After Dodd-Frank

• Author: J. Nicholas Ziegler,John T. Woolley
• Published date: 01 June 2016
• Date: 01 June 2016
• DOI: 10.1177/0032329216638061
• Subject Matter: Articles

Politics & Society

2016, Vol. 44(2) 249 –280

© 2016 SAGE Publications

Reprints and permissions:

sagepub.com/journalsPermissions.nav

DOI: 10.1177/0032329216638061

pas.sagepub.com

Article

After Dodd-Frank: Ideas

and the Post-Enactment

Politics of Financial Reform

in the United States

J. Nicholas Ziegler

Brown University

John T. Woolley

University of California, Santa Barbara

Abstract

The financial crisis of 2008 raised the politics of regulation to a new level of practical

and scholarly attention. We find that recent reforms in U.S. financial markets

hinge on intellectual resources and new organizational actors that are missing

from existing concepts of regulatory capture or business power. In particular,

small advocacy groups have proven significantly more successful in opposing the

financial services industry than existing theories predict. By maintaining the salience

of reform goals, elaborating new analytic frameworks, and deploying specialized

expertise in post-enactment debates, smaller organizations have contributed to a

diffuse but often decisive network of pro-reform actors. Through the rule-writing

process for macroprudential supervision and derivatives trading, these small

organizations coalesced with other groups to form a new stability alliance that has

so far prevented industry groups from dominating financial regulation to the degree

that occurred in earlier cases of regulatory reform.

Keywords

financial crisis, implementation, capture, knowledge regime, macroprudential

regulation, derivatives

Corresponding Author:

J. Nicholas Ziegler, Watson Institute, Brown University, 111 Thayer Street, Providence, RI 02912, USA.

Email: j_ziegler@brown.edu

638061PASXXX10.1177/0032329216638061Politics & SocietyZiegler and Woolley

research-article2016

250 Politics & Society 44(2)

The financial crisis of 2008 elevated the analytic priority of the politics of financial regu-

lation. The literature on regulation has been dominated by the concepts of business

power and the possibility of regulatory capture. Contrary to other major reforms, where

public attention subsided quickly after the enactment of new laws, attention to the goals

of the Dodd-Frank reforms has been sustained. The ability of incumbent firms to domi-

nate the rulemaking process has been blocked in important ways by the emergence of a

new network of interested organizations. As we show in this paper, the changing land-

scape of regulation is shaped above all by a consensus around a set of key ideas and

policy objectives that stand in stark contrast to previously dominant views.

Passed in July 2010, the Dodd-Frank Act1 resulted from the Obama administration’s

primary effort to craft a thoroughgoing regulatory reform for financial markets. Even

before taking office in January 2009, the Obama team was under intense pressure to

supplement the taxpayer-funded bailouts of 2008 with more lasting regulatory changes.

The reform effort was an important part of managing public anger over the bank bailouts

of October 2008. In addition, the Obama team emphasized reform in order to preserve a

measure of U.S. leadership in international efforts to reduce the risk of financial turmoil.

Revamping the existing regulatory institutions was second only to health care legislation

in the new administration’s priorities. Signed by the president in July 2010, the Dodd-

Frank Act was hailed as the most far-reaching overhaul of the country’s financial structure

since the Great Depression. Yet many observers, and much of the press, fear the reforms

are being diluted in the implementation process through industry efforts, that they have

been “captured” by the very interests the legislation was intended to constrain.2

Social scientists have also become attuned to the risk that general interest reforms

can be eroded even after legislative passage.3 Contrary to the image of Dodd-Frank as

a well-intended reform that has been subverted by powerful business interests, we

argue that the implementation of the law requires a different understanding of post-

enactment politics based on a broadened view of business power. We do not claim—

nor do the most optimistic observers we have encountered—that the Dodd-Frank

reforms can assuredly prevent financial crises in the future. It is too early to gauge the

ultimate success of the legislation. Yet in the implementation process to date, regula-

tors have used their new statutory powers to take many actions contrary to the explic-

itly and strongly expressed preferences of the financial services industry. These actions

have imposed significant new costs and limits on industry.

These developments do not mean the financial industry has been tamed.4 Rather,

they mean the post-enactment politics of financial reform are, like the politics of

enactment, contingent on an evolving set of coalitions that exploit the procedural fea-

tures of the rulemaking process to advance their goals. To understand this process, we

need a framework quite different from the stark images of regulatory capture and busi-

ness power that have informed the literature so far.

The fluidity of coalitions and ideas that we document was itself informed by a chang-

ing international context. Because the global financial crisis quite clearly originated in

the United States, top U.S. officials sought to lead the international effort to regulate

financial markets more closely. Policymakers in Europe, particularly Germany,

Ziegler and Woolley 251

portrayed the Anglo-American penchant for light-touch regulation as a central cause of

the crisis.5 In response, the United States claimed the role of committed if imperfect

regulatory pacesetter in the key postcrisis meetings of the G20 leaders in 2008 and

2009.6

Although international pressures made U.S. leaders more supportive of regulatory

reform, they do not explain the domestic maneuvering among the groups and organi-

zations that wanted to shape the reform measures in the United States. Accordingly,

this article focuses analysis on the political strategies of the groups and advocacy

organizations that shaped the implementation of new rules within the United States.

We therefore examine how domestic actors used several types of resources includ-

ing the ability to sustain an issue in the public eye, the articulation of coherent guiding

ideas and principles, the capacity to find allied, if not formally coordinated actors, as

well as to bring material resources or positional advantages to bear on key decision

makers. This approach requires an altered understanding of capture. It implies that

business can activate sources of power beyond those described by the contrast between

instrumental versus structural power. In particular, the financial services industry pro-

vides not only discrete products for its customers, but also produces a body of expert

knowledge on which regulators depend as they seek to supervise market competitors.

The concepts, frameworks of analysis, and tools supplied by the financial services

industry can, over time, grow into a coherent “knowledge regime.”7 When uncontested

in the post-enactment process of rulemaking, the industry’s ability to shape the pre-

vailing knowledge regime becomes a significant form of political power that can deci-

sively alter the regulatory process. Our argument for these underlying changes in the

politics of reform relies on three main assertions.

First, the financial crisis was the culmination of a thirty-year period of deregulatory

policy that fundamentally altered the underlying principles as well as the competitive

boundaries of the finance industry. The deregulatory program from the 1970s to 2008

made financial services ever more central to the U.S. economy. This broad-ranging

shift, often termed “financialization,”8 had the effect of permitting more concentration

in certain financial markets while encouraging competition in others. As a result, the

customary mechanisms of regulatory capture were slowly transformed. Instead of

privileging incumbent firms by creating entry barriers that protected them from com-

petition, federal regulatory agencies increasingly exposed firms to competition and

accepted arguments from free-market principles, moving away from prescriptive rules

toward greater reliance on industry self-regulation.

Second, by changing the basis of regulatory capture from entry-barrier mechanisms

to a diffuse but pervasive sort of intellectual capture, the deregulatory interregnum

from 1977 to 2007 had cross-cutting effects. It made the industry more dependent on

widespread acceptance of its central role in the country’s economic life. At the same

time, the pervasive role of finance made the industry increasingly vulnerable to intel-

lectual challenge and popular rejection. The shift to new forms of regulatory capture

opened the door to policy entrepreneurs and activists who questioned the principles of

market self-regulation in finance. Once the crisis of 2008 revealed the potentially dis-

ruptive fragility of core financial markets—in securitized mortgages, short-term