THE CONTINGENT ORIGINS OF FINANCIAL LEGISLATION.

• Author: Conti-Brown, Peter

ABSTRACT

Courts and scholars often view major financial legislation warily. One popular theory holds that Congress only legislates in this area when pushed by opportunistic activists in response to crises that neither activists nor legislators fully understand. Another account contends that financial legislation is the well-designed product of deeply entrenched special interest groups that control the process with limited input from others. Further, the Supreme Court's application of antinovelty doctrine--which counsels that governmental structures without historical precedent are constitutionally suspect--sends a strong signal that creative solutions to these problems will be viewed with judicial skepticism.

This Article challenges the prevailing scholarly theories of financial legislation and reveals as irredeemably flawed the Court's related assumptions about legislative processes. This reassessment is based on historical analysis of seven watershed legislative enactments, from the Federal Reserve Act of 1913 to the CARES Act of 2020. By grounding these laws in their political contexts, we uncover neither a pattern of responding to crises nor a logic of grand design at the frontier of congressional authority. Instead, the sweep of history reveals reactions to unpredictable events, policy entrepreneurs with proposals that change substantially during the course of the legislative process, and temporary legislative coalitions that respond to perceived problems in largely ad hoc ways. The result is a flourishing of congressional experimentation at every turn. Temporary coalitions and historical contingencies are the primary themes in financial lawmaking. Novel legislative experiments are not the exception, but the rule.

That insight exposes the impracticality of the ascendant antinovelty doctrine. Judicial insensitivity to the ubiquity of unpredictability and experimentation in legislative design risks curtailing Congress's legitimate and constitutional powers to shape the financial system in a democratically accountable way.

INTRODUCTION I. FOUNDATIONS A. Finance-Specific Theories B. Political Science Theories C. Judicial Doctrine II. FRAMEWORK A. Elements B. Alternatives III. APPLICATIONS A. Federal Reserve Act of 1913 B. Banking Act of 1933, [section] 8 C. Bank Holding Company Act of 1956 D. Financial Institutions Reform, Recovery, and Enforcement Act of 1989 E. Financial Services Modernization Act of 1999 F. Dodd-Frank Act of 2010 G. CARES Act of 2020 IV. IMPLICATIONS A. Anti-antinovelty B. Delegation C. Legislative Possibility CONCLUSION INTRODUCTION

Over the past century, Congress has organized, upended, and reorganized again large segments of the American economy through the passage of financial legislation. Whether establishing a central bank to set monetary policy, mandating and removing again a division between investment and commercial banking, reinvigorating consumer financial protection, or responding to an unprecedented pandemic, Congress has moved aggressively and with outsized consequences for financial firms and the macroeconomy.

Law and finance scholars sometimes view these measures skeptically. One prominent group of scholars considers the purported conditions under which financial legislation is enacted as evidence of these statutes' infirmities. These scholars assert that major financial laws are often enacted in the midst of a financial or economic crisis, when voters' temporarily heightened outrage compels lawmakers to act hastily. (3) The result is ill-conceived "bubble laws." (4) Most notably, Roberta Romano's "iron law of financial regulation" focuses on populist, panicked overreactions to financial crises as the primary causal explanation for major financial legislation. (5)

A second theory, Charles Calomiris and Stephen Haber's "game of bank bargains," posits that financial legislation is the product of durable coalitions of disparate interest groups, e.g., community activists and large banks in the United States. (6) In their view, that these coalitions supposedly endure for decades or even centuries calls into question whether "reformers can hope to improve [financial] systems." (7)

Federal courts also can take a skeptical eye towards financial legislation, particularly when it involves congressional experimentation. Most recently, in Seila Law LLC v. Consumer Financial Protection Bureau (CFPB), the Supreme Court stated that the CFPB's particular mix of structural features--designed by Congress after the 2008 financial crisis to insulate the agency from presidential control--"lacks a foundation in historical practice," which is "[p]erhaps the most telling indication" of the structure's unconstitutionality. (8) The CFPB director's protections against presidential removal were thus held unconstitutional. (9) Similarly, the Supreme Court has found that the design of the Federal Housing Finance Agency (FHFA) and the Public Company Accounting Oversight Board also were too novel to pass constitutional muster. (10)

This Article advances a framework for understanding financial legislation that contradicts these scholarly and judicial critiques. This framework focuses on the fragility of coalitions and the variety of historical contingencies that afflict every aspect of financial lawmaking. Drawn from the rich history of financial legislation, from the Federal Reserve Act of 1913 to the CARES Act of 2020, this coalitions-and-contingencies framework consists of four principles.

First, political sensitivity to unpredictable events drives financial lawmaking. Financial crises are an important type of these events, as Roberta Romano, Paul Mahoney, and others have observed. But the class of events that triggers major new legislation in this area includes far more than crises. Close elections, a bank megamerger, and a pandemic, among other events, also spark major legislative efforts. Ex ante prediction of which events will trigger a legislative response, and which will not, is nearly impossible. (11)

Second, even after an unpredictable major event triggers legislative interest, "policy entrepreneurs" of various kinds--i.e., well-placed individuals who proselytize for new ideas within the corridors of power--play a pivotal role in developing those ideas into legislation. (12) Surprisingly, policy entrepreneurs rarely succeed in implementing their ideas off-the-rack, without substantial modification. (13) The process of idea generation is instead both active and reactive, responding to dynamics partly endogenous to social, political, and economic forces. (14)

Third, after the chance encounter between an unpredictable event and a policy entrepreneur eager to respond, coalitions form to propel ideas toward legislative passage. The coalitions typically do not map onto partisan identification or other established groupings. Instead, they tend to be temporary, coalescing around the ideas and networks of policy entrepreneurs and others. They often are the product of a long, complex series of compromises and adaptations to push coalitions to the finish line. The need for legislative entrepreneurs to thread the needle so finely to assemble a winning coalition means that these coalitions are rarely built to last. Indeed, they sometimes disband even as legislation is debated.

Fourth, the consequence of these features is legislative diversity--the very novelty that jurists have found constitutionally suspect. Rather than moving through some well-worn arroyo, legislation is generated by unpredictability and historical contingencies. The result is that novel solutions and unique institutional designs are present throughout major financial enactments.

These principles challenge scholars' and jurists' understanding of financial lawmaking in several respects. The first principle--that a wide range of events spurs financial legislation--betrays the claim that these laws tend to be crisis-driven, and therefore ill-considered and hastily passed. The second and third principles--that a singular policy entrepreneur marshals support for a reform, and a temporary coalition then is assembled in support of the legislation--demonstrate that the system is not nearly as ossified and incapable of disruption as Calomiris and Haber claim.

The fourth principle--that financial legislation often involves experimentation and generates novel forms--provides a rejoinder to judicial critiques of novelty in financial regulatory institutions. (15) Simply put, administrative structures do not fit a pattern because legislation follows no clear template. Thus, the very novelty of congressional reaction to public policy challenges should be seen as a defining feature of lawmaking, not an unconstitutional defect.

Finally, the four principles in toto reveal a more optimistic picture of the prospects of financial reform than conventional wisdom suggests. Although passing major legislation is never easy, the door is not closed to nearly the extent that the crisis-legislation and bank-bargain accounts imply. That a wide variety of unpredictable events (not just crises) can serve as catalysts and that various temporary coalitions (not just a single, durable alliance of dominant interest groups) can be assembled to support financial bills should encourage would-be policy entrepreneurs.

The Article proceeds as follows. Part I outlines the major extant theories of legislation generally and financial legislation in particular. It also presents the courts' antinovelty doctrine alongside the related judicial concept of historical-gloss, highlighting how these doctrines presume a particular theory of lawmaking. Part II briefly introduces our coalitions-and-contingencies framework in a more fully specified form. The framework builds upon the political science theories and contrasts with the extant law and finance literatures described in Part I. Part III, the bulk of the Article, illustrates the framework via seven case studies of major...