Too Big to Fail: Antitrust law

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.

What is transparency and AIG?

In the aftermath of Watergate in the 1970s, a number of laws were enacted giving the public greater access to governmental information, increasing the accountability of businesses, civil servants and politicians for their actions, and making decisions more open. These included the Freedom of Information Act (FOIA), the Sunshine in Government Act (1976), and the Presidential Records Act (1978) giving the press and the public access to many government documents on request, to most meetings, and to many presidential materials.

Today these pieces of legislation might be described as creating transparency. The President, state’s attorneys general (Connecticut/New York), the appointee to oversee the bank bailout (Neil M. Barofsky), Republicans and Democrats, and journalists call for greater transparency, particularly when it comes to banks and AIG. But what do they mean?

Transparency is a relatively common word in the parlance of nongovernmental organizations and supranational organizations (e.g., European Union, Organization for Economic and Co-operative Development, and the International Monetary Fund). It is a word used to convey an open process, a way of conducting business that is subject to public scrutiny to reduce the possibility of corruption.

Its institutionalization may have caught on by an accident of translation assuming that the German, French, and English meaning of Transparenz, transparence, and transparency are similar. But it also became prominent when during the early 1990s, Peter Eigen, a manager at the World Bank, became increasingly distressed by the Bank’s failure to address corruption in its loan-giving to nations. Mr. Eigen with a small group of individuals created Transparency International. The organization would examine the effects and consequences of corruption for citizens, report on it across nations, and advocate policy changes in global institutions to address corrupt practices. Today, the organization has affiliates throughout the world, publishes a Corruption Index, and has developed a National Integrity System promoting open structures in the media, business, government, and throughout all of society.

Transparency International’s mission may not mean much to the average American. Corruption is an issue, but not one at the top of the agenda. Instead transparency may mean a piece of film that you write on to project on a screen. Or it could mean accountability. Often politicians use accountability and transparency in the same sentence, not really distinguishing between the two. Legislation such as the Federal Funding Accountability and Transparency Act of 2006 and the Legislative Transparency and Accountability section of the Honest Leadership and Open Government Act of 2007 use the word transparency side by side with accountability. The Internal Revenue Service (IRS) enacted a new reporting form for nonprofits to increase accountability and transparency.

But more and more it is coming to mean ready public access to government, nonprofit, and business information. With the newness of the idea of transparency, the confusion over its many meanings, and the tug for privacy and secrecy, politicians, banks, and AIG ignored creating transparency. Congress, the Treasury Secretary, and bank officials and most recently AIG learned the lesson of transparency when Congress failed to put in legal requirements, the Treasury Secretary failed to provide oversight for reporting the use of bailout funds and employee bonuses, and bank and AIG officials were not forthcoming with that information. A chance to increase the trust of the public was lost. Transparency is different from simple accountability because it creates trust directly. AIG’s web site has its executive compensation committee, its annual report, but it fails in describing its most important relationship, its relationship to the public.

Maybe AIG is too big to fail as the press is stating, but certainly not invincible from shaming. But perhaps there is another problem that needs to be addressed. If AIG and some of the banks are too big to fail, when is the Federal Trade Commission or the United States Attorney General going to investigate these businesses in terms of anti-trust laws?