The Construction of Financial Authority

Public Deposited

This dissertation examines the construction and regulation of over-the-counter derivatives markets before and after the 2007-2009 global financial crisis. It addresses two questions: How did the market for derivatives traded outside traditional exchanges grow so large and crisis-prone with so little public regulation? And, why, given derivatives’ contribution to the 2008 financial crisis, were post-crisis regulatory reforms so limited? I argue that the answer lies in the authority of financial market actors and in public regulators’ perception of them as competent managers of risk, based on a set of practices that assured regulators that banks were valuing assets consistently, allowing the price mechanism to function, and guarding against default. I find that particular market practices, including risk models and standardized accounting methods, made regulators overly confident in the benefits of derivatives and the abilities of market actors to prevent crises. However, because of pervasive uncertainty, opacity, and complexity in the market that financial actors constructed through these practices, many of the practices failed to predict and prevent systemic contagion during the 2007-2009 financial crisis. Indeed, the widespread use of some of these practices produced correlation in trading strategies that made the market less predictable and more vulnerable to crisis. Nonetheless, because these practices were so deeply entrenched in the operation of the market, the space for post-crisis regulatory change was and remains highly constrained. Because these practices are constitutive of the market, fundamentally altering them would jeopardize the existence of a market that regulators still perceive as providing a valuable social function by distributing risk. My conclusions are based on an interpretive analysis of an original body of primary source regulatory and industry speeches, testimony, and reports

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  • 10/22/2018
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