Charting a Course to Autonomy: Bureaucratic Politics and the Transformation of Wall Street

Over the past three decades, federal regulators have been at the heart of transformations that have reshaped the financial services industry in the United States and by definition, global markets. It was, for example, the Federal Reserve that initiated and developed risk-based capital standards, rules that are now at the heart of prudential regulation of financial firms across the globe. Federal regulators played a central role in preventing regulation of the emerging 'over-the-counter' derivatives market in the late 1980s and early 1990s, actions that later had dramatic consequences during the 2007-2008 financial crisis. The Securities and Exchange Commission took critical decisions regarding the prudential supervision of investment banks, decisions that greatly contributed to the end of the independent investment banking industry in the United States in 2008. Finally regulators played an important role in setting the agenda and shaping the outcomes of the Dodd-Frank Wall Street Reform Act of 2010, the most sweeping and comprehensive piece of legislation affecting the industry since the New Deal./nYet despite this, the idea that regulators possess independent political power is surprisingly controversial. All too often financial regulators are portrayed as 'captured' functionaries of the firms they regulate or as 'prisoners' of financial markets, assertions that are nevertheless frequently unsupported by rigorous empirics. Amongst political scientists, bureaucratic organizations tend to be treated as mere 'agents' that obediently follow the demands of their political principals, yet neither evidence nor logic supports such claims in the area of financial regulation. Finally, even amongst those that argue that autonomous bureaucracies were once possible in the pre-New Deal American state, there is skepticism about whether independent bureaucratic authority is possible in the densely institutionalized and interest-group heavy modern American polity. This project is designed to show that under conditions which pertain to institutional-level financial regulation -- low political salience and visibility, high technical complexity, and economic centrality -- such autonomy is not only possible in the modern American state, but is in fact ubiquitous. As a result, federal financial regulators have demonstrated not only a tremendous amount of influence over policy and legislative outcomes over the three decades, but they have done so in a manner that suggests that such action has been consistent with their own, differentiated and irreducible preferences./nThis influence is exercised primarily through the cultivation of reputation or 'images' of the agency amongst key policymaking audiences. When agencies are perceived to be legitimate policy actors and when audiences believe them to uniquely competent to deal with the policy problem at hand, regulators are often capable of inducing deference to their own preferences from other political and societal actors with different objectives. As a practical matter, however, we can only observe this exercise of influence during periods in which bureaucratic authority is 'contested' or challenged. During these periods, we see agencies behave in a strategic manner designed to promote and entrench images that boost their legitimacy and evoke a reputation for competency. Specifically, they seek to forge agreements with transgovernmental counterparts, create partnerships with private-sector actors, alter their public rhetoric in pursuit of expanding or defending their authority./nThis project explores these patterns of bureaucratic influence and behavior by examining regulatory policymaking in three main areas: bank capital rules, over-the-counter derivatives, as well as security holding company supervision and capital requirements. It does so by examining the historical development of these policies over time. This approach yields two important benefits. First, as a methodological device, it permits us to distinguish claims of capture, functionalism, or political control from autonomy-based processes. Indeed, while these theories may have explanatory power in later periods, they all too frequently fail to explain earlier critical junctures. Second, temporal analysis further highlights how early actions by regulators tend to create self-reinforcing or path-dependent patterns of power. In the first two cases examined, early decisions led to the empowerment of the Federal Reserve and a reduction in the degree of policy contestation in later eras. In the third case, negative feedback effects from prior actions lead to a diminishment of the authority of the Securities and Exchange Commission over time. In conclusion, this project also looks briefly at evidence of bureaucratic autonomy under "least-likely'' conditions: the high-profile 2008-2010 debate that led to the passage of the Dodd-Frank Act.

Advisor: Pierson, Paul