Anatomy of agency capture: An organizational typology for diagnosing and remedying capture

Recent crises and disasters in regulated industries have renewed scholarly attention to regulatory capture. The present research incorporates and builds on these efforts by creating a typology to help researchers and practitioners organize the capture literature. The typology has two dimensions: the degree of coordination within the regulated industry, the agents of capture; and the scope of capture within the agency and elected officials, the targets of capture. I illustrate the utility of the typology by using a case study of banking regulation before the 2008 global financial crisis. The case study uses process‐tracing methodology to weigh evidence about the role and scope of capture in creating the crisis. The contributions of this research are twofold. First, for capture theory, the typology assists in organizing the disparate, multidisciplinary research on capture mechanisms and remedies. Second, for practice, this organization can lead to more accurate diagnoses about the scope of capture and suggest appropriately tailored remedies.     

Why reregulation after the crisis is feeble: Shadow banking,offshore financial centers,and jurisdictional competition

A crucial element in the complex chain of factors that caused the recent financial crisis was the lack of regulation and oversight in the shadow banking sector, which is largely incorporated in offshore financial centers (OFCs), but instead of swift and radical regulatory reform in that sector after the crisis, we observe only incremental and ineffective measures. Why? This paper develops an explanation based on a two‐level game. On the international level, governments are engaged in competition for financial activity. On the domestic level, governments are prone to capture by financial interest groups, but also susceptible to demands for stricter regulation by the electorate. Governments try to square the circle between the conflicting demands by adopting incremental and symbolic, but largely ineffective, reforms. The explanation is put to empirical scrutiny by tracing the regulatory initiatives on shadow banks and OFCs at the international level and within the United States and the European Union, where I focus on France, Germany, and the United Kingdom.     

The Credit Rating Agencies and Their Contribution to the Financial Crisis

The credit rating agencies that dominated the ratings of mortgage‐backed securities were Moody's and Standard & Poor's. The two agencies rated some 4.3 trillion dollars of bonds as triple AAA, yet within a period of 18 months these same rating agencies downgraded these bonds to below investment grade. This paper seeks to show that the ratings agencies business model, the issuer pays approach, led to major conflicts of interest with both the ratings agencies unable to walk away from a rating. The evidence given by analysts to Congressional Inquiries confirms a cultural revolution within the rating agencies, with analysts feeling unable to question the quality of a rating. Analysts who were described as being awkward by issuers were removed from the rating process. In the meantime, the income for the rating agencies increased from 3 billion dollars to 6 billion dollars, with the CEOs of the rating agencies receiving incomes comparable to the incomes to the CEOs of investment banks.     

The Political Origins of the Financial Crisis: The Domestic and International Politics of Fannie Mae and Freddie Mac

For much of the last decade it was clear that the commercial operations of the government-sponsored enterprises Fannie Mae and Freddie Mac were creating an increasing systemic financial risk. That risk was compounded by the fact that the Japanese and Chinese central banks were acting as cheap creditors. The Bush administration and some Republicans in Congress made efforts from 2001 to create a tougher regulatory framework for Fannie and Freddie. Fannie and Freddie were able to defeat these attempts to constrain their operations by a four-fold political strategy involving campaign contributions to members of Congress, a vast lobbying apparatus, the cultivation of a political language around affordable housing for minorities, and abusing and smearing their regulator. Since Japan and China understood that the US government would have to assume Fannie and Freddie's liabilities in a crisis they had no incentive to expose the political fiction that it would not.     

金融危机对我国经济增长的影响及应对策略

金融危机通过贸易领域传导至我国,对我国出口、投资、消费产生了较大的影响,从而抑制了我国的经济增长。我国经济增长除受到外因作用而放缓之外,还受到我国自身经济结构不合理、发展方式不科学的制约。面对金融危机的挑战,政府应加快推进经济结构调整、切实转变经济发展方式,促使消费、投资、出口协调拉动经济增长,以保持我国经济健康平稳可持续增长。     

理性认识金融危机下我国中间阶层的作用

在全球性金融危机中,中国承受着巨大压力,一部分人认为,作为社会中流砥柱的中间阶层能够以其强劲的消费拉动中国经济,从而维护社会的稳定与发展。文章认为,在金融危机下,这不是一种理性的对待中间阶的态度,并从经济、政治和社会责任感三个角度,分析了在当前环境下这种观点是值得商榷的,随后,从不能正视中间阶层的现状,忽略中国社会发展的实情以及对中间阶层理解的偏差性等方面分析了持这种观点的原因。     

An Obituary for the Third Way: The Financial Crisis and Social Democracy in Europe

Why has the financial crisis not served as an occasion for social democratic revival? It is because, with the ‘Third Way’, European social democracy became imbricated with the financial system in crisis to such an extent that it is in no position to offer an alternative to it. The financial crisis is the crisis of the Third Way. Furthermore, the Third Way was based on the faulty premise that it was possible to replicate USA's apparent success in the 1990s, which, however, was based on very particular conditions. The argument is pursued with reference to inter alia Third Way ideology, transatlantic relations, the political economy of capitalist variety, and the political sociology of mass parties.     

Regulating finance after the crisis: Unveiling the different dynamics of the regulatory process

It is now widely recognized that regulatory failures contributed to the onset of the global financial crisis. Redressing such failures has, thus, been a key policy priority in the post‐crisis reform agenda at both the domestic and international levels. This special issue investigates the process of post‐crisis financial regulatory reform in a number of crucial issue areas, including the rules and arrangements that govern financial supervision, offshore financial centers and shadow banking, the financial industry's involvement in global regulatory processes, and macroeconomic modeling. In so doing, the main purpose of this special issue is to shed light on an often understudied aspect in regulation literature: the variation in the dynamics of regulatory change. Contributors examine the different dynamics of regulatory change observed post‐crisis and explain variations by accounting for the interaction between institutional factors, on the one hand, and the activity of change agents and veto players involved in the regulatory reform process, on the other.     

Risk and Financial Armageddon in Ireland: The Politics of the Galway Tent

This article examines Ireland's financial crisis. Thus far explanation has focused on individual or collective administrative failure: the office(r) of financial regulation singularly failed to scrutinise the banks sufficiently: it was a matter of poor risk management. While this article would agree that the (mis)management of risk was important to how the crisis unfolded, I argue that an explanation of why the crisis emerged demands an altogether different focus. Put simply, after financial regulatory reform, a reconfiguration of risk in politics took place as the locus of decision‐making about financial risk shifted from the realm of the political/legal (Cabinet/Central Bank/Department of Finance) to the economic/legal (retail banks, shareholders/consumers). It was a critical development, one that mirrored events taking place in the UK, upon which Ireland drew experience, for now assessments about risk undertaken by the banks demanded that intervention could be justified only on an ascertainable risk, not a theoretical uncertainty (or spurious fear). The evidentiary bar for intervention was therefore raised, removing the precautionary instinct implicit in the prudential governance of Central Banks.     

The State of American Federalism, 2005: Federalism Resurfaces in the Political Debate

After several years during which federalism was rarely a prominentor explicit issue in political debates, it was in several waysthrust into the public consciousness in 2005. It was not thatthe president or Congress ceased sacrificing state and localinterests to substantive policy goals, as shown by the costlyREAL ID Act, stringent new federal requirements in the TemporaryAid to Needy Families reauthorization, and congressional interventionin the Terri Schiavo case. However, Hurricane Katrina, and particularlythe delayed and ineffective intergovernmental response, generatedsubstantial debate about the appropriate federal role in disasterrelief. In addition, state and local governmental oppositionto the No Child Left Behind Act intensified and generated significantattention during the year, particularly as a result of a Utahstatute asserting the precedence of state over federal law anda Connecticut lawsuit against the act. Meanwhile, state governmentscontinued to address a number of policy problems that federalofficials were unable or unwilling to confront, especially regardingenvironmental, health-care, and labor issues. Finally, althoughthe Supreme Court in 2005 continued its recent (2003–2004)trend of pulling back somewhat from its late-1990s Congress-curbingdecisions, federalism issues figured quite prominently in thesenate confirmation hearings for Chief Justice John Robertsand Justice Samuel Alito.     

Post‐crisis reforms in banking: Regulators at the interface between domestic and international governance

Post‐crisis international standards have been agreed on in certain areas of banking regulation, namely capital, liquidity, and resolution, but not others, namely bank structure – why? We articulate a two‐step analytical framework that links the domestic and international levels of governance. In particular, we focus on the role of domestic regulators at the interface between the two levels. At the domestic level, regulators evaluate externalities and adjustment costs before engaging in cooperation at the international level. This analysis explains why regulators in the United States and the European Union act as pacesetters, foot‐draggers, or fence‐sitters in international standard setting; that is to say, why they promote, resist, or are neutral toward international financial standards. At the international level, we explain the outcome of international standard setting by considering the interaction of pacesetters and foot‐draggers.     

Banking supervision and the politics of verification: the 2014 stress test in the European Banking Union

The statistical methodology known in financial terminology as ‘stress testing’ was used by the European Central Bank in 2014 in order to assess the solidity of the banks in the eurozone. This audit process is analysed here as a problem of truth production or ‘veridiction’ in the sense developed by Michel Foucault in his 1978–1979 lectures at the Collège de France. In order to prove effective, the stress test had to deliver knowledge on banks, objectified and actionable at once, but also controlled by the idea of avoiding ‘market panic’. This epistemological dilemma is at the core of the politics of verification, which consists in the distribution of restraint and responsibility between non-risky and risky banks. This qualitative investigation is focused on France and is based on interviews with relevant policy actors and documentary analysis.     

On arbitration,arbitrage and arbitrariness in financial markets and their governance: unpacking LIBOR and the LIBOR scandal

Abstract

Amongst a series of scandals to hit international financial markets in recent years, that surrounding the London Interbank Offered Rate (LIBOR) – a highly influential interest rate benchmark – has attracted particularly intense media scrutiny. This paper seeks to push beyond conventional understandings to unpack critically both LIBOR itself and the scandal involving its manipulation by major international banks. Envisioning LIBOR as a commodity beset by inherent contradictions, the paper mobilizes the tropes of arbitration, arbitrage and arbitrariness to illuminate, respectively: the market-making work performed by LIBOR; its role in enabling the transfer of financial risk, most notably when fraudulently manipulated; and the nature of the regulatory prosecution of such manipulation.     

Investing in Crisis: The Methods,Strategies, and Expectations of Investors in Single-Family Foreclosed Homes in Distressed Neighborhoods

In the wake of the U.S. foreclosure crisis, the magnitude of homes flowing into investor ownership since 2007 has been unprecedented. Based on interviews with investors and other key informants active on the south and southwest sides of Atlanta, we describe the key aspects of the business models of such investors, including their methods of identifying properties, determining acquisition prices and renovation costs, and managing properties for rent. We also examine their expectations for financial return, including the sensitivity of returns to market and property uncertainties. We conclude with key findings and some recommendations for policymakers.     

The politics of bank bailout in Japan: a cognitive capture and leadership view

Abstract

This article explores why the Japanese government did not decisively intervene on behalf of bank bailouts at the early stage of the banking crisis of 1997–98 and investigates the institutional and political context behind the use of fiscal money for bank bailouts in 1997–98, 1998–99, and 2001–05. In contrast with prevailing views, which emphasize the conflicts of interest or differences in policy preferences between politicians and bureaucrats and their captured nature either by bankers’ special interests or political/bureaucratic interests, this article argues that Japanese policymakers shared a congruent policy preference — that is, minimizing the disruptions in the existing institutional arrangement in government-bank-firm relations and this congruence in policy preference (or ‘cognitive capture’) compelled the government to take a creditor-centered approach to the banking problem — i.e., letting banks resolve their own problems. It also argues that a strong political leadership that can break with the ‘cognitive capture’ and sustain government's resolute commitment to solving the nonperforming loan problem is an essential factor for successful bank restructuring.     

政府公共危机处置的阶段划分与管理对策

公共危机管理是现代政府亟待加强的重要职能之一,为了提高政府公共危机的管理能力,应当科学认识政府危机管理的全过程,正确处置危机管理程序.政府危机管理依据工作重点的不同可分为储备、预警、控制和恢复4大阶段,针对政府危机处置的程序,可以从10个方面加强管理.     

JISB Interview: Kosova in Dependence: From Stability of Crisis to the Crisis of Stability

Abstract

Albin Kurti is the leader of Lëvizja VETËVENDOSJE! (Movement for Self-determination!) in Kosova. The movement was standing candidates for the first time in the December 2010 Kosova elections and on 28 October 2010 launched its political programme entitled ‘Development and Statebuilding: Together (it) is Possible’. David Chandler interviewed Albin Kurti at the Lëvizja VETËVENDOSJE! offices in Pristina on 2 September 2010 and it was agreed that JISB would publish Kurti's essay (updated after the elections) articulating how the movement understands the barriers to independence in Kosova today and outlining the political development of its strategy of resistance.