Published online by Cambridge University Press: 11 February 2014
A growing body of scholarship explores processes of gradual but transformative institutional change, classifying patterns of change into several categories. I argue that policymakers themselves actively contest the appropriate institutional frames for understanding changes as they seek to guide institutional change, and show that judicial determinations of statutory meaning are sensitive to judgments about which institutional perspective is most compelling. A process-tracing examination of institutional changes in the Glass–Steagall Act over the law's whole life span, from 1933 to 1999, provides a concrete example of how the dynamics of contestation can play out. Those who conceived of Glass–Steagall as the institutional embodiment of the separation between commercial and investment banking argued that expansion of commercial bank powers represented institutional drift. Alternatively, those who came to see Glass–Steagall as just one set of statutory imperatives to be handled within the larger institutional context of American banking law, including banking regulators, interpreted regulatory changes as constructive acts of conversion adapting to novel economic challenges. I document the slow process through which courts came to accept the second framing while noting how the fixity of statutory text nevertheless continued to limit available adaptations.
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17. Commercial banks accept deposits and make loans, whereas investment banks underwrite and market securities as well as executing various trades. Unmodified, the term “bank” generally refers to a commercial bank.
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19. In adding to Streeck and Thelen's discussion of conversion, Lomazoff adopts roughly this approach, offering a penetrating glimpse into the thinking of officials at the Bank of the United States as they sought to turn that institution to new purposes. Adopting an internal perspective is perhaps the most direct route to acquiring what Carpenter calls “dense knowledge,” which requires an empirical account to “make sense to those most thoroughly and intimately aware of the action.” Carpenter, Daniel, Reputation and Power: Organizational Image and Pharmaceutical Regulation at the FDA (Princeton, NJ: Princeton University Press, 2010)Google Scholar, 29.
20. Note that, for almost all of the law's history, the most prominent of these defenders came from the securities industry, but that now in the post–Glass–Steagall era the loudest voices are those who yearn for a simpler financial industry, such as Sen. Elizabeth Warren (D-MA). See Robert Rizzuto, “Elizabeth Warren renews call for Glass-Steagall Act following JPMorgan's announcement that risky trading loss grew to $5.8 billion,” The Republican, 13 July 2012, http://www.masslive.com/politics/index.ssf/2012/07/elizabeth_warren_renews_call_f.html.
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26. A note on the various banking regulators involved: banking has been subject to federal regulation longer than any other part of the economy, and over time it has acquired a multitude of separate regulators, each of which has its own distinct “personality” in addition to having different responsibilities. This means that each pursued its own unique agenda as it enforced Glass–Steagall. The Office of the Comptroller of the Currency (OCC) is responsible for chartering and regulating national banks and has tended to craft regulatory solutions in order to satisfy its “customers”— and since bankers seeking a new charter are faced with a choice of either national or state regulation, seeing the regulated interests as customers or clients is somewhat more apt for banking than other areas of regulation. This culture tends to overwhelm any effects of partisanship, and comptrollers of both parties tend to be highly sympathetic to commercial banking interests. The Federal Deposit Insurance Corporation (FDIC) is built and acts like an insurance company but is also charged with regulating state banks that choose not to be members of the Federal Reserve System. When its insurance function was not directly implicated, it tended to follow the lead of the other regulators on Glass–Steagall issues. The Federal Reserve Board of Governors (Fed) is responsible for ensuring the safety and soundness of its member banks, and the Bank Holding Company Act of 1956 (discussed below) also vested it with regulatory responsibility for bank holding companies. The Fed functions much like an academic institution, and generally acts as a repository of prevailing technocratic impulses regarding banking. See Khademian, Anne, Checking on Banks: Autonomy and Accountability in Three Federal Agencies (Washington, DC: Brookings Institution Press, 1996)Google Scholar.
27. Board of Governors v. Agnew, 329 U.S. 441 (1946).
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36. For a similar dynamic, see Patashnik, Eric, Reforms at Risk: What Happens After Major Policy Changes are Enacted (Princeton, NJ: Princeton University Press, 2008)Google Scholar, 71.
37. Jessee and Seelig, Bank Holding Companies, 12.
38. 12 U.S.C. § 1843 (c)(8), also referred to as §4(c)(8) of the Bank Holding Company Act of 1956.
39. Office of the Comptroller of the Currency, “Digest of Opinions of the Comptroller of the Currency ¶ 220A” (August 1957), reprinted in Federal Banking Law Reporter (CCH) ¶ 96,262 at 81,357, cited in American Bankers Association v. SEC, 804 F. 2d 739 (1986), 741.
40. Baker, Watts & Co. v. Saxon, 261 F. Supp. 247 (D.D.C. 1966).
41. Congressional Quarterly Almanac 21 (1965): 856–57.
42. Congressional Quarterly Almanac 22 (1966): 762–66.
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48. Association of Data Processing Service Organizations v. Camp, 397 U.S. 150 (1970), 156–57. The case centered on powers granted to national banks by the OCC under the National Bank Act rather than directly implicating Glass–Steagall or the BHC Act, but the principle of its holding was easily applied to these closely related laws.
49. Investment Company Institute v. Camp, 401 U.S. 617 (1971).
54. See Macey, 10–15.
55. Cited in Board of Governors v. ICI, 450 U.S. 46 (1981), 48–49.
57. Letter from Comptroller James E. Smith to G. Duane Vieth (June 10, 1974), reprinted in Federal Banking Law Reporter (CCH) ¶ 96,272, cited in American Bankers Association v. SEC, 804 F. 2d 739 (1986), 741.
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68. Federal Reserve Board of Governors, “Order Approving Applications to Engage in Limited Underwriting and Dealing in Certain Securities,” 73 Fed. Res. Bull. 473 (June 1987).
69. James Kwak, “Cultural Capture and the Financial Crisis,” in Carpenter and Moss, eds., (2014), 71–98.
70. Erik Filipiak, “The Evolution of Bank Regulation: The Interplay of Regulators and the Regulated” (Ph.D. dissertation, Department of Government, Cornell University): 108–111. Filipiak's work is an especially valuable guide for those attempting to think about the systematic challenges facing banking regulators as they sought to harmonize their varied responsibilities.
71. Congressional Quarterly Almanac 55 (1999): 5–26–5–27.
72. “Order Approving Applications to Engage in Limited Underwriting,” 506.
73. E.g., “Statement by Michael Bradfield, General Counsel, Board of Governors of the Federal Reserve System, before the Subcommittee on Commerce, Consumer, and Monetary Affairs of the Committee on Government Operations, U.S. House of Representatives, July 21, 1983,” 69 Fed. Res. Bull. 609 (July 1983); “Statement by Paul A. Volcker, Chairman, Board of Governors of the Federal Reserve System, before the Committee on Banking, Finance, and Urban Affairs, U.S. House of Representatives, June 12, 1984,” 70 Fed. Res. Bull. 560 (June 1984); “Statement by Paul A. Volcker, Chairman, Board of Governors of the Federal Reserve System, before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate,” 73 Fed. Res. Bull. 199 (January 1987); “Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Subcommittee on Telecommunications and Finance of the Committee on Energy and Commerce, U.S. House of Representatives, October 5, 1987,” 73 Fed. Res. Bull. 907 (October 1987). Importantly, many policymakers viewed maintaining the separation between banking and commerce as far more important than the separation between commercial banks and investment banks. Rep. Jim Leach cites protection of this separation between banking and commerce as one of the primary motivators for reformers in the 1990s; James A. Leach, interview with author, Princeton, NJ, November 2008.
74. Such institutional patchwork recalls the “state building as patchwork” described in another context by Skowronek, Stephen, Building a New American State: The Expansion of National Administrative Capacities, 1877–1920 (New York: Cambridge University Press, 1982)CrossRefGoogle Scholar. Just as building America's administrative state as a whole proceeded through an incremental reconstruction of existing institutions, so too is the same messy, incremental, and layered process played out in the context of reconstituting statutory institutions capable of pursuing particular policy goals.
75. Board of Governors v. ICI, 450 U.S. 46 (1981), 68.
76. A.G. Becker Inc. v. Board of Governors, 693 F.2d 136 (D.C. Cir., 1982).
81. Chevron, U.S.A. v. Natural Resources Defense Council, 467 U.S. 837 (1984).
83. First Bancorp. v. Board of Governors, 728 F.2d 434 (10th Cir., 1984).
85. Dimension Financial Corporation v. Board of Governors, 744 F.2d 1402 (10th Cir., 1984). For a clearer exposition of the same facts, see Board of Governors v. Dimension Financial Corporation, 474 U.S. 361 (1986), 367.
86. Dimension Financial Corporation v. Board of Governors, 1405.
88. Board of Governors v. Dimension Financial Corporation, 474 U.S. 361 (1986).
92. SIA v. Board of Governors, 468 U.S. 137 (1984). The case is often referred to as Becker in other court cases and in the literature, and I adopt this usage in this article. Alternatively, this line of cases is sometimes called Banker's Trust, after the name of the bank seeking to market commercial paper (whereas Becker and the SIA represented the securities firms whose competitive interests were damaged by the Fed's permissive decision).
96. ICI v. Conover, 593 F.Supp 846 (N.D.Cal., 1984), 854.
97. ICI v. Conover, 596 F.Supp 1496 (D.D.C., 1984); ICI v. Clarke, 630 F.Supp 593 (D.Conn., 1986). In 1985, Robert L. Clarke replaced C. T. Conover as Comptroller of the Currency; each man is named as the relevant party in some of these closely related cases.
98. ICI v. Clarke, 789 F.2d 175 (2nd Cir., 1986); ICI v. Conover, 790 F.2d 925 (D.C. Cir., 1986).
99. ICI v. Conover, 933–35.
101. ICI v. Clarke, 793 F.2d 220 (9th Cir., 1986), 222.
102. Denial of Cert, 479 U.S. 939 (1986).
103. SIA v. Board of Governors, 807 F.2d 1052 (D.C. Cir., 1986).
106. Denial of Cert., 483 U.S. 1005 (1987).
107. American Bankers Association v. SEC, Civil Action No. 85-02482, slip op. (D.D.C.).
108. American Bankers Association v. SEC, 804 F.2d 739 (D.C. Cir., 1986), 741–43.
111. ICI v. FDIC, 815 F.2d 1540 (D.C. Cir., 1987), 1546.
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116. Federal Reserve Board of Governors, “Regulation Y: Amendment,” 75 Fed. Res. Bull. 751 (November 1989).
117. General Accounting Office, GAO/GGD-90-48, “Bank Powers: Activities of Securities Subsidiaries of Bank Holding Companies” (1990); GAO/GGD-91-131, “Bank Powers: Bank Holding Company Securities Subsidiaries' Market Activities Update” (1991).
118. General Accounting Office, GAO/T-GGD-95-12, “Modernization of the Financial Services Regulatory System. Statement of James L. Bothwell, before the Committee on Banking and Financial Services, House of Representatives” (1995).
119. This reversal of the securities industry's position nicely illustrates the opportunistic orientation of interest groups toward institutional change. This dynamic closely parallels what Hammond and Knott (1988) call the “deregulatory snowball.” They argue that when the status quo of regulation is sufficiently disrupted, those who found themselves as beneficiaries of regulation in the past may now find themselves receiving the short end of the stick and call for the abandonment of regulation altogether.
123. Leach's efforts to clean up banking policy make him an exemplar of what we might call a “policy superintendent.” Scholars of American political development have recently developed a rich scholarship surrounding “policy entrepreneurship.” See, e.g., Carpenter (2001), 14–36; Sheingate, Adam D., “Political Entrepreneurship, Institutional Change, and American Political Development,” Studies in American Political Development 17 (2003): 185–203 CrossRefGoogle Scholar. Where an entrepreneur conceptualizes and realizes new possibilities for action, the superintendent recognizes existing structures in need of attention and marshals the resources necessary to restore coherence. While less glamorous than entrepreneurship, superintendence can nevertheless bring political rewards, especially from those interests suffering as a result of statutory neglect.
126. Nationsbank v. VALIC, 513 U.S. 251 (1995); Barnett Bank v. Nelson, 517 U.S. 25 (1996).
127. Congressional Quarterly Almanac 52 (1996): 2–44–2–54 Google Scholar; Bill McConnell, “Leach to Seek Broadening of Powers for Bank Units,” American Banker, 20 December 1996, 1. A regulatory relief bill passed that year did contain a minor Glass–Steagall provision. Well-capitalized BHCs seeking to expand into non-banking activities approved by the Federal Reserve had previously needed to apply and wait up to 90 days for Fed Board approval, but could now proceed just by notifying the Fed within 10 days of commencing the new activity; see Congressional Quarterly Almanac 52 (1996): 2–49 Google Scholar. Congress was fully cognizant of the dynamic at work and here streamlined regulatory change even as it failed to provide more sweeping reform. Apparently, the interest group dynamics that made it too politically costly to achieve wholesale change did not prevent some modest harmonization of law and practice.
129. Congressional Quarterly Almanac 53 (1997): 2–74 Google Scholar. For further exploration of the political reorientation of the securities and insurance industries and its impact on the legislative process, see Suárez and Kolodny (2011).
130. Leach, interview with author.
135. Ibid., 5–10 – 5–12. It should be noted that Gramm's intense opposition to the CRA appeared to be ideological rather than interest-group-driven. At this point in time, the ABA's representative said that banks did not feel particularly strongly on the issue of the CRA; see Congressional Quarterly Almanac 55 (1999): 5–10 Google Scholar.
140. “Washington People: Playful Postmortem Ices Cake at Glass-Steagall Repeal Party,” American Banker, 8 November 1999, 3.
141. Leach, interview with author.
142. E.g., for its guilt: House Majority leader Steny Hoyer, interviewed in James Rowley and Christine Harper, “House Discussing Glass-Steagall Revival, Hoyer Says,” Bloomberg, 15 December 2009, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=arMrSVjq4cts); Ritholtz, Barry, with Task, Aaron, Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy (Hoboken, NJ: John Wiley & Sons), 135–37, 212–14, 238Google Scholar. And against Glass–Steagall's guilt: former President Bill Clinton, see Maria Bartiromo, “Bill Clinton on the Banking Crisis, McCain, and Hillary,” Business Week, 24 September 2008, http://www.businessweek.com/stories/2008-09-23/bill-clinton-on-the-banking-crisis-mccain-and-hillary; and Tyler Cowen, “Did the Gramm-Leach-Bliley Act cause the housing bubble?” Marginal Revolution, blog, 19 September 2008, http://marginalrevolution.com/marginalrevolution/2008/09/did-the-gramm-l.html.
143. Philip A. Wallach, “Moving Beyond Calls for a ‘New Glass-Steagall’.”
144. James Rickards, “Repeal of Glass-Steagall Caused the Financial Crisis,” U.S. News Economic Intelligence, blog, 12 August 2012, http://www.usnews.com/opinion/blogs/economic-intelligence/2012/08/27/repeal-of-Glass-Steagall-caused-the-financial-crisis.
145. See also Paul Krugman, “The Gramm connection,” The Conscience of a Liberal (New York Times blog), 29 March 2008, http://krugman.blogs.nytimes.com/2008/03/29/the-gramm-connection/?_r=0.
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147. Barry Ritholtz, “A Brief History Lesson: How We Ended Glass Steagall.”
148. See Suárez and Kolodny, 93.
149. Group of Thirty, “The Structure of Financial Supervision: Approaches and Challenges in a Global Marketplace,” October 2008, http://www.group30.org/images/PDF/The%20Structure%20of%20Financial%20Supervision.pdf: 32–33.
150. Statutory text thus creates a classic case of path dependence; see Pierson, Paul, “Increasing Returns, Path Dependence, and the Study of Politics,” American Political Science Review 94 (2000): 251–267.CrossRefGoogle Scholar
151. This logic closely tracks the arguments made in the constitutional realm by Whittington, Keith E., Constitutional Interpretation (Lawrence, KS: University Press of Kansas)Google Scholar.
152. For a discussion of the interpretive challenges posed by long-lived and dynamic statutes, see Strauss, Peter L., “Statutes That Are Not Static—The Case of the APA,” Journal of Contemporary Legal Issues 14 (2005): 767–802.Google Scholar