Regulating Performance-Enhancing Technologies

Abstract

This article compares the efforts to govern performance enhancement technologies in two seemingly different competitive arenas—financial markets and professional cycling—where the pressures to outperform are enormous. In the two decades prior to the 2007 financial crisis, new derivative financial commodities such as collateralized debt obligations (CDOs) were created to “juice up” investment returns for extraordinary profits. Over roughly the same period, the development and use of blood boosting drugs and technologies brought so-called doping by cyclists to new levels of complexity and sophistication with extraordinary race results and new levels of commercialization of the sport. The efforts to “turbocharge” their respective competitive spaces took place within complicated regimes of self-regulation that had strikingly dissimilar narratives about performance enhancement and, consequently, different technologies for control. Looking across these seemingly disparate cases draws our attention to how regulation fits into the assemblage of competition and prospects for reform.

Keywords

regulation drugs and sport white-collar crime governance sociology of finance

Performance enhancement is routine in environments where performers reap rewards from being stronger, going faster, and accumulating more by pushing the boundaries of what are seen as “natural” or otherwise assumed limits to human behavior. Athletes, financiers, and even students will seek out ways to extend their abilities and maximize their performance. Although beneficial to some, performance enhancement can come at a cost both to individuals and to society writ large, creating a regulatory conundrum. How does one create a regulatory environment that encourages actors to push their limits, maximize their potential, and create new frontiers of performance, while maintaining individuals’ health and the integrity of a level playing field? Given the multitude of ways to enhance performance, who should determine which methods are illegal or legal, and using what criteria and what strategy for enforcement?

In this article we engage in a thought experiment, comparing efforts to govern performance enhancement in two seemingly dissimilar environments: professional cycling and derivatives trading. In the last two decades of the twentieth century, the development and use of blood boosting drugs¹—such as Erythropoietin (EPO), banned by the International Olympic Committee (IOC) in 1986—brought drug use in cycling to new levels of complexity and sophistication. The widespread use of blood boosting fueled extraordinary race results and increased the commercialization of the sport. Over roughly the same period, new derivative financial products, such as collateralized debt obligations (CDOs) formed out of asset-backed securities (ABS), were created to “juice up” investment returns for extraordinary profits.

The changes associated with performance enhancement in cycling and derivatives trading provoked regulatory responses with remarkably dissimilar narratives: while sports regulators specifically banned particular practices and built up a law-and-order response to police the boundaries of acceptable behavior, financial regulators embraced the new products, creating a legal structure to support their unequivocal growth, at least until they helped to fuel a major economic crisis. In this article, we consider how regulation of one of these two environments might be different if it adopted the regulatory narrative and structure of the other. In doing so, we shed light on how the narrative of performance influenced the structures of regulation and, in turn, how regulatory structure influences the available narrative. The comparison offers an opportunity to rethink the regulation of each, given the unrelenting push for performance.

Performance Enhancement in Cycling and Markets

Although differing in many ways, the stories of doping and derivatives share many key characteristics. Monetary rewards and fame followed athletes and financiers when they performed exceptionally well, although their efforts were rarely solo acts. Performance enhancement had a short time horizon, not only because first movers reaped the most benefits, but because the benefits, even for those who were later adopters, were realized in the short term and without much regard for long-term costs. Nevertheless, a “new normal” followed the adoption of these new methods that had consequences far beyond individuals’ particular performances.

EPO in cycling

Perhaps more than any other competitive sport, professional cycling, which routinely tests the limits of physical endurance, has been linked to the use of performance enhancement drugs (PEDs) (Thompson 2008). In the early years, soon after 1900, some races would last more than 12 hours. Top riders were expected to be race-ready day after day, with little opportunity to rest and recover. To meet the physical demands, cyclists used a variety of stimulants, including dangerous cocktails of strychnine, alcohol, and caffeine, and, later, amphetamines that were relatively easy to find and self-administer (Woodland 2000, 56; Christiansen 2005, 500).

Blood boosting is a contemporary iteration of the continuing efforts to enhance cycling performance; the term refers to technologies and techniques used to increase the level of oxygen-carrying hemoglobin in an athlete’s blood. It has been defined by the World Anti-Doping Agency (WADA) as “the misuse of certain techniques and/or substances to increase one’s red blood cell mass, which allows the body to transport more oxygen to muscles and therefore increase stamina and performance.”² While some technologies that directly alter red blood cells are banned, other technologies, such as utilizing a hyperbaric chamber or training at high altitude, are not.

Blood boosting does not fundamentally alter an athlete’s “natural” talent; rather, it simply enhances his or her existing natural abilities in a number of ways. It contributes to increased average race speeds and the ability for individual riders to sustain top speeds, creating more frequent and spectacular performances in the sport. The changes in an athlete’s blood that make a difference could be small. The natural fatigue accumulated during a three-week stage race, such as the Tour de France or the Giro d’Italia, is reduced, enabling riders to race competitively day after day.

Until the late 1980s, blood boosting took the form of blood transfusions. An athlete’s blood was removed, stored, and reinjected prior to or during competition. By the mid- to late 1990s, injections of EPO, a hormone produced by the kidneys that stimulates production of red blood cells, had become the technology of choice for professional cyclists. When a test for EPO was introduced in 2000, some riders returned to using transfusions (Hamilton and Coyle 2012). As with any drug, the effects of EPO will vary based on individual biology, with some riders reporting better “responses” from EPO use than other riders (Hamilton and Coyle 2012). Using a smaller amount of EPO reduces the chances of testing positive, as the drug remains in an athlete’s system for a shorter period of time in this case. Still, even a 5 percent boost in performance, as claimed by some sports professionals, can make the difference, given razor-thin margins, between winning and second place. Indeed, of the past seven Tours de France, each covering more than 3,000 kilometers (1,864 miles) of racing, five were decided by less than two minutes.³

Because a viable test for EPO had not yet been developed in 1997, the Union Cycliste International (UCI), cycling’s governing body, instituted a rule that focused on a rider’s hematocrit (HCT) level, the proportion of oxygen-carrying red blood cells in blood. A rider’s natural HCT level might average between 36 and 42 percent, declining due to exertion over the course of a multiday race. Presented as a health check rather than evidence of EPO use, the rule capped the allowable level at 50 % those testing above that were sidelined for two weeks and not allowed to race until their HCT level went below 50 percent. Riders monitored their blood boosting so that it would fall just short of that level. When the test for EPO did become available,⁴ cyclists began micro-dosing EPO, among other things—injecting small amounts that would clear their systems quickly, to avoid triggering a positive test.

Procuring and administering EPO required a substantial network of expertise. EPO was expensive. Coaches, directors, and trainers were necessary to monitor and adjust schedules and training programs to optimize the drugs’ effectiveness. Medical experts were engaged to sample, process, and preserve athletes’ blood, and to hide the behavior in some cases. Before 1998, blood boosting was primarily an internal affair, practiced among teams; support personnel and riders would work together to enhance the performance of the cyclists (Brissonneau and Ohl 2010). After the Festina affair of 1998 (description to come) exposed the active role of cycling teams in PED use, blood boosting went further underground. Individual cyclists were forced to activate external networks to provide the same kinds of support, creating what some commentators (Christiansen 2005) described as mafia-like syndicates.

For many cyclists and for many years, blood boosting was as routine as “putting air in the tires and water in the bottles” (Armstrong 2013). It was frequently justified in instrumental terms, necessary for success at the top levels but also regarded as evidence of dedication and commitment to the sport (Hemphill 2009; Sefiha 2012). Levi Leipheimer, a third-place finisher in the Tour de France in 2007 and a bronze medalist in the 2008 Olympics in Beijing, explains:

When people thought about doping, they thought about a guy, by himself, using banned substances to get ahead. What people didn’t realize—what I didn’t realize—was that doping was organized and everywhere in the peloton. Doping wasn’t the exception, it was the norm. . . . Doping was so accepted that riders from different teams—who were competitors on the road—coordinated their doping to keep up with other riders doing the same thing. . . . Right or wrong, in my mind the choice was “Do it, or go home.” For me that was not a choice. (Leipheimer 2012)

The increase in race speeds made possible by blood boosting paralleled cycling’s rising commercial appeal both in the United States and Europe, as the public had come to expect regular record-breaking performances (Mignon 2003). Cycling had always been a commercial enterprise (Christiansen 2005). In its early years, the absence of formal rules regarding bike or body technologies coupled with the potential for considerable prize money allowed racers to become independent entrepreneurs pushing the limits of body and technology to look for the competitive edge (see Thompson 2008). North American Greg LeMond’s first-ever million-dollar contract, a World Cup competition, television rights, a computerized system for ranking cyclists, and new rules for admission to the major races changed the organization of the sport. The increased sponsorship costs necessary to cover cycling’s global expansion meant that smaller, provincial teams were virtually eliminated from the top tier and replaced by those supported by international corporate entities such as Radio Shack, Garmin, and even the U.S. Postal Service.

To obtain and keep sometimes-fickle sponsors, cyclists had to race hard and win. With the exception of its biggest stars and teams, professional cycling provides little financial security. Team sponsorships are often less than four years; most rider contracts are just two. Financial insecurity encouraged riders and their teams to do what it took to maximize their brief window of earning potential. Given the need to continually prove one’s occupational worth and to maintain sponsorships, PEDs become a rational and expedient strategy (Sefiha 2012), particularly during the late 1990s and early 2000s when breakthrough performances seemed to be routine. It did not pay to worry about one’s long-term health.

Technologies that could help to produce extraordinary performances emerged within this changing commercial dynamic, and indeed fueled ever more commercialization of the sport (Brewer 2002). As performance enhancement became routine, it created a new normal that extended well beyond the first mover. Riders readily recognized significant performance benefits to blood boosting, and many of the top teams quickly adopted some version of it (Voet 2001; Brewer 2002; Mignon 2003). Cyclists began taking advantage of new training techniques and technologies with more precise quantification of the physical effort that, combined with PED use, allowed them to be stronger and faster than ever before. Seeking to capitalize on the growing public interest, corporate sponsors devoted greater sums of money to facilitate team success while race organizers engaged in a form of brinkmanship by providing ever more challenging race courses designed to facilitate spectacular performances.⁵

CDO/ABS trading by investment banks

Beginning in the 1990s, small groups of Wall Street analysts began to look for ways to juice up their returns by “extending credit into places where the sun didn’t shine” (Lewis 2010, 8). Collateralized debt obligations (CDOs) created out of asset-backed securities (ABSs) provided one opportunity. They were unconventional, complex, and poorly understood, but CDO/ABS products increased the leverage that investment banks had available for investors and generated new ways for banks to earn money (Fligstein and Goldstein 2012).

CDO/ABSs are a form of financial derivative, and derivatives are nothing new. Used historically as a form of insurance, they enable a party with some underlying risks to shift the cost of risk to another party through a financial instrument derived from an underlying asset. The value of a derivative is derived from expectations about future behavior. Farmers worried about changes in crop prices might hedge against the possibility of a fall in prices by entering into a standardized “futures contract” to sell a certain amount of corn on a commodity exchange, six months in the future, at a certain price. If the price of corn increases in the next six months, the famer loses out on potential profits. But if the price of corn should fall, the farmer has protected herself or himself against a loss. Or if X owns a bond and is worried about its long-term value, she or he might purchase a financial derivative product that increases in value when the value of the bond itself begins to fall in the bond markets. Or she or he could consider entering into a “swap” arrangement with a third party, who would take on the risk of the bond seller’s default. And that third party could swap with another. Unlike insurance, the parties to these transactions are not tethered in a one-to-one ratio with real assets. Therefore, they can be manufactured, bought and sold in theoretically limitless quantities, and designed with any number of unique attributes. Also, unlike conventional derivatives based on standardized contracts and sold on exchanges, most financial derivatives are sold in the barely regulated “over the counter” derivatives market. They are contracts privately negotiated directly between two parties, meaning they are traded without the comparability or price transparency mechanisms that standardized terms or exchange trading would provide. Over the last two decades, speculation has become a more central feature of derivative trading (Biggins and Scott 2012, 313–14; Stout 2011). Parties with no underlying assets to protect may purchase derivatives effectively to gamble. While Company X may do a lot of foreign business and attempt to protect itself from negative changes in the exchange rate by swapping that risk with a third party willing to assume it, Company Y, with no foreign business, might purchase that same currency derivative simply hoping to profit from correctly betting on the direction of a change in the exchange rate. The free-floating, nontransparent, infinitely malleable nature of derivatives provided excellent conditions for some market participants to boost their profits in the markets, at least in the short term.

Gillian Tett’s (2009) analysis of J.P. Morgan’s involvement in the financial crisis locates the origin of the more sophisticated and unconventional CDO in the regulatory restraints and increasing competitive pressures faced by investment banks. Bank growth was limited by the Basel Accord of 1988, which stipulated that all banks needed to hold capital reserves equivalent to 8 percent of corporate loans on their books; and by internal policies placing limits on loans and leverage and, thus, exposure to risk. To free up capital to lend (enabling more fees and profits), bankers had to solve the leverage limits and the Basel reserve conundrum. They began to look for ways to move their loans off their books without actually selling them. Selling the loans to others was not an option as their commitments to clients were an important part of the banks’ brand and status. J.P. Morgan’s financial engineers turned to the idea of derivatives, and in particular credit default swaps (CDS), which allowed them to respect their loyalty to their clients (Tett 2009, 47) and keep the loan on their books, selling the risk of the loan for a fee while not eating up reserves. All of this made sense (or some sense) when the likelihood of default was low and lots of credit was available.

Other financial institutions followed suit, and few stopped at one swap at a time. They sought new ways to turbocharge the market. Rather than swapping one deal at a time, they bundled deals together, pooled all the risk, and carved securities out of the whole (Tett 2009, 51). These securitized assets were housed in a special purpose vehicle (SPV), such as an ABS, and removed from the bank’s balance sheet and reserve requirements (Acharya and Richardson 2009, 198). ABSs were formed from mortgages, student loans, corporate loans, and credit card payments, among other assets. The challenge in selling them, though, was making investors confident enough to purchase such securities, particularly when the whole pool of debt included loans to entities with different kinds of credit risk. Thus, the collateralized debt obligation derived from the ABSs was born. Most importantly, these more sophisticated financial derivatives were sold over the counter rather than through an exchange. They are contracts privately negotiated directly between two parties without regulatory oversight.

The following scenario offers a grossly simplified view as to how a CDO works. A bank purchases a pool of 30-year mortgages fixed at a rate of 6 percent, for $100 million. Some of those mortgage holders will default while others will pay back their principal early, so the bank values the package of mortgages to reflect, on average, a 12-year lifespan of interest income, or a $72.2 million profit. But since loans require reserves, which limit the potential to make more loans, the bank wants to get these securities off their books. How can they do that and still make a profit? Fund managers create CDOs that are segmented packages of risk and house them in SPVs, off the bank’s balance sheets. The segments are tranches of debt, each with a unique risk/return/maturity profile, which can be transferred or sold to investors. A cascading waterfall payment system determines who gets what and when. Slicing the mortgages into different risk tranches changes the value of the risk, according to models built by the banks and reinforced by credit rating agencies. This change allows the bank to sell off a whole package as if it were less risky, on average yielding 4 percent interest with income of $48 million. The bank is able to immediately book a profit of $24 million—the difference between the anticipated cash flows generated by the pool with their initial purchase and the value of that risk and return they sold to others. Accounting rules allow them to “book the profit” as if it were all realized today.

The package of risk in our simple case includes only mortgages. More often, CDOs included a combination of credit risk exposures, some backed by physical cash flows, such as credit card loans or student loans, and some in the form of synthetic risk exposure such as the credit default swaps described above. Critically, no two CDOs were alike, since they were customized for each transaction (for two of the more in-depth discussions of the CDO mechanism, see Tett [2009] and MacKenzie [2011]). But banks did not stop with the basic CDO either; they began collateralized debt obligations backed not by underlying assets but by pools of CDO tranches.

This financial “juicing” was possible, technologically, because of sophisticated proprietary risk modeling software that was, as we now know, too often wrong (Gerding 2009; Ford, this volume). Credit rating systems supported the banks’ proprietary modeling. By posting their evaluation models online, the ratings agencies created easy opportunities for banks to “test” their products against the agency models, to see what rating would result and then tweak the product to obtain the desired rating (Tett 2009, 100). Legal engineering, “knowingly and deliberately aimed at avoiding laws and regulations put in place to control risk and to ensure its disclosure” (McBarnet 2010, 2), supported the new financial engineering as well.

The creation of CDOs was part of, if not the pinnacle of, the financialization of the economy over the last three decades of the twentieth century (for a thoughtful overview of research on financialization, see Carruthers and Kim 2011). Although there is no precise definition of financialization, it generally refers to profit making through finance rather than through trade or commodity production (Epstein 2005). Financialization is associated with the growing importance of shareholder value (see, among others, Espeland and Hirsch 1990; Davis 2009); the ascendency of financiers to the highest ranks of corporate governance (Fligstein 2001); and “a rapid pace of credit expansion associated with domestic financial deregulation, large foreign capital inflows, and a monetary policy that ‘followed the market’” (Krippner 2011, 143). Corporate executives turned to higher-yielding financial assets rather than productive capital investments to turn a quicker profit. Finance entrepreneurs were more than ready to provide new technologies that could charge up the market in this way.

As long as banks could turn a profit in the short term, pushing the limits of risk-taking with derivative instruments such as CDOs was well rewarded. As early as the 1970s and accelerating during the end of the century, investment banks became public corporations. The partnership culture that may have encouraged prudence gave way to a bonus culture, in which employees felt free to take huge risks with other people’s money to generate revenue and big bonuses for themselves (Cohan 2012). Since fees do not have to be returned if securities generate large losses later, bankers had incentives to maximize the flow of loans. Ho’s (2009) ethnography of investment banking, which predates the recent financial crisis, highlights how compensation, linked to deal-making, created a “bubble culture of expediency” devoid of long-term strategic thinking. The focus was the immediate present. “If you can’t make money today, you are out of there” (p. 234, emphasis added). This short-term horizon for compensation created perverse incentives for risk-taking, according to some (Dallas 2011).

Simply put, CDOs changed the way that banks made money and the dynamics of financial markets overall. Many accounts of the financial crisis describe different ways that these financial instruments gave rise to more systemic risk, although both facts and explanations are much in dispute, as Andrew Lo’s (2012) helpful review makes clear. Less often discussed is the way that the growth in the unconventional markets changed structures of financial firms as they sought to streamline their supply chains (Fligstein and Goldstein 2012). Investment banks acquired nonconventional loan originators to ensure a ready supply of loans to repurpose as CDOs. For their part, commercial banks that already had mortgage origination as part of their core business began taking on investment banking’s traditional role of underwriting mortgage-backed securities and producing CDOs. The result was a financial industry organized quite differently than it had been when the overall structure of financial regulation was created.

As these financial instruments became more routine, there was less reflection about their purpose. In describing J.P. Morgan’s decision not to continue trading mortgage-based derivatives, Terri Duhon suggests to Public Broadcasting interviewer Martin Smith that CDO production took on a life of its own. Few banks were able to stop.

And finally someone on that phone call said, “I’m nervous.” And everybody said: “We’re all nervous. What are we doing?” We’ve just—we almost had stopped thinking and stopped reassessing the risk as we went along. It was almost not that we had become automatons, but we had done it so many times, and it was just a little bit different from the last trade, and a little bit different and a little bit different, and suddenly we found ourselves with a product that was vastly different from where we started. And every little tweak along the way, we had all said, “Oh, that’s OK, that’s OK, that’s OK,” until suddenly we all looked up and said: “Hang on. It’s not OK. It’s so different from where we started. What are we doing?”

And other banks didn’t have that valve.⁶

The Architecture of Response

Blood boosting and CDO trading emerged out of, and dropped into, existing regulatory frameworks. The ability to frame or define performance enhancement as “good,” “bad,” or “neutral” informed not only who had authority to address the situation, but also which technologies of governance were perceived as possible, appropriate, and legitimate. Although regulation of both cycling and financial markets have long histories, our story of the regulation of performance enhancement begins in 1998, an important year, as key scandals in both cycling and the financial markets challenged the narrative frames and the regulatory response. Framed by the rhetoric of “pure” competition and dirty cheating (Hoberman 2005; Denham 1997, 2004), the response to blood boosting “mobilized a rhetoric of imminent danger and a technology of criminal law to establish its authority” (Henne 2010, 308). By way of contrast, until the financial crisis, CDOs were clearly understood as the kind of innovation that was a net positive for the financial system, if not the economy as a whole. There was very little public knowledge about and public interest in these instruments. Proposals to regulate the more complicated and sophisticated derivative instruments traded off the market fell on deaf ears of the regulators, who assumed that sophisticated traders could monitor their own transactions and would walk away from overly risky investments. Unlike cycling, where efforts were made to integrate different regulatory regimes and to deter cheating through punishment, financial regulators continued to advocate for strategies that concentrated their authority over derivative trading and kept responsibility in trading a private affair (see Ford’s discussion of innovation-framing regulation, this volume).

Regulating PED use in cycling: The triumph of surveillance (law and order)

On the eve of the 1998 Tour de France, cycling’s secretive drug culture began to unravel when an anonymous tip led French police to stop and search a Festina team car en route to the start of the Tour. Until that time, “riders clearly expected the rules to be pushed and organized themselves as they saw fit. . . . [Now] their world had been found out” (Millar 2012). The Festina affair demonstrated that this “new normal” of widespread blood boosting was not sustainable as a matter of purely private governance. Various sport organizations, including national sporting federations (in particular the French Ministry for Youth and Sport, which spearheaded the Festina investigation), leveraged public and media outrage regarding Festina to define blood boosting and EPO in particular as cheating and a public harm.

Testing to detect and deter cheaters is the core of the anti-doping regulatory regime at all levels. As the international independent organization responsible for coordinating and monitoring the global fight against PED use in sport, the WADA promulgates model rules for the international federations, major event organizers, national anti-doping organizations (NADOs), and national Olympic committees. The original rules promulgated in 2003 were written to “allow for great flexibility” by international sports federations and national anti-doping agencies. By 2009, flexibility was replaced with wording that tightened up the relationship between the WADA and its implementing agencies and suggested that NADOs adopt the rules verbatim to eliminate uncertainties and difficulties in interpretation. Implementation remains largely in the hands of NADOs, typically part of a national Olympic committee, such as the United States Anti-Doping Agency (USADA); and sport-specific governing bodies, such as the UCI, which licenses athletes and governs the conditions of sport, including equipment, race length, rider contracts and salaries, and drug testing (Nafziger 2011). Indeed, as part of its stated goal “to get rid of cheats (PED detection) and dissuade riders from resorting to doping (through education, communication, firm sanctions, biological passport),” UCI has adopted the WADA’s anti-doping rules as “part of the competition rules, i.e. sports rules governing the conditions under which sport is played.”⁷ National federations have followed suit. The WADA supports its implementing agencies by providing infrastructure including the ADAMS monitoring system and a panel of experts to interpret the test, if needed. In an attempt to throw the sovereign power of nation-states behind the fight against performance-enhancing drugs (Straubel 2008, 64), UNESCO adopted the International Convention against Doping in Sport in 2005. The convention calls on states to support the work of the WADA and to adopt rules that are consistent with the WADA code, although the precise obligations are unclear.

Testing occurs both at games and outside competition. Initially, a PED use infraction was established when a cyclist actually tested positive for a prohibited substance. Now with the advent of Athlete Biological Passport (ABP), a cyclist can be found “guilty” of PED use based solely on inferences drawn from biological fluctuations observed in blood tests administered over time (Sluggett 2011). To “assist” in testing implementation, athletes must make quarterly reports on their “whereabouts,” including where the athlete lives, works, trains, travels, and so on; and they must specify a 60-minute time slot between 6 a.m. and 11 p.m. every day, 7 days a week, when they are available for testing. A “whereabouts failure” occurs if athletes are not where they say they will be at that time. Athletes are allowed two of these failures in an 18-month period; a third failure counts as a PED use violation (see Halt [2009] for an in-depth discussion of privacy implications of this rule).

Sanctions can be applied when “the Anti-Doping Organization has established an anti-doping rule violation to the comfortable satisfaction of the hearing body bearing in mind the seriousness of the allegation which is made” (World Anti-Doping Code, Section 3.1, 14; WADA 2007). This burden is recognized to be “greater than a mere balance of probability but less than proof beyond a reasonable doubt” (World Anti-Doping Code, Section 3.1, 14; WADA 2007). Sanctions include event disqualification and ineligibility for participation in future events that ranges from two years for the first anti-doping violation to a lifetime ban. The length of ineligibility may be reduced, but not eliminated, if athletes can prove that the banned substance was not intended to enhance performance or that they bear no fault or responsibility for its appearance. Sanctions will also be reduced if the athlete voluntarily admits the commission of an anti-doping rule violation before having received official notice of an anti-doping rule violation and that admission is the only reliable evidence of the violation at the time of admission. Strict liability has been endorsed consistently in the decisions of the Court of Arbitration for Sport (CAS), the appellate forum for athletes found to be in violation of anti-doping rules. In a case unrelated to sport, but widely cited to demonstrate its perspective, the CAS equated the fairness associated with a finding that an athlete had “doped” to a case of food poisoning that might prevent her from competing. Neither is fair, said the court (see Arbitration CAS 94/129 - USA Shooting & Quigley v. Union Internationale de Tir, 1995).⁸

As the Festina case makes clear, federal and local law enforcement, as well as administrative agencies, have a stake in anti-doping efforts in cycling. In the United States, the FDA became involved in anti-doping enforcement when the agency was alerted to PEDs left in the refrigerator of former professional cyclist Kayle Leogrande after he vacated his apartment. This sparked an investigation into a PED network among cyclists that ultimately led to a two-year federal investigation of Lance Armstrong. Despite copious grand jury testimony, prosecutors dropped the case in early 2012 without seeking an indictment. The Inspector General of the U.S. Postal Service also investigated the USPS sponsorships, including its sponsorship of professional cycling, and issued a report critical of this undertaking (Bizzotto and Hernandez 2003).

How did we get the surveillance regime that now governs cycling? Two things emerge: a moral crusade around the purity of sports; and conflicts over the control of sports, which produce contests over catching cheaters.

A changing morality

In the wake of repeated scandals, medical authorities and professional athletes launched anti-doping crusades to save the purity of sport. These crusades often involved, as Dimeo (2007, 6) argues, a “very specific Eurocentric, pseudo-religious morality linked with a romantic idealism about the function of sport in society.” In the mid- to late 1990s, crusaders found a criminal justice system engaged in a moral panic over drugs in society, a media willing to stress the moral and ethical failures of athletes (Beamish and Ritchie 2006; Goode 2011, Hoberman 2005; Moller 2010), and newly repentant athletes to support their agenda (see Hamilton and Coyle 2012; Millar 2011). The anti-doping movement that emerged roughly paralleled the height of the war on drugs and drew from that perspective to justify the seriousness and urgency of anti-doping policies for public safety. One such linkage between PEDs and “recreational” drug use was the 1990 Steroid Control Act, which labeled steroids as Schedule III controlled substances. This act was passed, Denham (1997) argues, in large part by employing similar claims successfully used to justify the larger war on drugs: the need to protect America’s youths and young adults from dangerous drugs. Over time, the successful linking of PEDs to the war on drugs served to frame PEDs not as tools for performance enhancement but as dangerous and immoral substances.

A contest over governance

Although not the first or only sports organization involved in anti-doping activities, the IOC took a more central role in anti-doping in the 1980s. Initially, the IOC took steps to ensure that local organizing committees had policies and procedures to test athletes for PED use at the Olympic games. In 1962, the IOC formed a medical committee to investigate PED use and identify banned substances, but little action followed, in part because PED use was seen as a problem related to only professional sports (Mazanov and McDermott 2009), and the games at that point were restricted to amateurs. Athletes continued to dope and the IOC appeared “almost spectacularly unsuccessful in catching athletes who used drugs” through the 1990s (Hanstad, Smith, and Waddington 2008, 230). By 1998, when the Festina affair drew world attention to institutionalized drug use in sport, the IOC’s moral and practical authority over sport was under increased scrutiny. Several drug scandals, including allegations of suppressing positive test results; the Salt Lake bidding scandal that resulted in the expulsion of six IOC members; and the highly successful commercialization of the games built on the back of record-breaking athletic performances raised questions about the IOC’s commitment to anti-doping efforts (Hanstad, Smith, and Waddington 2008). The IOC was pressured to respond to the Festina arrests, no less so because UCI, the governing body over cycling, had not (Waddington 2000) and because the French criminal system threatened to “redefine what had traditionally been seen as a sporting issue as a law and order issue . . . constituting a potentially serious threat to the authority of sports bodies in general and the IOC in particular” (Hanstad, Smith, and Waddington 2008, 229; Mazanov and McDermott 2009; Henne 2010).

The first World Conference on Doping in Sport was convened in 1999. Although the IOC hoped to restore its credibility and authority over sports by controlling both the agenda for the conference and its outcome, this was not to be (Hanstad, Smith, and Waddington 2008). Early on, government representatives challenged the IOC’s ability to self-regulate, citing decades of ineffectiveness and corruption. Governments, some of whom had already begun their own anti-doping activities, wanted a seat at the table. High-profile sporting events such as the Tour de France and the Olympics have historically been used by host nations to both construct and project nationalist values and ideologies (Macfarlane 1986; Steenveld and Strelitz 1998). The WADA was born out of this contest between self-regulation by the IOC and state regulation (Hanstad, Smith, and Waddington 2008); it is headquartered in Montreal, not Lausanne as the IOC had hoped, and is funded by both the IOC and governments.

Despite what might appear to be a harmonized process, there are many inconsistencies in the way PED use is handled, particularly between the WADA and NADOs, the international federations for sport, and state actors. In their analysis of the 2006 Operacion Puerto PED use scandal, Soule and Lestrelin (2011) describe the coordination problems, including “contradictions and even judicial incompatibilities, which can lead to the dilution of responsibilities, to the blocking of situations and, incidentally, to long delays” (p. 197). The fact that the U.S. Department of Justice dropped its investigation of Lance Armstrong without explanation clearly disappointed USADA officials (Macur 2012). Regulatory discordance is not just a problem of coordination between jurisdictions but a contest over authority and control. Ongoing tensions between UCI and the WADA, including allegations of incompetence and claims of defamation, have played out in the public media over the last decade. The public acrimony displayed by UCI and the WADA over retroactive 2005 tests on Lance Armstrong’s blood samples (see Jones and Quenet 2006) has persisted through the 2012 USADA “reasoned decision” against Armstrong.

OTC derivative regulation before the 2008 financial crisis: The triumph of private governance

The failure of hedge fund Long Term Capital Management (LTCM), in 1998, offers a critical moment in the regulation of financial derivatives. At its peak, LTCM held the largest single concentration of arbitrage positions in world markets (MacKenzie 2003, 352), that is, positions enabling it to take advantage of the moment when prices were not aligned. LTCM’s strategy was built around sophisticated models for measuring risk (MacKenzie 2000), new financial products, the availability of counterparties willing to take an opposing market positions, and a liquid market enabling the firm to buy and sell. In September 1998, a confluence of factors changed those conditions (MacKenzie 2003, 306), and LTCM was heading toward bankruptcy.

Many commentators, in retrospect, see LTCM as an early warning sign of the 2008 financial crisis.⁹ Key among the signs was a failure to fully understand the “interconnectedness” of financial markets and products, and the inability to correctly model correlations between products and markets. It was not simply that international markets fell in concert (that would have had little effect on LTCM), but that very particular phenomenon, which at the level of economic fundamentals was quite unrelated, suddenly started to move in close to lockstep (MacKenzie 2003, 374). Groups formed to study the problem (Summers et al. 1999; Government Accounting Office 1999). Some argued that it was bad modeling (Dunbar 2001), others that it was a failure of self-regulation. But in most reports, it was clear that new financial products and trading strategies had the potential to create systemic risk that could undermine the integrity of the market. And regulators knew it (Stout 2011; Partnoy 2002). Alan Greenspan, Federal Reserve chair, believed that LTCM’s failure would seize up the markets and potentially “impair the economies of many nations.”¹⁰

The regulatory response to the systemic crisis that LTCM revealed was twofold. Regulators intervened in the ad hoc way that became their norm (Skeel 2010) and made a deal; the president of the Federal Reserve Bank of New York, William J. McDonough, brokered a meeting of LTCM’s fourteen largest counterparties, arguing that a recapitalization by the group would be a better outcome than a “fire sale” of assets (bankruptcy) (see Davidoff and Zaring [2009] for the idea of regulation by deal). The Fed cut interest rates to restore confidence, and by December 1999 the consortium of banks completed an orderly liquidation of the fund. Meanwhile, calls for a more serious look at derivative trading by the U.S. Commodity Futures Trading Commission (CFTC) chairman, Brooksley Born, fell on deaf ears.

This light-handed, deal-making response to the LTCM crisis was just the beginning. Legislative changes in regulatory authority ensured that derivatives would continue to operate in the shadows of the regulators’ gaze. In 1999, The Gramm-Leach-Bliley Act repealed sections of the 1933 Glass-Steagall Act, which had prohibited insured commercial banks from engaging in underwriting and dealing in securities, changing the institutional landscape further. Oversight became more complicated. The SEC, for example, would oversee the brokerage arm of a company, while bank regulators would supervise its banking operation. State insurance commissioners would examine the insurance business. But no single agency would have authority over the entire company.

In 2000 the Commodity Futures Modernization Act (CFMA) clarified questions about federal oversight of over-the-counter derivative trading. The answer to who was responsible for this oversight: no one. According to the CFMA, sophisticated parties were not subject to governance by the CFTC (governing futures) nor by the SEC (governing securities). Instead, those derivative deals would be governed by market discipline, the adherence to general “safety and soundness” standards already in place in the markets and loosely monitored by central banks.

What accounts for this regulatory trajectory where private governance over the possibilities for systemic risk trumped clear and coherent public intervention? Following the work of others, we suggest two possible answers: a series of legal “innovations” that supported the financialization of the market and in particular speculative trading, and the political strength of the derivative industry’s private governance structure, buttressed by significant gaps in what regulators and managers actually understood about the instruments that were being traded.

The changing legality of speculative trading

Lynn Stout (2011) offers a compelling account of how changes in law supported the move to discipline through the market. While derivative trading was not new, the framing of the risks and legality associated with those trades changed significantly. The common law of “difference contracts” (the nineteenth-century term for derivatives) historically distinguished between legally enforceable hedging agreements and unenforceable speculative contracts, by considering whether one or the other party expected to “take delivery” of the asset underlying the hedged position (Stout 2011, 11). A difference contract without an underlying deliverable was regarded as a form of gambling that could not be supported by the courts (Stout 2011, 12). The doctrine of nonenforcement was justified on moral grounds, concerns that speculators would try to “fix” outcomes, and the possibilities for increasing risk (Stout 2011, 13). To solve the problem of the unenforceability of their contracts, traders created private exchanges that would guarantee the performance of the transaction. The 1932 Commodity Exchange Act (CEA) strictly prohibited trading “off-exchange” futures and created the CFTC to regulate the exchanges. This was the system in place until the late 1980s, when Wall Street firms were building their financial derivative portfolios with interest rate swaps. To ensure that these new instruments would not be subject to existing financial regulation, industry representatives approached CFTC chair Wendy Gramm, who subsequently issued a “safe harbor” policy that the CFTC would not attempt to regulate swap transactions. Interest rate swaps were formally exempt in 1993, one year after Congress amended the CEA and gave the CFTC authority to exempt various types of derivatives from their regulatory agenda. “For the first time in U.S. history, speculative wagers on interest rates made outside the watchful gaze of a member-owned exchange were declared both legal and legally enforceable” (Stout 2011, 20). Not surprisingly, the financial derivative market grew dramatically. In the wake of the LTCM failure, the Presidential Working Group, formed to address the potential for systemic risk, promoted “legal certainty” and enforceability for all derivatives traded off the exchanges (Stout 2011, 21). The framing of speculative contracts as legitimate opportunities to enhance financial performance was complete. This view held up until, and through, the financial crisis.

The power of self-governance in a technically complex environment

The International Swaps and Derivatives Association (ISDA) was formed in 1985 as the International Swaps Dealers Association. Its genesis was a meeting, convened by Salomon Brothers, of the ten top OTC traders to discuss the uncertainties of nonstandard derivative contracts. ISDA was chartered to “promote the efficient conduct of the derivatives business for its members and to develop and maintain standard documentation for derivatives” (Partnoy 2002, 5). A master agreement, a boilerplate contract that outlines the obligations of the parties to the transactions, was created in 1987, amended in 1992, and amended again in 2002 (readers would benefit from the cogent descriptions of these agreements in Morgan [2008, 2010, 2012]; Biggins and Scott [2012]; Partnoy [2002]). The ISDA creates supporting documents for derivative transactions as well, updating and clarifying the key terms of the transactions and generating confirmation forms that detail how the outcomes of transactions should be recorded. Still, the actual content of the transaction, that is, what is being traded and for how long, is left to the parties. The particulars of the master agreements and other ISDA documents may be less important than their symbolic value in assuring public actors that the OTC derivatives industry is capable of self-regulating (Biggins and Scott 2012, 323).

The capability of the industry to self-regulate is supported in other aspects of ISDA’s legal work. Contracts need to be enforced, and part of the ISDA role has been to solicit legal opinions on “the enforceability of the termination, bilateral close-out netting, and multibranch netting provisions of the 1992 and 2002 Master Agreements . . . [and] the enforceability of the ISDA Credit Support Documents in various jurisdictions”¹¹ that banking regulators require. The legal opinions are available to members only on their website. ISDA also “actively monitors” litigation that affects OTC derivative trading and routinely offers amicus briefs in support of the industry’s positions.

ISDA developed a fairly robust committee structure to assist in rule-making and communication. The association has grown from a small group of financial institutions that created derivative financial products to 815 members from sixty countries in 2012, including “a broad range of OTC derivatives market participants: global, international, and regional banks; asset managers; energy and commodities firms; government and supranational entities; insurers and diversified financial institutions; corporations, law firms, exchanges, clearinghouses, and other service providers.”¹² Its ability to draw in a wide network of expertise on new developments and potential problems leads Morgan (2008, 646) to conclude that ISDA is “able to engage with governments and regulators on a highly authoritative basis, playing a major role in framing the market and in dealing with what Callon (1998) describes as ‘overflows,’ i.e. controversial situations which do not exist in the initial frame.”

As both a market maker and technical authority, ISDA enjoyed enormous political influence. ISDA has lobbied national governments to incorporate their private governance norms directly into national legislation. This strategy effectively “enrols the legislative capacity of national governments to extend the reach of otherwise voluntary contractual rules” (Biggins and Scott 2012, 327, referencing Black 2003). The ISDA and its members mounted several legislative and lobbying campaigns to ensure greater legal certainty for the trades they wished to pursue (Partnoy 2009).

A Thought Experiment

Every regulatory regime includes a combination of actors, technologies, organizations, and rule systems. How regulation is assembled, organized, and ordered is of critical empirical importance. Our article suggests the assemblage of regulatory techniques is linked to the way behavior, in our case performance-enhancing technology, is framed as it moves through the existing network of the rules system. Importantly for public policy, a particular understanding of the cultural meaning and behavioral impact of PEDs tends to close the toolkit of regulatory response and ignores other possibilities, at least for a time.

The moral crusade against PED use took a decidedly law-and-order turn after Festina, when state police action challenged the deference traditionally given to self-regulation. The governance framework shifted to a public-private partnership with technologies of surveillance that more closely resembled traditional crime control. Sanctions looked like criminal punishment, although athletes were not afforded the same due-process protections. Since OTC derivative trading was never perceived as being deviant, let alone criminal, there were no new technologies of control, but rather, the private sector worked to “enrol” (Black 2003) public regulators into their framework of private governance forged through agreements between the parties involved. Financial institutions solidified their power and privilege in these self-governance bodies. Clearly, cyclists had neither the power nor the privilege to do the same.

To emphasize the importance of framing and the structure of governance, we introduce a thought experiment. What would happen if cyclists were regulated as derivative traders were before the crisis? What would happen if derivative traders were treated like cyclists?

If anti-doping regulation looked like regulation of CDOs before the financial crisis

If a regulatory model based on the financial industry existed in sport, blood boosting of all types would be understood not as cheating but as innovation. Sports’ regulating bodies would defer to riders, teams, and race organizers. By prizing innovation and the desire for increasingly spectacular performances, organizers would likely leave riders and teams to their own devices, assuming that they would evaluate and regulate the risks themselves and make rational calculations regarding the risks of PED use. Self-regulation assumes that those with the greatest propensity to use PEDs would also be the most wary of their risks. Disclosure would be essential. Like markets that provide different forums for different types of investors, cycling could create races for those choosing to “dope” and those choosing to ride “clean.” Spectators could choose which kind of race they wanted to watch. Like the financial markets, limited state regulation would come in the form of periodic “stress tests” or health checks of riders. These checks would not focus on the morality of the actor, but rather on the overall health and soundness of the rider and the stability of professional cycling.

If derivative regulation applied the model of anti-doping regulation

If the regulatory model that exists in sport were applied to the financial markets, product innovations would be perceived as potentially dirty and dangerously speculative. An independent third party would evaluate new instruments and either allow or disallow their use based on their impact on the spirit of the market. Rules would be clear that the misuse of certain techniques for speculative purposes would result in ineligibility to participate in the markets. Everyone who trades in derivatives would be a potential cheater. Traders and fund managers, that is, the folks who were actually dirtying their hands with derivative instruments, would be subject to the kinds of independent, 24/7 surveillance that athletes face. The test might be some pathological level of naturally occurring hormone (testosterone, estrogen, or cortisol) that encourages irrational risk-taking (Coates 2012). Market actors, perhaps including corporate executives, would be required to register their whereabouts. Failure to appear for testing would be an admission of speculative trading. Organizations might be subject to ethics audits that measure the firm’s potential to take irrational risks with other people’s money. The concern would not be financial soundness, but the moral character of individuals and organizations based on a particular reference to cheating.

Conclusion

The comparison of these two quite different forms of performance enhancement offers an opportunity to rethink the regulation of each. Given the systemic push for enhancement, what kinds of regulation make sense?

Regulation that draws bright line rules around performance enhancement and then seeks to deter rule-breaking by sanctions is problematic given that pushing limits is routine, valued, and highly rewarded. Regulators will almost always have a hard time keeping up with new techniques. Framing individuals as cheats and holding individuals accountable obscures the organizational dimensions of performance enhancement. Yet framing breaches of the rules as systemic often ignores the fact that it is individuals in organizations who make new activities happen.

Expecting other legal systems (criminal prosecutions or civil lawsuits) to do the work of managing performance enhancement, as both systems do to some degree, suffers from the all-too-familiar problems with deterrence and too often ignores the underlying causes for performance enhancement that goes too far. The threat of civil and criminal penalties might deter obvious instances of wrongdoing where the costs of rule-breaking are more significant than the rewards. However, given imperatives for performing better, this seems unlikely.

To be sure, regulators of one activity might learn something from examining how the regulation of performance enhancement occurs elsewhere. The purpose of our thought experiment is to do just that. The Lance Armstrong scandal in cycling and the global financial crisis have been moments of reflection for regulators and allowed for attempts for reform that engage parts of the other models. USADA is putting more emphasis on health issues, while the UCI with the WADA recently agreed to introduce a truth and reconciliation commission to “examine the culture of doping in cycling in the past, and clear the air so that cycling can move forward (McQuaid cited in USA Today 2013). Dodd-Frank has introduced some real changes in how derivatives are traded that should discourage speculative trades.

We need to wait and see whether these reforms affect the kinds of change they intend. There are some reasons to be skeptical. Regulatory reforms focus on technique and not the underlying purpose. The continued emphasis on the individual cheater in cycling may keep performance underground and do little to change the organizational pressures to win at all costs. EPO may be banned, but what about the emerging frontiers of performance enhancement that include genetic modification or “gene-doping” and stem-cell therapies (see Culbertson 2009; Miah 2008; Trothen 2011)? The law-and-order frame discourages disclosure. If one continues to assume that private actors are effective regulators of their behavior, even with some limits imposed, can we truly expect them to engage the public interest in their decisions to take on new, risky ventures?

Faith in disclosure may be misplaced in markets for a different reason. The financial crisis clearly showed that derivative traders had a stake in producing “incommensurate, uninterpretable overwhelming information,” making deciphering markets a problematic strategy (Dorn 2012, 318). Moreover, there is much evidence to suggest that the industry will continue to have its way when the details of Dodd-Frank are put in place (Ford, this volume; Skeel 2010). Given the economic stakes, the financial crisis makes clear that we cannot allow financiers to police themselves using existing tools.

Neither model fully engages the organizational culture that supports performance enhancement or, most importantly, the rewards and values that performance enhancement yields. A more robust regulatory regime might benefit from considering some of the underlying dimensions of performance enhancement that we have identified.

We must consider if the “new normal” of performance enhancement is what we want as a society. Difficult questions need to be asked about the trade-offs that exist between the benefits accrued by performance enhancement and the harm to the integrity of the system that can result. Should we accommodate new techniques, or limit them? Does trading in the markets require rapid-fire risk-taking, and does professional cycling require remarkable speed up mountain ascents? Are we clear about the goals served by the new financial instruments and race-winning performances of cyclists? Who should decide these questions, and how do we best bring the public interest into this debate? More broadly, these questions force us to reckon with the very purpose of performance enhancement. And finally, knowing that performance enhancement and its related regulations may not operate in the same way for everyone, what kinds of new inequalities are created in this new normal?

Footnotes

Notes

Nancy Reichman is a professor of sociology and criminology at the University of Denver and editor of Law and Policy. Her research and writing explores networks of regulation in settings ranging from global governance to individual work sites. She has published scholarly articles on financial and environmental regulation and inequality at work.

Ophir Sefiha is an assistant professor in the Criminology and Criminal Justice Department at Western Carolina University. His research centers on the interplay among deviance and social control, media, and crime. He is interested in the creation and resistance of social control measures adopted to respond to the use of enhancement technologies.

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