuration is reinforced by the organization of rating agencies and the accounting sector. Three rating agencies evaluate the “quality” of firms and nations worldwide. Their ratings modify the cost of debt and their recommendations are very influential. To conduct audits and certify the accounts of large companies, only “the big four” remain, since Arthur Andersen’s bankruptcy in 2002. In other words, the primary characteristic of global finance is that it is concentrated in the hands of a small number of entities that participate at the different stages of large-scale transactions. The work of banks is assisted at the start by analysts and consultants and at the end by accounting firms and rating agencies.
40Is this sufficient, however, to grant the financial industry truly collective power? It might seem that all the parties involved would play their parts according to their own professional logic, interests and context. And yet, if we may call finance global, it is because the industry is able to compare different assets, regardless of sector or country – and because it is the only entity capable of doing so. This means that the work of evaluating assets is not unduly influenced by contingencies, in which case nothing could be seriously compared. By what means is global finance able to establish equivalencies between an electrical power plant in Great Britain, a gas transportation network in Texas, a cable network in Taiwan, a highway in France, airports in Italy, large-scale housing projects in Germany and in Tokyo, shopping centers in Shanghai, a casino in Singapore and office buildings in major American cities? Let us add that these urban assets can also be compared to investments in other sectors.
41The reason we can talk about the global finance industry as a single entity is that, beyond individual specificities, the same powerful principles of alignment are in place in all its different branches. Let us consider for a moment a basic transaction. In order to complete it, participants rely on studies, interviews and numerical data that have as their “source” balance sheets and certified income statements. The parties involved evaluate the ratio of profit to risk and examine the sector’s growth and the management’s vision. By multiplying transactions year after year – either studied or successfully completed – these actors can collect a great deal of “source information” and then aggregate it, since it is all organized according to the same accounting standards. And this is the point where we understand why such different professions can be entirely in sync. Everyone is working with the same raw material: standardized figures.  Everyone is outfitted with relatively similar instruments (accounting standards, ratios) and doubtless also share some common values, such as the idea that self-regulating markets are superior to the visible hand of public authority. 
42Thanks to the calculating power of computers, the raw data is processed and turned into ratios, generating “second-tier information” that allows for comparison between firms, sectors, countries, cities, etc. This process allows the players of the finance and consulting industry to identify “qualities”. Research departments establish rankings and publicize certain companies or cities that have, according to them, adopted the “right” policies. Consulting firms broadcast these “good” examples to less performing entities.  Hence, in 2010 an international consulting firm advised Mumbai to adopt an infrastructure development strategy based on Shanghai’s, if it wished to become a global city.  In the fall of 2006, the director of a small New York hedge fund penned an open letter to the French prime minister, which was published in many large daily newspapers. This letter illustrated the power of the financial industry. Debating the different ways to generate value, the director contested the modalities of the merger between GDF and Suez (Le Monde, 2 September 2006). Behind this specific news item lay historical transformation. Since the nineteenth century, the organization of cities has been considered too important a task to be entrusted to the sole power of the market. Depending on the country and the sector, urban development has been more or less regulated and political concerns have often left their mark. The vision of these financial intermediaries radically challenges this conception of urban planning. Evidently, they believe themselves well-equipped to calculate values, evaluate risk and allocate resources in an optimal manner.
43Here we have the embodiment of informational power. This process is only partially tangible, as the finance and consulting industry only partially operates with real objects (the implementation of production processes) – it also intervenes via intermediary objects that merely represent the real: standardized figures and ratios. This information stands at the heart of its power in two different ways. Initially, it is a question of processing large data sets in a standardized manner that allows for the work of various actors to be cumulated – this is the role of accounting standards.  Then, the formatting of the source data by means of common ratios is what gives meaning to this raw material. Once equipped with these instruments, financial evaluators rely on their ability to measure and compare in order to reaffirm their own informational power. This explanation allows us not to only to explain the issue of consistency across different and legally autonomous players, but also to illuminate the surprising gap between this industry and its commitments. There was a time when economic experts in France wondered if the state should nationalize industry 100% in order to gain power; some estimated that 51% was insufficient. Investment banks can influence a company’s strategic vision (or industrial policies) by retaining between 1% and 5% of its capital. They manage this by leveraging their informational power. This is how, internally, investment banks can convince others that their recommendations are justified, and, externally, they can exert their influence, since other players in the industry – research firms, rating agencies, financial analysts – contribute to creating a representation of the issues that is coherent with their own analyses.
44We can describe this ensemble with the following formula: source data//accounting standards//processing instruments shared by the entire finance industry//source data processing//comparison//policy statements = informational power.
From discrete power to public policy
45The involvement of global finance in urban affairs challenges the nature of power and allows us to better understand a far-reaching contemporary phenomenon: the creation of an information-based power now supplements the traditional power of politics, management and property ownership.  If finance has become global despite being composed of many different players all fulfilling different functions in different countries, it is less because a few “dominant” actors manipulate everyone else than because of the existence of powerful principles of alignment. The representatives of global finance find themselves guided by higher principles and shared instruments. Rather than acting as a universal owner, when global finance exerts its power over cities, it does so with the instruments it uses and promotes, which incorporate a certain way of understanding projects and of determining their value. This industry demonstrates that phenomena do not always correspond to a neat binary opposition between visible power, wielded by cumbersome institutions, and actions without actors.  Global finance’s role in urban development can be both visible and invisible; this is doubtless why it is so difficult to describe and in turn, control. Sometimes it intervenes visibly with its lobbying power, or the set-up of large-scale operations. Other times, global finance wields a discreet power, its hand symbolized only by the use of its instruments. These instruments act as a sieve for the selection of appropriate projects. Although they present themselves as purely technical tools, these instruments in fact embody a predetermined way of looking at things. Understanding global finance means identifying its two registers: the visible and the invisible. But if we truly examine the issue, it appears that it is the behind-the-scenes power of finance that dominates, and this is problematic for public policy.
46Urban governance is based on the idea of democracy, with its principles of public transparency, debate and responsibility.  We are currently witnessing the rise of an inconspicuous, informational power that transcends national borders. This new power is not questioned, except perhaps in times of crisis. Its rules of operation are not regulated: global finance self-regulates. This delegation of regulation to private actors is particularly shocking. In their criticism of network industry monopolies, economists underscored that intervention at every step of the value chain was an advantage, though it did present some risks. Global finance has broadened its sphere of activity, now becoming involved in consulting, debt financing and shareholding (specialists call this the triple play strategy), without this producing the slightest degree of skepticism. A number of local governments, quick to action regarding the price of water, gas and electricity, negotiated debt transactions that caused them – and their taxpayers – to lose considerable sums of money.  In short, this discrepancy between the different targets of public scrutiny calls into doubt the ability of the ruling class to go beyond the mere facade of power.
47The problem global finance poses for public policy is a consequence of the fact that it acts globally, and is spread out over a very large number of transactions; it is thus not immediately empirically visible. The other difficulty is that global finance’s impact is indirect, more a consequence of implementing the principles contained within its instruments, than of specific decisions made. The full expression of this power, disseminated and made public by means of principles and tools, only reveals itself with hindsight. My research on global finance tracked several vague causal relations that were not immediately apparent.
48The work of evaluation and measurement establishes a hierarchy that highlights a handful of cities, global and specialized metropolises organized as exchange hubs and operating via a few fundamental infrastructures. This function of exchange has been systematized, thus leading a number of “strategist” cities to position themselves globally: the most extreme examples of this are Macao, Las Vegas, and Dubai. Once a city is established as a hub, global finance brings its capital, real estate prices soar and other investors follow suit. By forcefully publicizing these “good” models, global finance disseminates their examples to all other cities. Second-tier cities find themselves indirectly affected; some are tempted to imitate the policies that worked elsewhere. Can the story of Bilbao’s renovation as a tourist destination thanks to the Guggenheim museum be replicated in say, Metz or Saint-Étienne? In the worldwide game of specialized hubs, not all cities can be winners. Too many cities are adopting the same globalizing strategies, and only a handful of them will be successful; the remaining cities will bear the cost of ill-advised investments.  What’s more, rankings can be misleading. Yesterday’s model may be abandoned because cities belonging to the same tier now find themselves in competition. This is a structurally dangerous game that initially leads to a rise in real estate values but ultimately culminates in losses.
49The instruments used by global finance have their own impact on cities and urban landscapes. If we consider the more fluid deployment of capital directed towards projects, they can be said to have a positive impact. But there are other consequences to the use of financial instruments. First of all, we must recognize their cognitive and methodological properties: financial instruments account poorly for externalities and long-term planning, two things required by city planning. Their conception of institutions as market actors leads them to devalue the public organizations that are in fact essential in many sectors. Secondly, the financial engineering, as well as the debt-financing operations and mechanisms used to extract value operate according to positive expectations; their widespread use produces cycles, which culminate in bubbles. The universal comparison of assets introduces movement into urban public policy, an otherwise relatively stable realm that traditionally acted as a shock absorber with regard to boom-and-bust cycles. Global finance organizes transactions, experiences transactions and needs an ever-changing world: if there is too much fluctuation, this may be destabilizing. All of the above lead to the conclusion that, although this industry has introduced new skills which facilitate action, it must also be regulated, as was the case for network industries in the nineteenth century.  The impact that global finance has on cities, the risks that it forces society to bear and the limitations of the instruments that it uses are all too important for us to allow the industry to self-regulate. We must return to more basic principles. Urban affairs cannot be reduced to markets. The governance of cities is a political mission. 
50This study of political economics relied on long-term documentary work using articles in the financial press on the largest network industry companies (first and foremost in The Financial Times). This research base was supplemented by summaries from other sources discussing various companies and sectors: the financial press (Wall Street Journal, Asian Wall Street Journal, Business Week, Forbes), as well as progress reports and scholarly articles. As a result of studying operations in the urban sector (electricity, highways, telecommunications, gas and water) I was able to identify the role of the financial industry. This broad approach allowed me to determine the contours of global finance and truly understand what the term “global” signifies in this context. In order to comprehend what this industry does in the urban domain, I concentrated my attention (using the same documentary sources) on recording transactions. I examined when an urban asset was sold: who sold it, who made an offer, who bought it, and who was involved as a consultant. A database of 170 transactions relative to urban assets during 2000-07 (first two quarters of 2007) was constituted. This approach did not allow me to be all-inclusive but offered a compromise, given the current state of access to such data. Currently, such data is compiled by private information providers such as Thomson Financial and Dealogic, and thus constitute a commercial resource.
This general term encompasses telecommunications, gas and electricity, transportation, water, ports, airports, highways and railroads. Network industries, public utility companies and infrastructure companies may also be covered by this term.
John Vickers, George Yarrow, Privatization. An Economic Analysis (Cambridge: The MIT Press, 1989); Jack High (ed.), Regulation, Economic Theory and History (Ann Arbor: The University of Michigan Press, 1991); Robert Baldwin, Martin Cave, Understanding Regulation, Theory, Strategy and Practice (Oxford: Oxford University Press, 1999).
Robert Baldwin, Colin Scott, Christopher Hood (eds), A Reader on Regulation (Oxford: Oxford University Press, 1998); Claude Henry, Concurrence et services publics dans l’Union européenne (Paris: PUF, 1997); William L. Megginson, Jeffry M. Netter, “From state to market: a survey of empirical studies on privatization”, Journal of Economic Literature, 39, June 2001, 321-89; José A. Gomez-Ibanez, Regulating Infrastructure (Cambridge: Harvard University Press, 2004).
Matthew Bishop, John Kay, Colin Mayer, Privatization & Economic Performance (Oxford: Oxford University Press, 1994); Sam Peltzman, Clifford Winston (eds), Deregulation of Network Industries, What’s Next? (Washington: AEI-Brookings, 2000); R. Baldwin et al. (eds), A Reader on Regulation.
Joseph E. Stiglitz, The Roaring Nineties. Why We’re Paying the Price for the Greediest Decade in History (New York: Penguin Books, 2004); Michel Aglietta, Antoine Rebérioux, Dérives du capitalisme financier (Paris: Albin Michel, 2004); François Morin, Le nouveau mur de l’argent. Essai sur la finance globalisée (Paris: Seuil, 2006).
Jean-Paul Betbèze (ed.), Fonds souverains, à nouvelle crise, nouvelle solution? (Paris: PUF/Descartes & Cie, 2008); Anton Brender, Florence Pisani, Globalised Finance and Its Collapse (Paris: Dexia, 2009); Jacques Sapir, “Sept jours qui ébranlèrent la finance”, Cemi/EHESS, Policy Brief, September 2008; and “Social and political consequences of the crisis”, Cemi/EHESS, Policy Brief, 2 February 2009.
Michel Offerlé, Sociologie des groupes d’intérêt (Paris: Montchrestien, 1998); Emiliano Grossmann and Sabine Saurruger, Les groupes d’intérêt. Action collective et stratégies de représentation (Paris: Armand Colin, 2006); Julie Pollard, “Acteurs économiques et régulation politique”, PhD dissertation in political science, Paris, Institut d’études politiques, April 2009.
Stiglitz, The Roaring Nineties, 11.
“The duties [of governing] can only be accomplished if a government exists and is able to establish, in society, ‘a supreme authority, clearly defined and indisputable; a central hierarchy of public functions; a sphere of distinct abilities… a continuous territory over which its authority presides…’”. Cited by Pierre Favre, “Qui gouverne lorsque personne ne gouverne?”, in Pierre Favre, Jack Hayward, Yves Schemeil (eds), Être gouverné. Études en l’honneur de Jean Leca (Paris: Presses de Sciences Po, 2003), 257-71 (268).
Pierre Lascoumes, Dominique Lorrain, “Trous noirs du pouvoir. Les intermédiaires de l’action publique”, Sociologie du travail, 49, 2007, 1-9.
Pierre Lascoumes, Patrick Le Galès (eds), Gouverner par les instruments (Paris: Presses de Sciences Po, 2004); Dominique Lorrain, “Les institutions de second rang”, Entreprises et Histoire, 50, April 2008, 6-13; Valérie Boussard, “Quand les règles s’incarnent. L’exemple des indicateurs prégnants”, Sociologie du travail, 43(4), 2003, 533-51.
Fernand Braudel, Civilisation matérielle, économie et capitalisme, 15e-17e siècle, 3 vols (Paris: Armand Colin, 1979); La dynamique du capitalisme (Paris: Arthaud, 1985); Jacques Le Goff, L’Europe est-elle née au Moyen Âge? (Paris: Seuil, 2003); Henri Sée, Les origines du capitalisme moderne (Esquisse historique) (Genève: Slatkine, 1980 [1st edn: Paris: Armand Colin, 1926]).
Michel Lescure, Les banques, l’État et le marché immobilier en France à l’époque contemporaine, 1820-1940 (Paris: Éditions de l’EHESS, 1982).
Christian Topalov, Les promoteurs immobiliers. Contribution à l’analyse de la production capitaliste du logement en France (La Haye: Mouton, 1974); and Le logement en France, histoire d’une marchandisation impossible (Paris: Presses de Sciences Po, 1987).
Hubert Bonin et al. (eds), Transnational Companies (19th-20th Centuries) (Paris: PLAGE, 2002); Robert Millward, “Cross-border investment and service flows in networks within Western Europe, c. 1830-1980”, in Judith Clifton, Francisco Comin, Daniel Diaz-Fuentes (eds), Transforming Public Enterprise in Europe and North America. Networks, Integration and Transnationalisation (Basingstoke: Palgrave Macmillan, 2007), 16-29.
Alain Jacquot, “La Compagnie générale des Eaux 1852-1952: un siècle, des débuts à la renaissance”, Entreprises et Histoire, 30, September 2002, 32-44 (34).
Jean-Pierre Goubert, “La rente de l’eau. La stratégie industrielle de la Société Lyonnaise des Eaux et de l’Éclairage: 1880-1925”, Annales de la recherche urbaine, 30, April 1986, 17-22.
C. Topalov, Le logement en France; Bernard Lepetit, Christian Topalov (eds), La ville des sciences sociales (Paris: Belin, 2001); Susan Fainstein, The City Builders. Property, Politics and Planning in London and New York (Oxford: Blackwell, 1994); Patrick Le Galès, Le retour des villes européennes (Paris: Presses de Sciences Po, 2003).
Natacha Aveline-Dubach, Immobilier. L’Asie, la bulle et la mondialisation (Paris: CNRS éditions, 2008); Élisabeth Campagnac (ed.), Les grands groupes de la construction: de nouveaux acteurs urbains? (Paris: L’Harmattan, 1992).
Pascal Griset, “Entre monopole et haute technologie, les mutations d’une entreprise de longue durée: le Bell System, 1876-2000”, Entreprises et Histoire, 30, 2002, 100-14; Robert W. Crandall, After the Breakup. US Telecommunications in a More Competitive Era (Washington: The Brookings Institution Press, 1991). Online
Alan Greenberg, “The marketization of American politics”, in John Donahue, Joseph S. Nye (eds), Governance Amid Bigger, Better Markets (Washington: The Brookings Institution Press, 2001), 212-32. See also the Center for Responsive Politics.
William W. Hogan, “Making markets in electric power”, in J. D. Donahue, J. S. Nye (eds), Governance Amid Bigger, Better Markets, 93-109.
W. L. Megginsson, J. M. Netter, “From state to market”, 373.
See M. Aglietta, A. Rebérioux, Dérives du capitalisme financier.
These multiple games, in which the input of game 1 becomes a resource for game 2, are not without conflicts of interest.
See J. Vickers, G. Yarrow, Privatization, chap. 2.
Nicolas Curien, Économie des réseaux (Paris: La Découverte, 2000).
Christophe Defeuilley, “Retail competition in electricity markets”, Energy Policy, 37(2), 2009, 377-86; Dieter Helm, Energy, the State and the Market. British Energy Policy since 1979 (Oxford: Oxford University Press, 2003); Paul L. Joskow, “Deregulation and regulatory reform in the U.S. electric power sector”, in Sam Peltzman, Clifford Winston (eds), Deregulation of Network Industries. What’s Next? (Washington: AEI-Brookings, 2000), 113-88.
FT Global 50, 2008, in FT Weekend, 28-29 June 2008; Christophe Defeuilley, “Centrica”, Flux 78, Oct-Dec 2009, 89-97.
Dominique Lorrain, “L’industrie de la finance et les infrastructures (1): les fonds privés d’investissements”, Flux, 71, Jan-March 2008, 78-91; “L’industrie de la finance et les infrastructures (2): les fonds privés d’investissement”, Flux, 72-73, April-Sept 2008, 138-51.
The founders of Blackstone (1985) came from Lehman Brothers. KKR was created in 1976 by three executives from Bear Stearns. Former employees from Drexel Burham Lambert (a bank specialized in taking over high-risk debt, which would ultimately declare bankruptcy) founded the Cerberus and Apollo Management funds.
Publicly traded companies have obligations regarding transparency; among other things, they must produce quarterly results. Management of non-publicly traded companies is not subject to the same regulations and can consequently adopt mid-term policies without worrying about the immediate impact of its decisions.
These are also sometimes referred to as leverage buy out (LBO) funds.
The private equity firm that manages the specialized fund is generally remunerated according to a 2/20 rule: 2% of the assets managed and a 20% commission on performance, measured by the yearly assessment of the fund. (cf. Gérard Marie Henry, Les Hedge Funds (Paris: Eyrolles, 2008), 28).
See the famous acquisition of Nabisco by KKR, a gigantic operation which almost entailed the disappearance of the fund: George Anders, Merchants of Debt. KKR and the Mortgaging of American Business (New York: Basic Books, 1992); Brian Burrough, John Helyar, Barbarians at the Gate. The fall of RJR Nabisco (New York: Harper-Collins, 1990).
N. Aveline-Dubach, Immobilier.
It is important to differentiate two notions. The “funds raised” correspond to the amount contributed by investors to the specialized funds (what are sometimes also termed feeder funds) created by private equity. The “transactions” express the purchases effected from this “raised” capital and debt. There is a time lag between these two aggregates. When the markets started to collapse in 2008 and funding was more difficult to come by, several private equity firms ended up with available capital (that they had already raised) but for which they could find no satisfactory use. Some opted to repay the equity to their investors.
Financial Times, 26 May 2005 and 12 July 2006.
Dominique Lorrain, “Macquarie, une banque dans les infrastructures”, Flux, 81, July-September 2010, 67-78.
Pierre Jacquet, “Les fonds souverains, acteurs du développement?”, in J.-P. Betbèze (ed.), Fonds souverains, 59-69 (68); Michel Aglietta, “Les fonds souverains et l’avenir du capitalisme”, in J.-P. Betbèze (ed.), Fonds souverains, 81-93 (83).
Charlotte Halpern, Dominique Lorrain, “Ferrovial/BAA: une transaction de trop?”, Flux, 79-80, Jan-June 2010, 140-52.
When transactions picked back up in 2010, it was primarily in the hospital and cable network sectors, with several transactions concluded by the Carlyle fund.
A. Brender, F. Pisani, Globalised Finance, chap. 1.
Raghuram G. Rajan, Luigi Zingales, “The great reversal: the politics of financial development in the twentieth century”, Journal of Financial Economics, 69, 2003, 5-50 (18).Online
André Lévy-Lang, L’argent, la finance et le risque (Paris: Odile Jacob, 2006).
These principles have often been reiterated by American firms when expressing their vehement opposition to the German model. The Enron teams never stopped criticizing the integration of production, transportation and distribution activities in the energy sector. In 1992, a representative from Calpers (a pension fund) fought for the “1 share, 1 vote” principle during a RWE shareholders meeting; at that time, municipalities still held 58.9% of voting rights and 29.3% of the capital. See David Waler, “Calpers Fail in RWE Vote”, Financial Times, 11 December 1992, 23.
J.-P. Betbèze (ed.), Fonds souverains, 13.
The divergence in the measurements published by two private equity firms, Blackstone and TPG, regarding a shared subsidiary are proof of this problem. Blackstone estimated its value at the end of 2009 as 45 cents per share, compared to 1 dollar at the time of acquisition, whereas the Texas Pacific Group more conservatively valued it at 20 cents per share (Financial Times, 28 June 2010, 17). See Albert Ogien, “La valeur sociale du chiffre. La quantification dans l’action publique entre performance et démocratie”, Revue française de socio-économie, 5, 1st sem. 2010, 19-40.
The World Bank has largely contributed to establishing and disseminating these methodologies. See Antonio Estache et al., “An introduction to financial and economic modeling for the regulators of transport infrastructures” (Washington: The World Bank Institute, CD-ROM, 2004). In this sort of engineering, the method of discounted cash flows (DCF) and net present values (NPV) are two of the central instruments used.
José Corpataux, Olivier Crevoisier, Thierry Theurillat, “The expansion of the finance industry and its impact on the economy. A territorial approach based on Swiss pension funds”, Economic Geography, 85(3), 2009, 313-34.
Presentation at the FitIn seminar in March 2011. See also Ludovic Halbert, L’avantage métropolitain (Paris: PUF, 2009); Ludovic Halbert, Kathy Pain, “Services globaux, géographies locales: les services aux entreprises dans les métropoles de Londres et Paris”, Cybergeo, 510, 2010, <http://cybergeo.revues.org/2333>; On Japan, see Natacha Aveline-Dubach, FitIn seminar, 14 February 2010.
Isabelle Baraud-Serfaty, “Capitales et capitaux. Vers la ville financiarisée?”, Le Débat, 148, 2008, 96-105.
These large urban objects are especially prevalent in Asia; think of Hong Kong’s proliferation of towers and integrated centers: Harbour City, New World Renaissance and New World K11 in the Kwoloon neighborhood. In the Philippines, a single important real estate developer owns the 3rd, 4th, 7th and 11th largest shopping centers in the world (measured according to developed surface area). The “Mall of Asia” has the same surface area as the Vatican (Financial Times, FTfm, 5 October 2009, 8).
See the special issue edited by Agnès Sander, “Paquebots urbains”, Flux, 50, Oct-Dec 2002.
The industry refers to an underlying asset.
Jacquet, “Les fonds acteurs du développement”, 60; M. Aglietta, “Les fonds et l’avenir du capitalisme”, 82.
Richard Franceys, “Managing and financing water and waste-water”, presentation to the Comité des concessions [Concessions Committee], Paris, Institut de la gestion déléguée, 31 March 2011. See also Ofwat, Final Determinations, 2000-05, 30-31.
Financial Times, FTfm, 26 October 2009, 3. This result corresponds to my findings from the database of 170 transactions, or the length of the involvement of American electrical companies in Great Britain.
Dominique Lorrain, “Le marché a dit. Intermédiaires financiers et managers dans le secteur électrique”, Sociologie du travail, 49(1), 2007, 65-83.
Paul L. Joskow, “Deregulation”, working paper for the Lecture sponsored by the AEI Center for Regulatory and Market Studies, 10 February 2009; and “Deregulation and regulatory reform”.
C. Halpern, D. Lorrain, “Ferrovial/BAA”; Charlotte Halpern, “La gestion aéroportuaire a-t-elle changé de nature? Le rôle de BAA plc”, Flux, 79-80, Jan-June 2010, 140-52.
For an explanation of these mechanisms, see A. Brender, F. Pisani, Globalised Finance, chap. 1.
See, for examples, the analyses conducted by the CEO of the investment fund 3i (Financial Times, 10 January 2010, 17).
Financial Times, 8 October 2010, 15.
Work done by the Centre for Management Buy-Out Research (Nottingham) Financial Times, 2 August 2010.
From a macroeconomic point of view, this is a massive phenomenon. During the 1950s and 1960s, 10% of loans were securitized in the United States; 50% of them were in 2003. Consequently, retail banks only had a little more than a third of the total debt on their balance sheets, compared to three quarters during the mid-1970s (A. Brender, F. Pisani, Globalised Finance, 6).
The most important new contracts are the interest rate swap and the credit default swap (CDS).
Steve Johnson, “Private equity’s love affair with leverage”, FTfm, 26 October 2009, 3.
The multiplier of 2.71 corresponds to 1.83 (operative contribution), 0.87 for EBITDA growth, 0.42 for improving free cash flow contribution, 0.51 price/earning multiple contribution (the price related to dividends) until the moment of purchase and to 0.88 from leverage (ratio of debt to capital).
D. Lorrain, “Macquarie”.
Martin Arnold, “Private equity picture remains bleak”, Financial Times, 20 November 2008, 20.
See J. E. Stiglitz, The Roaring Nineties.
F. Morin, Le nouveau mur de l’argent, 38.
A. Brender, F. Pisani, Globalised Finance, chap. 1.
R. G. Rajan, L. Zingales, “The great reversal”, 13; see also David Held, Anthony McGrew, Globalization/ Anti-Globalization. Beyond the Great Divide (Cambridge: Polity Press, 2007).
Christopher D. McKenna, The World’s Newest Profession. Management Consulting in the Twentieth Century (Cambridge: Cambridge University Press, 2006).
J. E. Stiglitz, The Roaring Nineties; see also Manuel Castells, La société en réseaux (Paris: Fayard, 1997), 3 vols; and La galaxie Internet (Paris: Fayard, 2001).
In Australia, the government’s 1992 decision to generalize a funded pension scheme fueled the country’s financial industry and partially explains the significant activity of several Australian funds: Hsu Wen Peng, Graeme Newell, “The significance of infrastructure in investment portfolios”, Pacific Rim Real Estate Society Conference, Freemantle, 21-24 June 2007. In Switzerland, pension funds correspond to a capitalization of 600bn Swiss francs placed on the market, about 15% of which is in real estate. See J. Corpataux et al., “The expansion of the finance industry”.
J.-P. Betbèze (ed.), Fonds souverains.
Thierry Godefroy, Pierre Lascoumes, Le capitalisme clandestin. L’illusoire régulation des places offshore (Paris: La Découverte, 2004), 59.
Stefan Stern, “Reinventing the spiel”, Financial Times, 25 June 2010, 9.
C. D. McKenna, The World’s Newest Profession.
For more information on this debate among urban geographers, see L. Halbert, L’avantage métropolitain; Saskia Sassen, The Global City (Princeton: Princeton University Press, 1991).
Ève Chiapello, Karim Medjad, “Une privatisation inédite de la norme: le cas de la politique comptable européenne”, Sociologie du travail, 49(1), 2007, 46-64; Michel Capron (ed.), Les normes internationales, instruments du capitalisme financier (Paris: La Découverte, 2005).
The 2007-2008 crisis and the debates over the way to curb financial excesses perfectly highlighted the industry’s implicit values. As soon as it became a question of regulating private equity funds or hedge funds, the argument was made that flexible and self-regulating markets were superior.
Numerous times we have observed these comparisons used to justify a transaction. Regarding the electrical sector, see for example Dominique Lorrain, Christophe Defeuilley, “Enel et Scottish Power, les utilities européennes (1)”, Flux, 60-61, 2005, 105-15 (112).
Marie-Hélène Zerah, “Mumbai ou les enjeux de construction d’un acteur collectif”, in Dominique Lorrain (ed.), Métropoles XXL en pays émergents (Paris: Presses de Sciences Po, 2011), 139-214 (193).
See È. Chiapello, K. Medjad, “Une privatisation inédite”; M. Capron (ed.), Les normes internationales.
Adolf Berle, Gardiner Means, The Modern Corporation and Private Property (New York: Harcourt, 1932); see also numerous discussions of the topic, in particular M. Aglietta, A. Rebérioux, Dérives du capitalisme financer, 41 and passim.
Erhard Friedberg, “En lisant Hall et Taylor: néo-institutionnalisme et ordres locaux”, Revue française de science politique, 48(3-4), June-August 1998, 507-14.
Michel Callon, Pierre Lascoumes, Yannick Barthe, Agir dans un monde incertain. Essai sur la démocratie technique (Paris: Seuil, 2001).
See Le Monde (19 July 2008; 14 October 2009, 15; 7 December 2010) or Les Échos (12 November 2009) for an analysis of the problems of Asnières (in the Seine-Saint-Denis department), of Lille, Rouen and Saint-Étienne.
This was recently the case in France regarding the provision and servicing of industrial areas. In southern China, the hub logic led to the construction of multiple airports: Lantau/Hong Kong, Canton, Macao, and Shenzhen.
See the plea made by the economists at the École de Paris in the fall of 2010 for the regulation of this industry and a distinction between utilities (regulated) and investment banks.
This text was enriched by discussions with a number of colleagues. I would like to thank Pascal Chauchefoin (Université de Poitiers) and his economist colleagues for their insight on the first version of this essay in December 2007. This work was also informed by the fruitful exchanges I had during the seminar organized by Ludovic Halbert (CNRS, LATTS). Finally, I would like to thank the anonymous readers of the Revue française de science politique, as their comments have been invaluable in terms of streamlining my argument.