Charting a Course to Autonomy: Bureaucratic Politics and the Transformation of Wall Street by Peter Joseph Ryan A dissertation submitted in partial satisfaction of the requirements for the degree of Doctor of Philosophy in Political Science in the GRADUATE DIVISION of the UNIVERSITY OF CALIFORNIA, BERKELEY Committee in charge: Professor Paul Pierson, Chair Professor J. Nicholas Ziegler Professor Neil Fligstein Spring 2013 Charting a Course to Autonomy: Bureaucratic Politics and the Transformation of Wall Street Copyright c 2013 by Peter Joseph Ryan Abstract Charting a Course to Autonomy: Bureaucratic Politics and the Transformation of Wall Street by Peter Joseph Ryan Doctor of Philosophy in Political Science University of California, Berkeley Professor Paul Pierson, Chair 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 invest- ment 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. Yet despite this, the idea that regulators possess independent political power is surpris- ingly 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 neverthe- less 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. This influence is exercised primarily through the cultivation of reputation or ‘images’ of 1 the agency amongst key policymaking audiences. When agencies are perceived to be legit- imate 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 practi- cal 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 le- gitimacy 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. This project explores these patterns of bureaucratic influence and behavior by examining regulatory policymaking in three main areas: bank capital rules, over-the-counter deriva- tives, 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 ac- tions 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 evi- dence of bureaucratic autonomy under “least-likely” conditions: the high-profile 2008-2010 debate that led to the passage of the Dodd-Frank Act. 2 Acknowledgements The genesis of this project occurred in late 2008 when Paul Pierson and myself had our first discussion about the dearth of systematic scholarly attention paid to financial services policy. Since then, I have been extraordinarily fortunate to have had access to someone who is undoubtedly an intellectual powerhouse. In particular, I should note that Paul’s capacity to understand big picture puzzles is perhaps unrivaled and, as a result, his theoretical and empirical insights are greatly imprinted upon this project. Of equal importance, however, has been Paul’s steadfast support of my academic and career objectives, particularly over this last critical year. I will be forever grateful for his efforts on my behalf and for his strong belief in the value of this project. To my other committee members – Nick Ziegler and Neil Fligstein – I want to extend my deepest gratitude for agreeing to join this effort at what was a later stage in the process. Your expertise and advice has been of tremendous importance in shaping this project for the better. I also owe a special debt of gratitude to David Karol for his mentorship throughout the years. David was instrumental in me coming to Berkeley, and though this specific project ultimately evolved in a different direction, I will always be thankful for his invaluable advice and support throughout the years. I would like to thank Steve Vogel for his helpful insights regarding this project, along with Bob Kagan and Ann Joseph O’Connell, both of whom also served on my prospectus committee with David and Steve. I would like to thank Sean Gaillmard for his trenchant insights that helped to significantly improve the theoretical portion of this project, as well Jacob Hacker for his insights at an earlier stage in this endeavor. My thanks also go to David Vogel both for his advice on this effort and providing me with the opportunity to work with him on a year-long research project. I am also grateful to faculty I have worked with over the years, including Margaret Weir and Gordon Silverstein, as well as to the valuable advice I received from Eric Schickler and many others. I would be remiss if I did not acknowledge the late and great Nelson Polsby for persuading me to come to Berkeley; it was a privilege to take his American politics seminar, which was undoubtedly one of the highlights of my years in graduate school. Finally, I am extremely grateful to the supportive staff in the Political Science Department who have provided tremendous assistance to me at various points in this process, including Andrea Rex, Gwen Fox, Janet Newhall, and Suzan Nunes. I would like to extend a special thanks to the UCDC community, which has been my home over the past three years. Above all, I owe a deep debt of gratitude to the Center’s former Executive Director Bruce Cain for his mentorship, support, and advice. I am grateful to the always ebullient Janou Gordon, as well as her indomitable predecessor, Pretti Piplani, for their friendship and support. I would like to thank Jim Desveaux for his insightful feedback on this project, as well as Marc Sandalow and Matt Dallek, both of whom have been valuable sources of advice for me on this and other matters. I am very lucky to have had a supportive community of graduate students around me, including Jay Purcell, Lauren i Janes, Phil Wolgin, and Genevieve Lester, all of whom have moved on to bigger and better things. I would particularly like to thank Chloe Thurston for her feedback on this project over the past two years and for working with me on a related collaborative effort. I am also grateful to all of the other faculty and staff at the Center that I have had the privilege of working with over the past three years. I truly could not have made it through my early years of graduate school without the support of my housemates John Henderson and Devin Caughey. In particular, John’s guid- ance, support, and friendship throughout the years has been invaluable to me. I want to also thank the other member of our Americanist cohort, Sara Chatfield, for her abiding friendship over the past seven years. Ryan Williams: thank you for always being there to listen and offer advice. Kimhouy Tong, Tom Kordel, Catherine Kordel, and Liz Ho: thank you for your love and support over many years. I could not have gotten through the past three years without an amazing group of friends who helped make Washington DC home.