The Need for New Antitrust Laws

The great corporations which we have grown to speak of rather loosely as trusts are the creatures of the State, and the State not only has the right to control them, but it is duty bound to control them wherever the need of such control is shown.

Theodore Roosevelt, “Address at Providence,” 1902 (emphasis added)

By “creatures of the State,” Roosevelt meant not that corporations were created by the state, but that their existence and power existed because of and in concert with the state. A few years ago, someone reading this quotation would have probably thought first of Halliburton; today, it evokes the large banks that are too big to fail.

That quotation was pointed out to us by Zephyr Teachout, a law professor at Duke, who has been proposing new antitrust laws aimed at reducing the political power of large firms.

U.S. antitrust law was rooted in late-nineteenth-century hostility toward large corporations, but in practice became focused less on size than on specific anti-competitive practices. The Sherman Act of 1890 was aimed at collusion among companies to constrain freedom of trade, while the Clayton Act of 1914 went further in specifying anti-competitive practices, such as bundling or mergers that create excessive concentration in an industry. Over the past few decades, in part under the increasing influence of free-market economic theory, antitrust enforcement by the Department of Justice has become more tolerant of size and concentration in themselves, and has focused instead on whether mergers will benefit or harm consumers. On the one hand, increased concentration increases the ability of large firms to raise prices, hurting consumers; on the other hand, or so the argument goes, larger firms gain economies of scale that enable them to reduce costs and therefore reduce prices to consumers. (If you believe that, take a look at the price of text messaging on your mobile phone bill.)

So it seems likely that existing antitrust laws, as currently enforced, would be unlikely to do the trick of breaking up large banks. Even though the four largest banks hold about 60% of assets in the U.S. banking system, that’s not nearly concentrated enough to attract the attention of the DOJ. And while there may very well be illegal collusion among large banks, there is no smoking gun that I’m aware of, and you certainly wouldn’t need collusion to explain the events of the last decade, or the uniformly high prices charged for services such as equity underwriting. (One of the major implications of game theory, which was standard fare in first-year graduate micro by the 1990s, if not earlier, is that what looks like collusive behavior could also result from individual rational action.)

Teachout’s response is clear: write new laws. In particular, she argues, existing antitrust law does not address the problem of political influence.

There are many reasons a “too big to exist” conception of antitrust law makes good sense for a democracy. Perhaps most importantly, large companies have proven to have disproportionate power over the political process. Concentrated financial power often leads to concentrated political power; if you have a lot of cash, one of the most efficient uses of it to maximize profits is to petition the government to change the rules in your favor. Economies of scale might work all too well when it comes to influencing government.

This argument would barely have gotten a hearing in the 1990s and earlier this decade, when companies were scrambling over each other trying to merge, and the business media were constantly congratulating the “winners” in the battle to become big (even though, in most mergers, any actual gains go to the shareholders of the acquired company, since the acquirer invariably overpays). Now that we have official endorsement from a Republican administration that even the third-largest investment bank (Merrill) was too big to fail (and widespread regrets over letting the fourth-largest investment bank fail), and we have increasing recognition of the linkages between Wall Street and the federal government, the need for new laws may receive serious consideration. In addition, there is evidence (I’ll try to post on this another time) that, at least when it comes to banks, there is a size beyond which any economies of scale are outweighed by coordination problems, most tellingly in risk management. (And, there is the simple fact that large banks tend to charge higher fees, charge higher interest rates on loans, and pay lower interest rates on deposits than small banks.)

There is another, minority view, which is that a new approach to enforcing existing laws could be used against large banks. The general principle is that laws are defined by their interpretation. For an example, look no further than TARP, which gave Treasury the power to purchase “assets” of troubled banks, meaning things on the asset side of their balance sheet – and was prompty interpreted to mean that Treasury could buy preferred stock in those banks, which is only an “asset” from the perspective of the buyer, not the seller. Of course, to get your interpretation to stick, you may have to convince a court, in the antitrust case probably the Supreme Court. But it would not be the first time the Court has changed an interpretation that was once considered settled. For example, when the Court found an individual right to bear arms in the Second Amendment in District of Columbia v. Heller, 128 S.Ct. 2783 (2008), it was reversing a precedent that had not even bothered revisiting since 1939.

What would the argument be? Well, for one thing, having banks that are too big to fail, and then having to bail them out to the tune of hundreds of billions of taxpayer dollars, is clearly bad for “consumer welfare” in general. However, consumers under this argument are only being affected indirectly, so that argument may not stick. But perhaps someone can come up with a better legal theory here.

By James Kwak

61 responses to “The Need for New Antitrust Laws

  1. Carson Gross

    There is another option: reduce the size and power of the federal government so that large companies co-opting it wouldn’t matter. Make large companies deal with tens of state governments and thousands of local governments. James, you are very familiar with the P&C insurance market. Would you say that one of the reasons it is so stable and staid is that there are thousands of small and midsize insurance companies that operate in specific states and regions? I’m not an expert on it by any means, but it seems like the lilliputian state-by-state regulations does a pretty good job of limiting systemic risk.

    Of course it’s inefficient at times, but it also seems to be quite stable and difficult to co-opt. Another bonus is that it seems like what the founders had in mind when they wrote the Constitution: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” and all that.


  2. priscianus jr

    what’s intriguing about Teachout’s approach (which is intellectually correct) is that our political system doesn’t seem to have a way of conceptualizing the fact that a corporate entity has “concentrated political power,” or in other words too much political power. We have ideas like “all men are created equal,” universal franchise, therefore, if some entity has concentrated political power, then in theory that’s because that’s the collective will of the nation. But under the law, a corporation has the same rights as any other people. I think she may have found the Achilles heel of our whole system. No, I think we’re going to need that “too big to fail” argument, James. Too big to fail because if they fail, the taxpayer has topick up the tab.

  3. Dr. Frankie

    “our political system doesn’t seem to have a way of conceptualizing the fact that a corporate entity has “concentrated political power,” or in other words too much political power.”

    How can anyone conceptualize publicly the fact that their on the take for money? Just read the reactions of the senators who voted against the cramdown bill to Dick Durbin’s statement “Frankly, the banks own the place”.

    It is an interesting study in denialism.

  4. rough riders

    Factor in gross derivative exposures and the concentration ratio is likely to look very different. Graph the counterparty relationships and you have a measure of excessive systemic risk (as well as a measure of restraint of trade – if most everyone trades with you in a notionally efficient market, that indicates entry barriers or a de facto monopoly.) DoJ could do a lot with the existing laws. Or the Feds could just throw their weight around. The fight against parasitic banks is too important to depend on Congress for new laws.

  5. What about other jumbo corporations that could fall under the scope of new anti-trust laws? Please have a look at my post.

  6. Pete Muldoon

    I suppose there is always the “general welfare” clause in the Constitution.

    I am not convinced that trying to accomplish this on a bank-by-bank basis, with a court trying to determine which banks will be forced to split and which won’t, will be any faster than a legislative solution. Nor is it likely to come up with a better plan.

    Now would be a time for Obama to use his bully pulpit to explain, in simple and understandable words, that banks are simply too big and too powerful. This might actually motivate Congress to do something.

    I absolutely agree, incidentally, that economies of scale are not likely to overcome the losses incurred by poor coordination in the management of large FI’s. The inevitable big blowup probably more than negates any extra efficiencies.

  7. adios amigos

    More mindless blogging nonsense? Call me when your’re ready to march, armed, into Washington. All this “blogging” nonsense, is exactly that: nonsense.


  8. But under the law, a corporation has the same rights as any other people.

    What law would that be, exactly? (And maybe the right solution is to overturn it.)

  9. I like Professor Teachout’s ideas. Obviousely the bankers have too much political power now. Even as people are losing their homes, most Senators are still siding with the banks. Below is a link which shows how each Senator voted (listed by name, state, party affiliation) on the amendment to lower “cram-down” mortgage payments for troubled homeowners. Obviously, “Yea” means they wanted to help families keep their homes. “Nay” means they are the friend of big bankers. Pay close attention to the Senators in YOUR state.

  10. I should have put “cram-down” in parentheses just above, but I think most of you got the idea. Sorry folks.

  11. James Twiner

    There are 2 obvious problems with this idea:

    1) We live in the real world, not some Randian Paradise. Government will never surrender power it has taken onto itself. It is simply laughable to imagine any reasonably intelligent and knowledgeable person not being aware of this. Solutions that cannot be enacted in the real world are not solutions, they are fantasies.

    2) We live in the real world, not some Randian Paradise. Deregulation, devolution of federal power to state and local governments are the solutions we have enacted for a generation, and I would say the jury is pretty much in on their effectiveness. State and local governments are _vastly_ more easy to corrupt and manipulate, have vastly less power and scope to effectively regulate, and a far far weaker ability to attract the sort of talent necessary to regulate effectively. While the federal government is grossly corrupt and inefficient, it is whole orders of magnitude less so than the majority of state governments.

  12. James Twiner

    I’m pretty sure the law in question is not a law, but a Supreme court decision: Santa Clara County v. Southern Pacific Railroad Company ( gives a good general feel for the issue, or just google “corporate personhood”). And it would be a WONDERFUL thing if it were reinterpreted, if we returned to the corporate model of the 18th and 19th centuries, when corporations were incorporated for specific purposes, and had designated “lifespans”, were dissolved and their assets distributed to their shareholders when their purpose (such as digging the Erie Canal) were completed. Corporations are what they are today because the government CHOOSES TO LET THEM BE WHAT THEY ARE. While we’re at it, can we consider the legality of franchise pyramid schemes like McDonald’s … they too were illegal until the mid 20th century, and our nation was the better for it.

  13. Steve Koch

    In what sense was Halliburton a trust? It wasn’t/isn’t too big to fail and it wasn’t/isn’t a monopoly.

    Halliburton may have gotten government business because of political connections but it is a joke to think that is exceptional (especially in the current political/economic environment) or that it indicates that the politically connected company is a trust. It seems that you are confusing corruption and trusts.

    It would be great if the Justice department went after federal corruption seriously but don’t hold our breath.

  14. Something must be done to protect the retirees and college students and pension plans and school endowment funds from being destroyed by the vagaries of the Street.

    I don’t have a solution. But since we’re referencing TR – here’s a choice quote of his from a speech he gave on July 4, 1886 in the Dakotas:

    “It is peculiarly incumbent upon us here today so to act throughout our lives as to leave our children a heritage, for which we will receive their blessing and not their curse….

    “If you fail to work in public life, as well as in private, for honesty and uprightness and virtue, if you condone vice because the vicious man is smart, or if you in any other way cast your weight into the scales in favor of evil, you are just so far corrupting and making less valuable the birthright of your children….

    “It is not what we have that will make us a great nation; it is the way in which we use it.

    ….We must keep steadily in mind that no people were ever yet benefitted by riches if their prosperity corrupted their virtue.”

    Quaint, isn’t it, his discussion of virtues? However, I wish we could frame the dialogue, as Teddy did, around the need to preserve the birthright of our children. As Americans, we’ve been given tremendous gifts and it is incumbent upon us to pass them on to our children – not ravage them and leave nothing for all those who follow.

  15. Steve Koch

    Carson Gross did not say that government would have less power, he said that the power of the federal government should be reduced with a consequent increase in the power of state government. The total power of government (federal and state) would be about the same. You were wrong in your characterization of Carson’s argument and also needlessly rude.

    This (i.e. decreased federal power/increase state power) could happen if a Libertarian/Federalist president is elected. Reducing the power of the federal government would be consistent with his political ideology. Not all politicians are driven by greed, some are motivated by ideology.

    As Carson pointed out, there is a constitutional basis for challenging (in court) the current distribution of power between the state governments and the federal government.

    Having said all that, I agree with Kwak that it makes sense to limit the size of companies so that no company’s failure poses a systemic risk and to reduce their ability to capture regulators.

  16. Carson Gross


    I’m not Randian: Chesterton and Tocqueville are my guys. Again, I’m looking at P&C insurance, which is (N.B.) *heavily regulated* at the state level, and appears to have a much more stable infrastructure than the banking system, despite somewhat similar financial risks (the temptation of over-leveraging, etc.) There might be something there, no? Is it at least worth talking about?

    I must disagree that Governments never surrender powers that they had previously attained, and can refute this by pointing out that we do not live under Roman law. Unfortunately, these powers are usually surrendered in a collapse (e.g. the Soviet Union) rather than in an orderly way, but it still happens fairly frequently. I would be willing to wager that we’ll see the E.U. give up a fair amount of power in the next decade or two in this manner.

    Finally, while I admit that I am quite laughably stupid and ignorant, I do know a few people who are neither and who, so far as I am able to comprehend, also think devolution of power to the states is both possible and reasonable. It might be good for you to talk to some of them.


  17. “reduce the size and power of the federal government so that large companies co-opting it wouldn’t matter. Make large companies deal with tens of state governments and thousands of local governments.”

    This has fail written all over it: the big corps buy and sell most state governments from petty cash.


  18. This might be a good long-term solution. It will have to wait for changes in the Senate, though, and that could take years.

  19. Oh, and btw, the local governments are all chartered by the state governments, which routinely override them when large corporate interests are at stake.

  20. Carson Gross

    The Raven,

    More or less fail than what, realistically, will be implemented by our friends Larry Summers, Tim Geithner and The Goldman Boys at Treasury? Regulatory capture isn’t conjecture on my part: it’s staring us in the face.

    Again, I’d like to request that people to use their real names in the comments here. I think it helps foster a more polite and intelligent discussion.


  21. Exactly. Well said Anne

  22. Pingback: Links on China, Germany, Boston Globe, Buffett and more - Credit Writedowns

  23. The two approaches outlined — write new laws or ask the courts to reinterpret existing laws — make sense, but they both are limited to a top-down approach. What about consumers acting in their own interests, voting with their feet and their wallets to move their saving and borrowing activity from the banks that are to big to exist? Wouldn’t it help if consumers knew which banks have behaved well during the boom and the bust through some sort of a consumer-friendliness rating system?

  24. Zephyr Teachout


    Thanks for posting this; and thanks to all the commentators. I have been working on this idea with my colleague Shawn Bayern (who co-wrote the piece cited above), and one of the things we are trying to puzzle through now is how best to operationalize a size-based antitrust policy. Revenue? What best way to measure size that is both workable and reflects real economic and democratic values?

    Our fundamental goal is a society where businesses find it more efficient to invest in productive activities than rule-changing activities. And as hard as it might be, I think there is a deep antitrust ethos in the American political imagination (left, right and center), and therefore a chance for these ideas to take hold politically.

  25. The two approaches outlined — write new laws or ask the courts to reinterpret existing laws — make sense, but they both are limited to a top-down approach. What about consumers acting in their own interests, voting with their feet and their wallets to move their saving and borrowing activity from the banks that are to big to exist? Wouldn’t it help if consumers knew which banks have behaved well during the boom and the bust through some sort of a consumer-friendliness rating system? How much each bank spends on lobbying, what positions each bank takes on issues – is this information compiled or available to the public, or could it be? Any legal hurdles to doing that?

  26. James Twiner

    Perhaps I _was_ a bit intemperate late last night, and I apologize for that. My point remains, that I simply don’t see any effective way that devolution could occur. As you admit in your reply, the vast majority of situations where a strong central government relinquishes authority historically occur when that government collapses. I simply cannot think of a significant instance where a strong state releases authority it once held short of that.

    Certainly it is worthwhile to consider new models for banking and investment, as the old models have so clearly failed us. I simply would prefer those considerations to be of things remotely possible. If you can lay out a plan for how we would convince the federal government to voluntarily weaken itself in re banking regulation, I would be happy to argue my second point (which I note you give no consideration in your reply), that of the inefficiency and corruptibility of state and local authority compared to federal authority.

    Again, my apologies for any insult I may have given. This is a somewhat more cordial internet forum that many, and I certainly meant no offense.

  27. IMHO the government should at least practice regulation in some meaningful way before they move the goal posts anymore. It seems to me that people have broken the law and effectively proven that the janitors of the constitution own the government. However identifying banks that are too big to fail should be the first goal, so that we then can break them up like the baby Bells. This would of coarse include any investment bank that changed its charter to a bank holding company I would imagine, as security’s have become for whatever reason necessary to insure against loss.
    Any idea to the contrary of burdensome wealth is nearly impossible to request from our government. They are the janitors of the constitution and they have figured out where the snacks are.

  28. Is there no true grassroots lobby that represents a counter weight to banking interests. A moveon type of approach but with an agenda focused on the financial industry and related legislation.

    If such a thing doesn’t exist why not? Is such a thing impossible? If there is anything like this it should be publicized and supported. If there isn’t, someone should step up and begin to create it. A grass roots lobbying group focused on one issue, breaking the power of the banking oligarchs so the public interests rather than the banker’s interests become paramount.

    If the banks win the day by purchasing the government shouldn’t future battles against this oligarchy be focused on raising counter balancing funds that can play the same game.

    I believe many politicians would be very happy to find that they are rewarded to do the ‘right thing’. Like training animals, you make the easy choice the right one. It seems that always, since time began, this playing field has only had one team, the bankers.

    Now technology allows us to reach a vast number of people easily–to raise awareness and money for causes that are of interest. Wouldn;t this be at least a potentially positive outlet for whatever it is we call populist rage.

    And btw, wouldn’t small banks be a natural ally of such an organization.

  29. In Economics, the usual measure of abused monopoly power is the capacity to cap aggregate supply through the voluntary disuse of potentially profitable production capacity. This captures consumer surplus and yields higher profit margins – think OPEC.

    So, some kind of analysis looking for prices that are detached from costs would seem to be in order as demonstrative of market failure and disequilibrium between supply and demand.

    If prices and costs of a particular ordinary mass-delivered good remain significantly greater than the average market rate of return for a long-period, then it seems reasonable that it could give rise to a presumption of anti-competitive behavior. Kind of a Res Ipsa Loquitor for the marketplace.

    The text-message fees of Mr. Kwak could provide an example – it is inconceivable that the technological cost of providing an ordinary SMS message could have done anything but collapse exponentially over the last decade, and yet prices are now twice as high. Under normal market conditions, technological improvements and competitive conditions should yield an ever-cheapening price for the identical service.

    People would be stunned if you offered them the same slow notebook computer from 8 years ago today at twice it’s past price – our experience proves that’s not how a consumer-technology market normally operates – precisely the opposite.

  30. Laissez faire dogma definitely informed consolidation of other industries besides finance, and a perfect example is telecom carriers. The U.S. has a near-duopoly of AT&T and Verizon, and as a result there’s far less price competition than in Europe, far less choice of phones, plans, etc., for consumers, and terrible service. The re-merger of the Baby Bells has been a disaster.

    And the ultimate irony is that AT&T may not be enjoying many economies of scale from its acquisitions. Many people who’ve dealt with AT&T “customer service” have noticed that their operations are still divided along regional lines defined by the former Bells. The month it took AT&T to install simple DSL service here suggests that organizational chaos is costing them dearly.

  31. Right on, brother!

    There are several good books in this vein (and Wiki, is probably its usual great self al well), but I found “Colossus: How the Corporation Changed America”
    By Jack Beatty to be an especially good, non-ideological (in the sense of an in your face, axe to grind mission from God ideology) treatment.

  32. Well at least they had decent suits when they were ripping off the American taxpayer:

    The Closer

  33. The political power of large corporations is not only an argument for shrinking them, it’s also an argument for better campaign finance laws. There are many ways to reduce corporate influence in politics. One, which you’ve proposed here, is to reduce the resources each individual corporation has available for such influence by way of shrinking them. This particularly helps with the “too big to fail” problem.

    Secondly, we can increase the amount of “friction” in the corporate-political system. State funding of elections would prevent corporations from paying for access, or choosing who to elect by who has the money. There are many other permutations which would also help with this, of course.

    The problem of the revolving door, where federal officials have the ideology of big finance because that’s where they were before they were in politics and that’s where they’ll go when they’re done, would still remain. This is really only solvable by not electing people with the wrong attitude.

    See also Lawrence Lessig’s current work on political corruption; it clearly applies.

  34. You’re right, there is a crying need for more grassroots involvement, aka democracy, and not merely as an outlet for populist rage. But moveon is not really it, being too facile and too shallow. If you want some ideas, check out They all take more time than sending a form letter, but most worthwhile things do. Meanwhile, don’t forget to give your congressmen the benefit of your opinion, and refer them to articles and blogs you think they ought to consider. You don’t have to be the expert, just the thoughtful passionate citizen who wants them to listen to the experts you respect.

  35. Carson,

    Just a few things to think about with the understanding that at its base I love your premise.

    1. How do you regulate multi-national corporations at a state level? One of the arguments against regulation on a national level is the lack of competitiveness our companies end up having vs. other international companies in the same businesses. I know some of that argument is false and just used to dampen regulations, but it does have some merit and with 50 separate regulatory agencies how is, Vanguard for example, to be competitive with AXA in it’s money management business internationally?

    2. You picked the P&C industry, but perhaps that’s in good shape because of the type of business, not the regulatory system. These financial companies did not get into trouble operating their traditional lines of business. They made up completely new financial instruments that caused this problem. I don’t see where any particular state would have jurisdiction over the packaging of a CDO or the writing of a Credit Default Swap. The securities markets are nothing if not the very definition of interstate commerce. That clause is the most over-extended one in the Constitution, but you’d be hard pressed not to apply it to the securities markets. I’m sure your line of thinking went to the mortgages themselves, but most of them are regulated by state agencies and it still didn’t matter. This problem may have started with the sub prime mortgage market, but it was fueled by the leverage in that market. A bunch of bad loans valued at par, with no leverage on top of them would have been a very manageable problem for our economy.

    I’m sure you could argue that all banks should be small and regional – but it really was the investment banks that are to blame, and they are in the securities business. Even if their customers are regional, they must be able to buy and sell across state and international lines or there is no business.

    3. The reality of our world also crops up again. Unfortunately the GOP (I realize they are not Libertarians) has co-opted the low taxes, small government message. That message permeates through all levels of government. People want extremely low taxes locally, on a state level and a National level. I wish we had smaller government, and with a smaller Federal government we would have lower overall taxes because of the massive amount of waste and bureaucracy. However, the message “low taxes” seems to be the only one that gets out there. If we are truly to have a smaller Federal Government, we will need somewhat bigger state and local governments to fulfill some of the roles. Unfortunately it’s easier to petition your local and state government for lower taxes. So what you end up with are local and state governments with too little money to take up any of the slack we would like them to take from the Feds, and a Federal government more than willing to make up the difference. The mantra for too long has been only lower taxes, not a change in the system and too few people understand the vast difference between a return to Federalism and simply lower taxes across the board. So even a Libertarian President, we would have to have at least a very divided congress, and many state and local governments that “get it.” It would be nice, but so would a lot of things.

  36. From my time in the insurance industry I remember when the Texas insurance industry was very successful at co-opting the Texas legislature. Their goal was to make it difficult for insurers from outside of the state to operate in Texas, leaving the field to the hometown boys.

    They had no trouble with the legislature, but somewhat perversely perhaps, the out-of-state insurers adapted better to the changed legistation than the locals…

  37. When Teddy was ranting against the trusts, he had only to consider the domestic market. I am certain that Obama’s golden tongue will be able to convince the Chinese, Indians, Brazilians and others to limit the size of their multinational companies in order that U.S. multinationals can maintain their current dominant status or maybe, in the interest of global fairness, Obama and the ivory tower elite would prefer that our multi-national giants be reduced in size and power in order to give the multi-national companies of the developing world a fairer chance of competing. Maybe, in the interests of fairness, we need to allow foreign, developing world domiciled multi-nationals to overtake us, thereby making up for years of unjustified dominance.

  38. How ’bout criminal prosecution for corporate officers? The problem is that corporations have all the rights of individuals, but none of the responsibilites. You can’t put a corporation in jail. You can’t conduct a criminal proceding against a corporation. If someone is able to successfully pursue a civil case, the resultant expense is merely a cost of doing business.

    Even this is probably inadequate, though…

  39. Clayton Christensen’s notions of disruptive innovation seem germane to this line of thinking. One of CC’s books a few of his articles focus in particular on how regulations protect existing approaches to a particular market, constraining innovators in a way that pushes them to pursue one of two approaches: either avoid the category covered by the regulation, or exploit a lacuna in the relevant regulations. (Two examples: “vitamin supplement” makers’ who avoid food and/or drug regs; SUVs, which automakers famously devised after new fuel economy standards created an exception for vehicles built with a “commercial” wheel base.)

    CC’s findings suggest two responses (one laudatory; one pessimistic) to your goal of causing industry to invest in productivity rather than “rule-changing activities”. The laudatory response: in the financial sector in particular, (as the Baseline Scenario pointed out in an earlier post) the innovations that accomplish something other than bubble-generation are pretty easy to parse. As such, we can reasonably expect sophisticated regulators to weed the garden of financial innovation effectively. Now, the pessimism: CC’s focus on innovators’ interactions with regulations is informed by the eternal tendency of mature players to secure their industries’ norms and forms. Adam Smith bemoaned this in the 1780s. It isn’t going away. As such, pushing corporations to focus away from politics is not a matter of incentives so much as capacity. That is, changing the rules will always pay, so no one can prevent corporations from focusing there — one cannot make them politically disinterested, only politically weak.

    Two final points: first: the same regulations that can stunt competitive innovation were often initially devised in order to protect investments in some earlier, fruitful innovation. Selecting those rule changes that promote or stunt growth is thus a difficult if not impossible exercise (though the financial sector may represent an exception, as noted above). Second: the prospect of expanding antitrust law in this way links up nicely with Professor Teachout’s recent article on the possibility of identifying a structural antipathy to “corruption” in the US Constitution. In particular, that reading of the Constitution has greater promise in the anti-trust setting than in campaign finance reform, which must vie with an ever-delicate 1st Amendment context. This goes for the political as much as for the legal features of the approach.

  40. Carson Gross: “There is another option: reduce the size and power of the federal government so that large companies co-opting it wouldn’t matter. Make large companies deal with tens of state governments and thousands of local governments.”

    Hell, yes! Back to the 19th century! Charge! ;)

    If I were a coffee drinker, I would have spilled my coffee. Fortunately, I just got my coke up my nose — Coca Cola, that is. ;)

  41. Seriously, anti-trust legistlation grew out of the abuses of large companies during the time of a small and weak federal government. Rolling back the clock is not the solution.

  42. Eric Dewey, Portland, Oregon

    Good point, JT – but a little-known fact about Santa Clara County is that the idea that corporations are “persons” under the law comes out of a footnote, and was not the central holding of the case, and was not based on any legal precedent.

    It was merely an assumption that the court made in order to reach the decision that it did.

    This is likely to be part of the legal argument James is searching for – but if so, it will need to be a long-term string of fights waged in a manner similar to that used by Thurgood Marshall and the the NAACP in overturning Plessy v. Ferguson, because, like the the concept of “separate but equal” the concept of corporate “personhood” is an intuitive one that is deeply entwined into the personality of modern corporate law.

  43. Katherine-Thanks, yes you’re right-wellstone is a better model than moveon.

    There was a really fascinating interview with David Simon (The Wire) on Bill Moyers where he discussed all these issues. And said something along the lines of “things won’t change unless they get much much worse”. In other words, pitchforks are out, we’re not about to see a revolution in the streets. We have too much bread and circuses–the distractions we all love.

    What options are there? Maybe, in a perverted kind of way, the NRA is the model. Grab onto some legislative issues like a mongoose and don’t let go.

    If banks can wine and dine congressman until they own them why can’t a group representing a different opinion on say, legislative proposal A do the same thing. They know the right vote on legislative proposal A is X and if you give them enough incentive, in the way of support, votes and $$ they could find their way to do the right thing. This way they get to do the right thing, be compensated in the culturally appropriate ways, and keep their self esteem–who wouldn;t choose that route if it became available.

  44. Theo Kirkland

    Is there a real down side to having multiple medium size banks compared to 1 large one?

  45. Here’s a good example. There’s always only one voice that gets heard. Of course, it’s all about the money. This is from Jane Hamsher – Firedoglake today about the credit card industry.

    “…Nancy Pelosi and Barney Frank didn’t want interest rate limits capped. Nor do they want House members having to take an embarrassing vote on the matter. Small wonder — I’ve been going through the campaign contribution and lobbying records, there’s tens of millions flying around to keep it from happening.

    This is the way the agenda gets controlled by the banks — just enough gets done to make it seem like Congress did something, but the banks actually get to dictate the terms of what that “something” is. Now on to the Senate, where nobody thinks the situation will get any better.”

  46. illusionoflife

    Lets get to it. There is no bigger corrupt bank then the Federal Reserve which favors large corporations. That needs to be banished oh wait the government created it and depnds on it for never ending debt. Good luck there.

    Then of course no bigger monopoly then the Federal Government itself which then charges high prices for substandard services and hey they do not even let you opt out either!!

    Alright lets get to breaking up these cartels and monopolies that are protected by laws.

    By the way corporations and current banks are all children of the federal government and their laws/regulations. Government made a mess so lets depend on them to clean it up and not power grab in the process like they always do.

    How about ignore legal theory sense the legal system is a corrupt monopoly itself. Keep playing by the rigged rules and obey kangaroo courts has to be wearing thin by now?

  47. D. Christopher Leonard

    Courts have quite consistently held that ‘money’ is equivalent to speech. Hence, any real limitation on corporate lobbying (vide defeat of court mandated mortgage modification in Senate) or the direct/indirect influence of legislation and elections is unlikely. It seems equally unlikely given this state of affairs, that any of the possible anti-trust proposals are politically possible. Undoubtedly, some of them are solid policy proposals but they are (like temporary bank nationalization or single payer-national health) outside the terms of political discourse in the U.S.

  48. Why not raise money and lobby from the other side-in the mirror image of the banks?

    OK, maybe this would be the 30 year plan, since although its about money its also about networks and friends, and that takes time to break into. But the foundation for all that networking is still the money.
    Actually, that relates to an earlier post by James about culture–the one called Pierre Bourdieu, Tim Geithner, and Cultural Capital.

    Meanwhile, do 19 large banks have more funds for this than potentially millions of individual citizens–who presumably could be educated as to where their real interests lay?
    This is an honest question. I have no idea of the answer.

  49. Bill Bradbrooke

    James & Zephyr Teachout;

    I agree, Zephyr Teachout: “…Perhaps most importantly, large companies have proven to have disproportionate power over the political process….”, and I agree, James: “… we have increasing recognition of the linkages between Wall Street and the federal government….” That makes now a good time to act. However, is containing the size of financial institutions, helpful as it would be, the place to start? Should we not make some simple regulatory adjustments first [or as we go]?

    “Too big to fail” has more than one meaning in the context of the financial crisis. Think of the totality of legal process that surrounds the creation of a single CDO issue. It is a stack of paperwork yards high. Contributors include: (i) the mortgage underwriter, (ii) the mortgage servicer, (iii) the aggregator, (iv) the securities underwriter and his “structured investment vehicle”, (v) the underwriter’s bank, (vi) the rating agency, (vii) the selling group and (viii) the client. Much of this paperwork serves to demonstrate compliance; much of it serves to place liability at a distance.

    How effective is it at distancing liability? Think of CNBC’s David Faber’s documentary, House of Cards. Knowing what we do today, were CDOs secured by US RMBS appropriate for a Scandinavian village in the arctic circle seeking complete safety of principal and a fair return on interim investment of its tax receipts? Would a prudent person that is fully informed have ever purchased such an investment? Absolutely not, yet it happened. The layering of disclaimers enveloping those CDOs is so dense that today the villagers are essentially stuck; a mountain of paperwork “too big to fail” blocks any redress they might have expected through the normal workings of securities law.

    What makes this significant is that in this case the Prudent Person Principle, the fundamental principle underpinning all securities dealing, has been completely sidestepped. The law has been used to effectively block the exercise of prudence in making the investment. This is toxic to the operation of markets. Markets have responded accordingly by seizing up entirely. The situation demands correction, however, if all we do is limit banks to being no bigger than some safe size consistent with “…real economic and democratic values….” those smaller, safe-sized banks could, theoretically, resume issuance of CDOs as before. What prevents them, of course, is not the law working as intended but a worldwide strike by securities purchasers who have lost all confidence in the operation of that law and refuse to purchase anything that could possibly be toxic or have a toxic tail.

    Imagine the same CDO issued in a regulatory environment more reflective of prudent person principles, one in which there were: (i) appropriate underwriting standards for mortgage companies, (ii) guarantees by aggregators in the form of reasonably funded mortgage insurance, (iii) securities underwriters full disclosure of all risks inherent in their SIVs, (iv) ratings for CDOs commensurate to risk [CC instead of AAA], (v) requirements that underwriters and selling group participants retain a certain percentage of each issue and call a market on these until a spontaneous after-market forms. This would return to securities law and regulation an effectiveness formerly intended but undermined by ill-conceived deregulation in the late 1990s. Confidence would return to markets and all financial stitutions, irrespective of size, would funcition more normally once more.

    I doubt that limiting the size of banks will, by itself, revive markets.

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  51. Yes, that’s an important link/site:
    A New Way Forward.

    thanks for posting it.

    The longest journey begins with a single step, right?

  52. James Kwak

    I think your argument presumes that bigger companies are more profitable, or competitive, or some other desirable adjective. This is often assumed by people who follow businesses and, indeed, by people who run businesses. But I can’t think of any good conceptual reason why it should be true, nor is it particularly well borne out in practice. For a long time, the biggest car company in the world was GM. The biggest insurance company was AIG. The biggest computer company was IBM. Sure, big companies have an advantage in buying smaller companies – but they do so by overpaying, which benefits the shareholders of the smaller company.

  53. Zephyr,

    Use the same measure of size investment banks use to figure out how much to pay when merging – NPV of future Free Cash Flows.

    Granted, they are not easily observable and very subjective to “expert” influence in a court case. So, maybe next best alternative would be to use the share of corporate profits as an observable measure of concentration. This would limit the size of the companies/banks and control their leverage.

    The justification could be on the basis the long-run economic competitiveness of the nation is ensured if the sources of corporate profits are “diversified” or spread across numerous industries so that no one profit industry can become too powerful to capture the political elites. It further ensures balanced regional development and democratization of economic opportunity.

    Sarajevo, BiH

  54. Carson Gross


    No offense taken. I don’t want to come across as an apologist for the banks. As I said, I’m a Chesteron guy: “Big Business and Big Government are very much alike. Especially Big Business.”

    I agree that devolving powers to the states seems unlikely, but I don’t think it’s entirely out of the realm of possibility, particularly if the current government spending binge ends poorly.

    A lot of people have said that the states will be unable to take on the large banks. But, as I look around, the toughest opponent I see to the banks right now is New York AG Andrew Cuomo. He’s the only major player I see actively going after the obvious fraud that the banks and major hedge funds have engaged in.

    If Jerry Brown started looking into fraud charges with respect to CalPERS, I think you’d start to see some sweat beads forming on Wall Street.

    I’ll admit, there is no small amount of idealism in the position that the states can and should take on the responsibility for preserving the stability of their citizens financial environment. At the same time, I think there just as much idealism in the notion that a single federal bureaucracy will not eventually be captured by the financial industry.


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  56. Depends on the company. ExxonMobil is a huge company and extremely well managed.. Size does matter in the international oil business. You need to be big enough to spread your risk among many countries as all governments are essentially corrupt, either intellectually or ethically. The worst are democracies. Actually, the least corrupt government and the best placed o do business is Singapore, an autocracy. Singapore drives a hard bargain but once made you never have to worry about it being reneged or renegotiated. You also need to be big because hydrocarbon projects are big and, if you want to run a development, which ExxonMobil likes to do because it has great technology and project management skills, you need to make the largest investment. There are huge economies of scale running refineries, especially export refineries.

    GM was ruined by its union and provincial management. Unlike multi-national oil companies who understand portfolio management and diversification of political risk, GM for too long had most of its eggs in one basket — the U.S. Only 20% of Exxonmobil’s profits come from the U.S. and I really like it like that. I think the unions ran the company. GM basically became a retirement and health care provider for millions of America workers. Management’s attention was primarily focused for too long on managing its unions.

    As for banks, you may have a point although if I am a Freeport McMoRan and I want to develop a new copper mine in the Congo, I am not certain I want to finance it using a medium size domestic U.S. or European bank. If the Chinese or Indians are able to build world class multi-national banks with broad based expertise and syndication, I might be inclined to use one of them instead of a smaller, well regulated U.S. competitor. That is one of the reasons the league tables were so important as a marketing tool.

    The risk I think we run is that if banks are required to operate based upon a black swan event, I think we are going to have a very anemic recovery and, going forward, much slower economic growth.

    On the other hand, maybe we have turned a corner — we can just print money. Let’s face it, the taxpayers are never going to pay back the debt. As least not half of them, since only 50% of tax filers pay taxes. And that should be just fine with the wealth redistributionists. As for the other half, well who cares about them anyway, since it was only good fortune (parents, genes, what have you) or luck that put them there. It is therefore fair that the top 10% of filers pick up 70% of the personal income tax tab. Right? If we are really concerned about the taxpayers we wouldn’t have ethanol or farm subsidies or the tens of thousand of earmarks we hear about every time there is a new bill.

  57. Carson Gross


    Fair points. I can’t tell if P&C is more stable because of it’s inherent business model or because of the historical fact that it’s been regulated so heavily at the state level. I know what I *want* to be true, but that’s not particularly useful, which is why I asked James to comment. (I know what his answer would be in general, but I’d like to see a deeper explanation of it.)


  58. A New Way Forward sounds just like what you’re talking about (I’m an organizer for it). It’s a grassroots, all-volunteer organization that started in March partly because of the sound ideas coming out of Johnson and Kwak. We’re calling for structural change to the financial sector and economic recovery plans that address the root causes of the crisis and call for a more accessible political economy for everyone. This is the single most important issue for balancing the size and reach of corporate entities in order to have a functional and engaging political system for everyone. We had protests in April, mentioned on the blog here. We’re planning educational economic crisis forums and video screenings in June. Campaign launching soon. Zephyr Teachout is helping to coordinate our activities and hopefully lead the charge for new antitrust rules! if you want to help push for reform —

  59. The issue of some states being more lax than others has not been raised either. Industries will seek out the state with the most favorable regulations or least regulations (e.g. Delaware corporate law). States may even feel that the benefits of attracting business and therefore jobs to their state might outweigh any potential future industry “crisis”. It’s an interesting idea worth the discourse but I think ultimately you need regulation at the Federal level.

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