When I heard the words “to big to fail,” about AIG, I immediately thought of antitrust law. When an organization becomes so big that it controls a market, it is called a monopoly. The US government then regulates it or divides these “trusts” through the work of the Federal Trade Commission, Bureau of Competition or the Attorney General’s office, Antitrust division. The FTC and the Attorney General’s office promote competition by reviewing and approving mergers and by taking court action against companies engaged in prohibitive practices. These offices work through two basic laws, the Sherman Antitrust Act (1890) and the Clayton Antitrust Act (1914). Most of us know little about this rather esoteric part of law, but it actually affects us much more than Supreme Court cases about our civil liberties or rights. You may be vaguely familiar with the term trust busting from recalling the history of President Teddy Roosevelt’s effort to “trustbust,” break the monopoly power of the railroads. In New England we are seeing the result of anti-trust law as ExxonMobil divests itself of gasoline stations to other companies.
Monopolies can be caused by vertical or horizontal integration. In vertical integration, a company buys up all its suppliers or inter-related businesses. In horizontal integration, it buys up its competitors. The theory is that a monopoly can set prices and control the market. In a nutshell antitrust law determines if prohibitive practices are taking place. Some monopolies have been allowed in the past particularly in the utilities area (telephone, electricity) and banking. State laws contributed to monopolies of commercial banks, credit unions, savings and loans by regulating their practices to be contained within a state. Some competition existed between the three, but all in all they had distinct purposes: to provide financial services to companies and then to individuals, to providing checking, savings and loans to member employees of particular companies, and to provide savings and loan services to individuals primarily for homes, respectively.
What struck me as odd was the government involvement in creating the mergers of huge failing banks and private banks (banks that are unregulated and are not publicly traded). The government did not seek to divide these “too big to fail” banks but to merge them creating possible monopoly power.
What is the AG’s office and the FTC doing? The FTC’s website warns the public of “phising” emails from emailers pretending to be affiliated with these new banks, and the FTC provides information on deceptive mortgage practices. But only as of this week did it announce a crackdown on these practices. The Attorney General’s (AG) website has bank merger Guidelines (April 2, 1992) and an explanation of those guidelines given at a banking conference (1996). The AG’s office has primary responsibility for bank mergers. The site says nothing about the recent bank merger activities that have been reported in the press.
The AG’s office reviews banks in terms of the effect on local market competition, the share of deposits and loans, compared to other banks in the area assessing horizontal monopoly effects. So antitrust activity related to banks is stuck in an era when the location of a bank had more meaning. In the era of cross-state, international, and web banks; international private banks; and non-banks acting as banks (finance companies, mortgage companies, credit card companies), this is a limited means to assess competition.
AIG is a different antitrust problem and less clear. It is actually an umbrella of 130 businesses including insurance companies, retirement funds (VALIC), financial products (Financial Products ), mortgage underwriting company (Mortgage Capital) and an aircraft leasing company (International Lease). It’s possible that its many businesses create a vertical monopoly.
In both the banking and AIG cases, the FTC and AG have been quiet (although they may be involved behind the scenes). What the public does see is whether called banks or not, these entities are inter-related and as one goes down another goes down. In this sense, anti-trust laws and their regulatory rules need to be updated for the global world of banking. Or we need a better model that moves away from the fear of large companies and regulates where minimal competition exists. European countries, in theory, regulate the action of the monopolies rather than “busting” them. But it appears that the European model has failed as well with little oversight of the large banks of, say, England or Iceland.
