The White House Should Also Announce An Antitrust Investigation Into Major Banks

In the aftermath of Tuesday’s Massachusetts special election debacle, the White House today is set to announce a major change of strategy on financial reform, with the president to propose new legislation that will limit the size and complexity of banks.

Such legislation is unlikely to pass the Senate.  In fact, the approach to financial reform already in place, crafted by Senator Christopher J. Dodd with the blessing of the White House, was to trade away some parts of the House bill — including perhaps the potential new consumer protection agency for financial products — in return for sufficient Republican support to pass a bill in the next month or two.

But fresh from their success in the Democratic heartland, the Republicans will be less inclined than before to compromise in any meaningful way. They may keep negotiating, but the Senate Democratic choice will quickly become: pass a law with little sensible content, or don’t pass anything and look ineffectual.

Fortunately, there is an alternative — one laid out neatly by Krishna Guha of the Financial Times on Tuesday. Instead of pursuing the issue of those “too big to fail” financial institutions exclusively through legislation, the administration could launch instead one or more serious antitrust investigations into the behavior of our biggest banks.

This is a sensible idea that is long overdue.  There are definite elements of oligopoly in wholesale markets, underwriting new issues, and mergers and acquisitions both in the United States and around the world. This is part of the explanation for very high profits in banks — particularly big banks — over the past decade.

The question becomes: Is there evidence that our leading banks have used their pricing power or other aspects of their market muscle to keep out competition or otherwise distort behavior in very profitable arenas, like over-the-counter derivatives?

This is a complex question — and most of our existing antitrust experience and capability is more suited to the nonfinancial sector. But given the importance of finance in our economy — around 7 to 8 percent of gross domestic product — and the way in which concentrated credit markets have shown they can move the world economy, both up and down, in destabilizing ways, we need one or more in-depth Justice Department investigations to determine exactly what big banks have been doing.

We may also need new theories of antitrust.

Most of our existing thinking was developed in response to the behavior of giants like Standard Oil — big industrial trusts at the start of the 20th century. There has obviously been some updating of the relevant conceptual frameworks to take account of “network economies,” most prominently around software, although we can debate how successful this has been.

But finance really is different. It reaches every corner of our economy. And the biggest banks have become even bigger: Assets in our largest six banks now stand around 60 percent of G.D.P., up from around 20 percent in the early 1990s. This degree of concentration has only increased during the crisis and bailout of the past two years.

It looks as if we are heading to a European-type situation, where individual banks can be as big as the entire economy. This is not a good destination. When a single bank becomes deeply troubled, like the Royal Bank of Scotland (which had assets that peaked at over twice the size of the entire British economy), that is a major fiscal issue for its home country.

In the United States, we urgently need regulatory action that would include raising capital requirements steeply, as well as a size cap on our biggest banks in order to rein them in. The administration’s existing proposals, including their latest bank tax, are ineffectual at best; today’s annoucement is a major (and welcome) course correction – but by itself this is unlikely to be enough.

The administration and Congressional Democrats were planning to run for the November midterms on their health care achievements. That now seems high risk and low return.

Claiming to have averted a second Great Depression, even if true, is also not an obvious vote winner — after all, what exactly did this administration do that other administrations (led by John McCain or Hillary Rodham Clinton) would not have done? What “change” can you point to in any aspect of our financial system – other than for the worse?

Increasingly, Congressional Democrats are thinking about how to run against the big banks in November — these banks, after all, brought us a massive financial crisis, need to be reformed completely, and so far have resisted any meaningful change. Launching a high-profile antitrust action would play well in that context.

By Simon Johnson

This is an edited and updated version of a blog post that appeared on the’s Economix this morning.  If you wish to reproduce the entire piece, please contact the New York Times.

37 thoughts on “The White House Should Also Announce An Antitrust Investigation Into Major Banks

  1. Why can’t “unsafe and unsound” practices, which are already a regulatory hook in place be used to order the break up of the TBTF banks? All it would take is a Fed rule announcing the application of that regulatory authority to size and risky trading practices. If you are TBTF then your capital requirements double, or triple. Or even better, if you are TBTF you get broken up.

  2. I’ve been saying for decades, and I’ve said it here before: “The primary economic role of government in a Capitalist economy is to ensure competition in the marketplace.”

    It is the dynamic play between “profit motive” and “competition” that creates VALUE – the best goods and services at the best prices – which is, as I see it, the purpose of Capitalism.

    One of the tools government has to ensure competitive markets is anti-trust regulation. It has all been abandoned over the past few decades, with government instead turning a blind eye or, in fact, giving its blessings to mergers and acquisitions that undermine Capitalism.

    Yes, some anti-trust investigations and prosecutions would be nice to see. But I’m not holding my breath.

  3. Here Here!

    /I’m not holding my breath though. That would constitute ACTUAL change . . . not something our politicians are inclined towards.

  4. How about some RICO action? Not sure if RICO applies to corporations or just “human” individuals who may be part of if not also officers of corporations.

    General fraud and securities fraud appear to be potential RICO offenses.


  5. You may be right about what Capitolism SHOULD be, but what it has actually devolved to is a strong drive to maximize profits (and thus investor returns) by gobblin gup competitiors, creating oligopolies at best, and monopoliesa at worst. This has played out in the financial sector domestically these last two years, and you can see it in other sectors as well – how else do you explain Kraft Foods acquisition of Cadbury?

  6. Instead of one big financial reform bill, why not introduce a bunch of little reform bills, each with an easily understood one-sentence summary? Force the Republicans to block each one, if that is what they want to do.

    I do not believe that would be a winning strategy for the Republicans. The “Boston Massacre” was not because the Democrats have not done anything; quite the contrary…

    Let the Wall-Street-owned senators, from both parties, try to obstruct meaningful financial reform. Then let’s see what happens in November.

  7. I think when you look at the behavior of Phil Gramm and how his wife got the job at CFTC (and helped destroy the California economy with total mayhem in energy speculation), and Gramm later got the job at UBS, I don’t think there can be a lot of doubt about what is going on here. I could list about a zillion other examples more recent, but everybody who can read a newspaper or a site like Huffington Post gets the idea.

    But there is no way they are going to win that battle. The way to handle that would be to do it secretively and a put a bug on some of these bank lobbyists, get a recording of them making backdoor deals with these guys or find a paper trail. My guess is it would have to be an open and shut case before they even started the damned thing.

    And also if they prosecute they are going to have to be more severe in penalty than sending them to the Michael Milken Penthouse Prison/Shrine (with jacuzzi).

  8. Personalities and campaign tactics aside, to the extent Brown’s win was related to Obama and national policy, it was primarily related to the ridiculous monstrousity of a health care bill that gave away everything and anything to health insurance companies and citizens of Nebraska (and other lower income states) in exchange for getting _something_ passed; a bill that was not only against the interests of the middle class (and upper middle class), but very against the interests of a high-income-high-cost-of-living state in a progressive tax / social transfer federal system. Especially when Mass has to cover the interests of its own poor. And it’s a bill that everyone agreed would not cut costs.

    Next on the list, it was related to failure to generate jobs. Period. (Thank you Fed – especially Mssr Hoenig and Plosser.)

    Third came the fact that the Fed/Treasury saved finance, but let the rest of the economy rot – failing to fulfill pledges to massively invest in energy infrastructure, etc.

    The Dems deserved their loss, plain and simple, but don’t expect that suddenly this will provide the momentum needed to reform finance. Obama’s going to go populist, the Republicans don’t really want to regulate finance; screaming loudly as part of the minority party is a far cry from wanting to do anything other than regain power.

    Baseline would do well to remember Clinton’s old adage: It’s the economy, stupid. And to most voters, that means jobs. Giving voters the moralistic message that they should have absorbed an EVEN LARGER economic hit back in January 09 in order to punish wall street is a message that falls on deaf ears. The fact that voters want vengeance against Wall Street doesn’t mean they are willing to pay the price for that vengeance if it means higher unemployment and losing their homes.

    All of this goes back to one political fact: FIRST fix the economy, THEN regulate and reform. Baseline has always been arguing that we should FIRST regulate and reform, THEN fix the economy – the classic IMF approach.

    Which would work beautifully if we could export our way to recovery like Chile…

    Welcome to the political reality.

  9. The bad part of Team Obama’s setback on Tuesday is that even if they did finally get the message (which I doubt, given their egos), they probably don’t have credibility to pass the sort of massive investment in infrastructure they might have launched in early 08.

  10. Don’t under estimate republicans. They are in the hot sit as much if not more so then the democrats. The Tea Party folks are against the bailouts and the TBTF as much as everyone else.

  11. to the extent Brown’s win was related to Obama and national policy, it was primarily related to the ridiculous monstrousity of a health care

    What is your evidence for this claim?

    According to everything I have read, the #1 issue among the independents and Democrats who gave Brown his victory is the perception that Obama has been too kind to the banks.

    Apparently, whoever controls the Dow does not like Obama’s proposal. Go figure.

  12. If the white house doesn’t break apart the banks, then the dems will be toast later this year. People want something done about the banks that are too big to fail. Splitting them into pieces would
    not require any legislation as it already exits. However Obama is beholden to the banks interest as they funded his initial campaign.

  13. “All of this goes back to one political fact: FIRST fix the economy, THEN regulate and reform. Baseline has always been arguing that we should FIRST regulate and reform, THEN fix the economy – the classic IMF approach.”

    I think that the argument is one of political realism. The urge to reform is strongest in the immediate aftermath of a crisis or catastrophe. If the economy is fixed first, then a lot of the impetus to reform is dissipated. Opponents of reform can argue that the current system worked.

  14. Mr. President,
    Having good ideas has not been your problem. The trouble starts after you announce the idea and you go away and hope for the best. Might I suggest that you take a more forceful role in implementing these ideas, maybe get a little rough with objectors on our behalf? During the campaign, you asked us to “make you” do the things necessary to make our world a better place, well, we are at that moment right now and anything less than a full court press with lots of flying elbows will be seen as a failure on your part.

  15. As far as the MSM are concerned, StatsGuy is right when is says: “to the extent Brown’s win was related to Obama and national policy, it was primarily related to the ridiculous monstrosity of a health care”

    See for example how The Economist analyzes the Massachusetts defeat:

    According to the magazine, voters were spooked by:
    1) Healthcare bill
    2) Deficit
    3) Unemployment

    The reform of the banking system is never mentioned.


    “Fifty-six percent (56%) of voters in the state say health care was the most important factor in their voting decision.”

    Final Rasmussen Poll:

    “· Among those who Strongly Favor the plan before Congress, Coakley won 97% of the vote.

    · Among those who Strongly Oppose the plan, 98% voted for Brown.

    · Coakley also picked up 90% of those who Somewhat Favor the plan while Brown was supported by 78% of those who Somewhat Oppose it.

    · One key to Brown’s victory is that 41% Strongly Opposed the plan while just 25% Strongly Favored it.”

    Other polls, in case you don’t like Rasmussen:

    Pretty much every poll I’ve seen says the same thing. Baseline can argue that pressing hard on financial issues right now will ride a wave of popularity to the midterm elections. How wonderful if this were true.

    Voters – even in Mass – don’t want Health Care Subsidies at any cost. They do want jobs, and to keep their homes. I rather strongly suspect that do want financial reform, but not at the cost of jobs and homes.

    As I’ve said about a bazillion times, unless financial reform is accompanied by massive monetary stimulus, it’s doomed – and so is the US economy (what’s left of it).

  17. If there really is massive voter angst against incumbents or in the case of Coakley, the annointed replacement, there will be a swing by independents to vote for challengers in the upcoming primaries. Incumbents of both parties must quickly produce perceived results to avoid their own Coakley syndrome. Aggravating the problem for incumbents in the primaries will be cross over votes in states with open primaries.

    Incumbents now have an advertising problem that must be cured very short term by united actions against the perceived problems creating angst where voters will bolt to a challenger. If there really is voter angst the Congress will drop everything else and everyone else to cure their problem. Every member of Congress is a voter realist. What they must do will not itself cost money. The media coverage is all they need. Look what an anti vote swing of 8 % or thereabouts did to Coakley.

    A 20 % incumbent loss at the primaries will really put the heat on them to deliver big perceived cures before next November. If there is no massive loss by incumbents in the primaries the incumbents with political talent can schmooze their way to survival in November. So, the key political factor is the real state of anti incumbent political angst by middle voters. It is enough to upset and is real or it can be schmoozed away.

    Obama’s problems will require administrative action to avoid a failed presidency. I know what I would do. In no uncertain terms there must be indictments of major financial players. The big bank heads and the others must fear the wrath of the perpwalk to the exclusion of all else. People seem fond of calling US politics Kabuki theatre. OK, indulge them. Is Obama capable of the required nastiness to survive politically? I wonder.

    At the least we might see some wonderful Kabuki theatre. What might we be observing? That ten percent of the voters do all the thinking and doing while the rest are just mindless true believers of either stripe? If there is no anti incumbency voter angst then the politicians may do what they please because that is what voter’s desire.

  18. Unfortunately, we will never know the answer to this – because Team Obama decided to keep the current financial system in place with massive subsidies while it squandered 9 months trying to pass a Christmas Tree version of health care reform that in the end even Howard Dean said to toss:

    We had the discussion on tactical errors back in September…

  19. I say you split those banks up. Bring Glass Steagall back. Financial intermediation was long ago abandonded as the main source of income for banks. Today it is Trading. And that idea of having access to the Fed’s 0% rate is totally discriminatory. It allows carry trade to banks, exclusively.

    It simply does not make any moral nor economic sense that is those financial institutions fail, the people have to help them out. But if they succeed, shareholders and employees get the benefits. That may also be a reason why a lot of people hate banks. Evenmore, why people hate capitalism. Capitalism is a good system, but it has its flaws and banks are showing what they are.

  20. how about RICO racketeering prosecutions both civil and criminal against the banks and insurance and pharma executives who conspired with our Congress and Executive Branch at EVERY level? JAIL the bastards! and seize their stolen assets and bank accounts onshore and offshore!

  21. And what about some antitrust investigation into major regulators?

    I mean that little thing of all of them, in Basel, reducing to 1.6 percent the capital requirements for bank when lending to those AAA rated that had it good anyhow; or to zero when lending to the government; while keeping it at 8 percent when lending to an ordinary citizen or small business, sounds a bit suspicious. What were they up to?

  22. Let me quote here parts from a letter that I sent to my colleagues Executive Directors of the World Bank in 2003 after a discussion in the Board of Basel II from the perspective of emerging countries, and which is included in my book Voice and Noise, 2006. From it you will see that whether the Basel regulations favored big banks was indeed an issue… unfortunately I had not enough voice to make a difference.

    Dear Colleagues,

    An excess of Basel’s banking regulations could be very harmful to your country’s development.

    Leaving the issue of prudent bank regulations exclusively in the hands of too prudish bank regulators might be dangerous for economic growth. It is not an unimportant issue, and I beg you to read the following extensive quote from the chapter about “Coping with Weak Private Debt Flows—Basel II” that appeared in the World Bank report “Global Development Finance 2003.”

    “The new method of assessing the minimum capital requirement is expected to have important implications for emerging-market economies, principally because capital charges for credit risk will be explicitly linked to indicators of credit quality, assessed either externally under the standardized approach or internally under the two ratings-based approaches. The implications include the likelihood of… “unleveling” of the playing field for domestic banks in favor of international banks active in developing countries….

    If, as expected, most domestically owned banks in emerging-market economies adopt the standardized approach to credit risk, they will be at a comparative disadvantage vis-à-vis cross-border lending by international banks when attempting to lend to high-quality domestic borrowers….

    The regulatory capital requirements would be significantly higher in the case of non-investment-grade emerging-market borrowers than under Basel I. At the same time, borrowers with a higher credit rating would benefit from a lower cost of capital under Basel II. A quantitative assessment of such effects is not straightforward, as the results are sensitive to a number of factors, including banks’ loan pricing policies and, in particular, the extent to which banks’ economic capital, which derives loan pricing, may exceed the minimum capital charges under the IRB approach.”

    Colleagues, after having seen the World Bank Group capable of expressing such serious warnings as those quoted above, its continuous silence about the issue truly astonished me. Frankly our wish to harmonize with the International Monetary Fund cannot, and should not, mean we silence our voice.


  23. Ha, If they did they would expose themselves to legal dangers for helping the banks perpetrate the anti-trust in the first place.

  24. I agree with you 100%. If we want to return to any semblance of Capitalism, we need to put competition back into the equation!

  25. finally we are getting away from the stagnant ad nauseum redundancy of TBTF and getting to some actual critical mass and matter. This has been the best open questioning of potential options that has been raised for over a year. Decidedly outside of the confining shadow of the 1920s and updated to begin to assess 2010, maybe it will move on to question the priorities of a nation rather than the ideological legacy of a cold war default strategy. Perhaps we can begin to talk about “matrix and network” Economies instead of the misnomer of “free” market? But maybe, just maybe, we can begin to conceive of the “ECONOMY” as something more synergistic and emergent than a universal corporation or industry with a spread sheet to be commanded and cut up into proportions of controll and manipulation.

    This didn’t actually “break ground” (which hopefully is still in the prospectus) but it may certainly break the ice towards new foundation and discovery (if not “recovery” itself).

  26. No question about it being the boldest regulatory move until now. Let us see how it gets worded because there is a devilish amount of devils in the details.

    Instead of trying to figure out what of the many new financial products goes where, I would have preferred to slap them all with one single capital requirement, which could fluctuate somewhat depending upon where in the economic cycle we find ourselves, and then let the market figure out the details… instead of having the lawyers do that.

  27. Simon, don’t give up!! I think that Bernanke won’t be confirmed, and that the economy will continue to crumble, such that the runup to the fall elections will largely focus on the economy with health care reform being essentially a tangential part of the candidates platforms. My take is that the platforms will focus on finance and financial reform, and will get substantial backing from voters and non-financial interested parties. The Republicans may have only seen a moment in the sun because of Health Care reform fatigue amongst voters who believe that, while this is an important issue, it doesn’t trump economic reform in the control of Wall Street. This is the main focus of public animus, and any candidate running a smart campaign will focus on the taking on of Wall Street, both legislatively and through the courts. Republicans won’t do that, and Democrats, Independents and Progressives will. Although much of the country is conservative, they haven’t seen any solutions put forward by Republicans, and are unlikely to, since they believe that the elites caused the problem and must be controlled, taxed and regulated into submission.

  28. I have said it before and I will say it again, banking, which is primarily regulated by other agencies (including concentration) does not appear remotely at the level of concentration to suggest antitrust issues. Even with “new theories of antitrust” it is really hard to see any market in which there are fewer than, say, 10 major competitors of roughly equal size. That just is not the kind of thing antitrust law deals with.

    Again, safety, soundness, political power, etc are issues to be concerned about. But they are not the power to restrict output and increase prices.

    Simon, if you have an argument for why either an individual bank or a group of banks do have the power to restrict output and increase prices (outside of collective panic), feel free to offer it. If not, please stop being so transparently and basely political. Vaguely allude to such power in “OTC derivative” (for which, incidently, I am sure I can name ten major players) is hardly a substitute for actually having a point.

  29. According to my bank of america loan servicer,the investor group holding my mortgage,will not modify my loan or give me even an inkling of the criteria they used in refusing the request.Who is the investor group?Reluctantly the bank of america representative told me after some informed prodding by me…Wells fargo.I figured it out when the foreclosure notice arrived with references on it to “the wells group”..they may be too big to fail but not too big to work together.I also wonder which of them is carrying insurance protecting them against losses from my foreclosure and how did they package the loan when they sold it on to investors, surely that was fraud,i can promise readers the numbers i gave the bank would not have passed the scrutiny of any of the bankers i got mortgages from in the eighties or early nineties, so how did they sell it on to anyone?.My beef is that if they had kept it in house then they would have more likely to do a mortgage modification as it would have lowered their exposure to foreclosure losses on my loan.Why have we heard so little about this shady world being investigated by the justice department i think this adds to the sense ordinary people have of the collusion of politicians and bankers

  30. Bank of America might not know who is the real investor holding the mortgage so it might not be Wells Fargo but one of those who the “Wells’ group” sold it to.

    Had not BofA or the others counted on getting an AAA rating to stamp on your mortgage they would never have given it to you since they would never have been able to sell it to somebody else and would have had to carry it on their own books… and that is exactly what was doomed to happen sooner or later when the regulators made their capital requirements for banks dependent on the credit rating.

    To owe money to an unknown is torture. Any debtor should have the right to know who he owes money to, so that he knows to whom he is fulfilling his obligation and, if he cannot do that, he knows with whom to talk.

    You have heard so little about this because regulators are busy busy hiding their responsibility in the disaster, mostly by blaming it all on the bank oligarchs. For instance how many posts in Baseline have asked the question of why the Simon Johnsons of the IMF and other “knowledgeable” experts did not speak out when these regulations were being amply discussed 2002-2003… and they were busy caring for their own careers. Frankly these Monday morning quarterbacks might know something but in fact are not worthy of holding prominent positions as Monday morning experts. But, the worst of all, is that the experts who have the direct responsibility for the failures are still in charge of the Basel Committee and of the Financial Stability Board, and are now trying to reform regulations without admitting what was wrong with them in the first place and so digging us deeper and deeper in the hole.

  31. Per Kurowski: “To owe money to an unknown is torture. Any debtor should have the right to know who he owes money to, so that he knows to whom he is fulfilling his obligation and, if he cannot do that, he knows with whom to talk.”

    Absolutely! Unfortunately, part of the motivation for one creditor to sell a loan to another is to avoid responsibility. In game theory terms the creditors form a coalition against the debtor, who is a stakeholder in the sale but not a party to it. This does not always work to the disadvantage of the debtor, but it may. At the very least the law should not only keep the debtor informed, but also ensure that negotiation between the debtor and the eventual creditor can take place.

    The law should also protect the eventual creditor. Some mortgages have in effect been voided because who holds them could not be established. Whether that is a good or bad thing, it just shows how much of a mess there is.

Comments are closed.