The Economic Crisis and Antitrust
Is Antitrust Relevant to the Financial Crisis?
Is Antitrust Relevant When Businesses are “Too Big to Fail?”
January 2009
What role will antitrust enforcement play in resolving the current economic crisis? There has been a great deal of speculation on what antitrust policy in the Omaha Administration will look like, including a promise to “reinvigorate antitrust.” However, throughout U.S. history, wars and financial crisis have been opportunities for greater business consolidation. Will Obama’s antitrust policy ensure that the competitive process survives the economic crisis, or will antitrust be a hindrance? We recently sat down with Fredrikson & Byron Antitrust Litigation shareholder, Richard Wegener, to discuss the relevance of antitrust law to the current economic crisis.
F&B: Consolidation in the banking industry has been swift and garnered eye-catching headlines. For example, J.P. Morgan/Bear Stearns, Bank of America/Merrill Lynch, and Wells Fargo/Wachovia. Has merger enforcement been tossed aside as these major banks have combined?
RW: These mergers seemed to happen quickly, and early terminations of Hart-Scott-Rodino waiting periods were granted in each case. Essentially, there was no exhaustive investigation in each case.
F&B: Were there issues that should have been looked at under antitrust law?
RW: The answer probably lies with an explanation of the business of a commercial bank - it takes in deposits and makes loans. Traditional antitrust analysis of bank mergers has been to look at the merger partners’ local markets, their “bricks and mortar” activities.
F&B: How “local” is the market for deposits?
RW: The Federal Reserve Board has talked in terms of metropolitan areas for city banks and counties for rural banks.
F&B: And on the lending side?
RW: Here, the concern is who has “access” to credit; where can business borrow. Is local knowledge important? Consider Bear Stearns, they did a number of things: underwriting, options and trading for their own account. Bear Stearns was a “brand” and a participant in a differentiated market which was also populated by foreign/international banks with a U.S. presence. For these banks, I assume the government worried very little about post-merger market concentration. On the other hand, I would have expected some concern about the Wells Fargo/Wachovia merger …
F&B: Why?
RW: Because of the effect on the MSA consumer banking/deposit market. Where the transaction is in the consumer banking market, the government has historically been concerned. Consider the PNC/National City Bank merger. PNC’s post-merger share of branches in Pittsburg was an issue as the government focused on the local market impact on deposits and lending to local and mid-sized businesses.
F&B: So, do we have a “new” exemption for financial services from antitrust merger enforcement?
RW: I would like to think, at least behind the scenes, that the Department of Justice was working seriously with other agencies, the Fed and Treasury, to review these transactions.
F&B: We have been told that the bailout of the nation’s largest financial institutions was necessary in order to prevent even greater problems. In essence, that Bear Stearns, AIG and others are “too big to fail.”
RW: It is ironic that one moment we are told certain banks are “too big to fail,” and the next everyone seems relieved when the Bank of America steps in to acquire Merrill Lynch, thereby becoming even more of a mega bank that it was before. If antitrust were somehow supposed to prevent corporations from becoming “too big,” the Department of Justice would have presumably stepped in to stop or at least slow down to allow for serious antitrust evaluation the Bank of America/Merrill deal, thereby worsening (not improving) the current crisis atmosphere.
F&B: Was Justice Brandeis right when he spoke about the “curse of bigness?” Should we be using antitrust to stop organizations from becoming too big and powerful, even if merger enforcement has traditionally focused on whether the efficiencies of the merger outweigh the likelihood of harm to competition?
RW: Keep in mind that “too big to fail” is not an antitrust concept; it is a political belief. There is no way to anticipate in advance how big is “too big” for purposes of whether or when politicians will want to prevent a failure in order to benefit the economy To do so, we would have to make a lot of assumptions about the nature of the merged firm’s future business, size, and success. This includes its role in the future economy, the relationships it would have to other businesses, the possibility of failure having a “domino effect” on other businesses, and of course, the nature of the crisis that might occur at some future point that would trigger such a meltdown. I don’t think that the antitrust agencies want to undertake such a task, nor do I think they - or any other government agencies - are capable of doing so.
F&B: Hasn’t size, at least in terms of businesses being “too big,” been a concern before?
RW: Yes. In the late ‘70s, Senators Kennedy and Metzenbaum introduced a bill in the Senate that, if passed, would have prevented to companies with more than $2 billion assets or annual sales from merging, as well as stopped takeovers by such firms of any business with more than $350 assets or sales. It was a populist approach that never found its way out of committee.
F&B: Doesn’t merger enforcement, at least in some circumstances, accomplish the same thing?
RW: In some instances, merger challenges may have the same effect. But it’s unlikely that the government is going to attack mergers where the perception is that the merger preserves jobs and economic stability.
F&B: We seem to have very quickly reached the point where government regulators are directly participating in an unprecedented scale in order to shore up the markets. Is antitrust relevant to the crisis at all?
RW: The history of the current financial crisis has yet to be written. It would be preferable to view antitrust enforcement as an aid to the effort to solve the crisis. Unfortunately, there are already several signs that as a practical matter, antitrust policy may play little role in efforts designed to solve the crisis which seem at odds to the commitment to free market principles which antitrust embodies. The rush to solve the crisis appears to be shrinking the scope and relevance of antitrust. The Treasury Department has reportedly pushed for consolidation as a remedy for bank illiquidity. Chrysler and General Motors have discussed a merger without any appearance of antitrust objection, and the failure of corporate institutions like Lehman Brothers leaves little doubt that the business landscape will emerge considerably more concentrated that it was before. We will all have to watch the Obama Administration closely for clues to whether or not antitrust policy remains relevant to the crisis, or will it be merely a luxury that will have little, if any, meaningful impact on the crisis outcome.