Category: Antitrust


Breaking Up Behemoth Banks

Thanks to banking industry mistakes and government’s orchestration of its rescue, the country now has ten banks that together command some $10 trillion in assets, roughly equal to nearly 70% of the country’s gross domestic product. Pending legislation would break those up into a total of about 36, each still commanding about $285 billion in assets apiece—larger than the next largest bank is now.

That break up would eliminate the continuing threat to the US economic and political system posed by banks deemed so big that government lavishes trillions in aid to avoid letting them fail—at enormous cost to ordinary citizens and the real economy. It is by far the cleanest and most reliable solution to the manifest havoc massive banks wreak, not addressable by any pending technocratic tinkering like better regulation or capital requirements.

The break-up idea is not as radical as it is controversial, due to foes of ex ante legal constraints on private power.  All passage of the legislation would mean is substantially a return to the scale and distribution of the US banking system as of the mid-1990s, when no bank commanded assets exceeding more than a few percent of GDP. In important part, as the lists below suggest, the conglomerate mergers of the past two decades that caused this massive concentration of economic and political power would be reversed. Read More

Banks, Bankers, and the New Political Economy

As post-mortems of the financial crisis proliferate, it’s helpful to keep an eye on some foundational causes. Michael Lewis recently commented that “the people who squandered the most money paid themselves the most”—and continue to do so. We’ve all heard about agency problems, but rarely are they as crisply illustrated as in this post by James Kwak:

[The hedge fund] Magnetar made the Wall Street banks look like chumps. [In] one deal . . . Magnetar put up $10 million in equity and then shorted $1 billion of AAA-rated bonds issued by the CDO. It turned out that in this deal, JPMorgan Chase, the investment bank, actually held onto those AAA-rated bonds and eventually took a loss of $880 million. This was in exchange for about $20 million in up-front fees it earned.

But who’s the chump? Sure, JPMorgan Chase the bank lost $880 million. But of that $20 million in fees, about $10 million was paid out in compensation (investment banks pay out about half of their net revenues as compensation), much of it to the bankers who did the deal. JPMorgan’s bankers did just fine, despite having placed a ticking time bomb on their own bank’s balance sheet. Here’s the second lesson: the idea that bankers’ pay is based on their performance is also hogwash. (The idea that their pay is based on their net contribution to society is even more absurd.)

I was recently at a conference on “Too Big to Fail” banks organized by Zephyr Teachout, and several experts explained how the tail of massive compensation was wagging the dog of societal capital allocation. William K. Black‘s theory of “control fraud” is one of many efforts to illuminate the persistent conflicts of interest between banks, bankers, and investors, but one needn’t designate any of these conflicts “fraudulent” in order to see how socially destructive they have become. Rather, pulling back to see the big picture—from the lens of political economy—illuminates the key drivers of the crisis. As Kwak notes, “the crisis was no accident: it was the result of the financial sector’s ability to use its political power to engineer a favorable regulatory environment for itself.” Thinkers across the political spectrum—from Kling to Kuttner—can recognize the critical role of political connectedness in driving bankers’ compensation.
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Me, Justice Stevens, and the Dublin Marathon

Here is a sentence I never expected to write. So there I was on Monday in the middle of running the Dublin Marathon when I decided to listen on my Ipod to a C-Span podcast interview with Justice Stevens. I had traveled to Dublin to run the actual Dublin marathon and to co-host Antitrust Marathon IV: Marathon with Authority, a round table discussion co-hosted with the British Institute of International and Comparative Law and the Irish Competition Authority.

Around Mile 11, I was hurting and turned from a combination of Irish rock and random songs to some pod casts. After some short New York Times and NPR pod casts, I remembered that I had downloaded a series of C-Span interviews with the current Justices and Sandra Day O’Connor.

I have a special fondness for Justice Stevens. We are both Chicagoans, Cub Fans, and Northwestern Law grads. More improbably, we even had the same antitrust professor (James Rahl) at Northwestern, albeit about 35 years apart. That plus the fact he was primarily an antitrust litigator before going on the bench was enough to get me to devote the next 30 some minutes, and about 3 miles, to the Stevens interview.

A lot of it was a fluffy discussion of his chambers and personal history. But mixed among the fluff and the questions for non-lawyers (What is certiorari?), there were a handful of interesting tidbits. Justice Stevens talked about the reasons and impact of not participating in the cert pool, the importance of writing his own first drafts, and his interest in having the court hear a few more cases than its current docket. There are no smoking guns or shocking revelations, but Justice Stevens does mention the need for Justices from diverse legal backgrounds, such as veterans and litigators, as an important mix for the Court to have on the bench. Justice Stevens is of course both and as far as I know the only current Justice to actually have made his living as a litigator.

The main thing I came away with was the genuine niceness of the good Justice which was my impression from the only time I ever met him. In 1993, I taught in a summer program in Innsbruck, Austria where Justice Stevens was lecturing. Instead of staying for the three days as promised, he stayed and lectured the entire week and interacted warmly with the students and the rest of the faculty. At one point, a student asked him to sign the packet of course materials which he did after class. Because he did not want to play favorites, he then stayed and patiently signed for more than a hundred students.

In the pod cast interview, Stevens demurred on picking a most important or favorite case. But when asked about a most memorable experience, he didn’t hesitate and proudly mentioned throwing out the first pitch at Wrigley Field before a Cubs game at the age of 85.

With that, I grinned, quickened my pace a bit, and headed up the next of an endless series of hills on my way around Dublin on a surprisingly warm and sunny late October day.

I have not listened to the rest of the interviews. But if anyone else has, please post if there are particularly revealing or interesting moments.


Antitrust in Obamaland

Antitrust enforcement was one area where most observers expected significant changes from the Bush years, particularly at the Antitrust Division of the Justice Department. For the past eight years, the Antitrust Division had vigorously prosecuted cartels, but had not been active in monopolization or merger enforcement. In addition to bringing relatively few cases in these areas, the Division had filed a number of amicus briefs in support of defendants, opposed a petition for certiorari sought by its sister agency the Federal Trade Commission, and issued a number of reports and policy recommendations that restricted the reach of the antitrust laws or imposed significant burdens on private plaintiffs. During this same period, the FTC proved to be more active in the competition area, particularly in the health care and intellectual property fields which suggests that the FTC will have a greater continuity in the competition area despite key changes at the Commissioner and staff levels.

The key officials in the Obama administration came into the antitrust agencies promising change. Christine Varney, the new head of the Antitrust Division, gave a speech in her early days promising more vigorous enforcement and hearkening back to the days of Thurman Arnold during the latter half of the New Deal. At the same time, she repudiated a highly restrictive report on monopoly power issued during the waning days of the prior administration issued by the Justice Department alone because a majority of the FTC had refused to endorse. In addition, the Division has reversed policy and filed an amicus brief in support of plaintiffs in a key Supreme Court case involving the pharmaceutical industry. Most recently, the Justice Department and the FTC jointly announced a new initiative to revisit the Merger Guidelines of the 1990s used by both agencies to decide which mergers and acquisitions to challenge on competition grounds. Read More


The Informant!

It’s not often that I hear about a new Hollywood movie based on the facts of a case that I first encountered while clerking, but The Informant!, directed by Steven Soderbergh and starring Matt Damon, is just such a film. It tells the story of Mark Whitacre, a central actor in a case decided while I was clerking for my judge on the Seventh Circuit. Whitacre served as the key informant in a successful FBI investigation into price-fixing charges against Archer Daniels Midland Co. that sent top executives to prison. As my co-clerk Kevin Metz observed, the case featured the type of direct evidence of an agreement to fix prices that antitrust professors explain is almost never available in antitrust prosecution. Whitacre secretly recorded many hours of conversations with co-conspirators in the lysine industry over three years, all while bragging carelessly to others about his role as an FBI informant and embezzling millions from ADM under the FBI’s nose. During my clerkship year, we worked on a number of memorable cases, but United States v. Andreas probably featured the most colorful facts. Whitacre was a very odd and unpredictable personality who suffered from bipolar disorder, which Matt Damon plays up for comic effect in the movie.

Google Books and the Limits of Courts

GoogleBooksThe Google Books litigation has inspired a lot of commentary on the web. As an early October fairness hearing approaches, a consensus appears to be building: the proposed settlement is too important and complex for a court to approve in its current form. Agent Lynn Chu has complained that “No one elected the[] ‘class representatives’ to represent America’s tens of thousands of authors and publishers to convey their digital rights to Google.” Pamela Samuelson, by all accounts one of the leading academics in American intellectual property law, has this to say:

The Google Book Search settlement will be, if approved, the most significant book industry development in the modern era [emphasis added]. . . . The Authors Guild has about 8000 members. OCLC has estimated that there are 22 million authors of books published in the U.S. since 1923 (the year before which books can be presumed to be in the public domain). Jan Constantine, a lawyer for the Authors Guild, is optimistic that authors and publishers of out-of-print books will sign up with the Registry, but there are many reasons to question this.

For one thing, the proposed settlement agreement implicitly estimates that only about 750,000 copyright owners will sign up with the Registry, at least in the near term. Second, many books are “orphans,” that is, books whose rights holders cannot be located by a reasonably diligent search. Third, many easily findable rights holders, particularly academic authors, would much rather make their works available on an open access basis than to sign up with the Registry. Fourth, signing up with the Registry will not be a simple matter, since the Registry won’t just take your word for it that you are the rights holder. You are going to have to prove your ownership claim.

The non-representativeness of the class is one ground on which it is possible to object to the proposed Book Search settlement. Other reasons to object or express concerns will be explored in subsequent articles. Objections must be filed with the court by September 4, 2009.

A suitable platform for hosting public discussions of the deal only launched a few weeks ago, thanks to the diligent efforts of James Grimmelmann (who is also organizing an academic conference on the issue in October). The proposed settlement raises a number of issues, which may only be addressed by extensive regulation of the project — or a public alternative dedicated to serving those marginalized by the current proposal.
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From Antitrust to Anti-Systemic Risk

The “optimal size and complexity of developing countries’ financial systems” has been hotly debated in the economics community. Writing for the Harvard Business Review & Boston Globe, Duncan Watts focuses on our own dilemmas in a provocative account of complex systems:

[G]lobally interconnected and integrated financial networks just may be too complex to prevent crises like the current one from reoccurring. . . . A 2006 report co-sponsored by the Federal Reserve Bank of New York and the National Academy of Sciences concluded that even defining systemic risk was beyond the scope of any existing economic theory. Actually managing such a thing would be harder still, if only because the number of contingencies that a systemic risk model must anticipate grows exponentially with the connectivity of the system.

So if the complexity of our financial systems exceeds that of even the most sophisticated risk models, how can government regulators hope to manage the problem? There is no simple solution, but one approach is close to what the government already does when it decides that some institutions are “too big to fail,” and therefore must be saved – a strategy that, as we have seen recently, can cost hundreds of billions of taxpayer dollars. . . .

An alternate approach is to deal with the problem before crises emerge. On a routine basis, regulators could review the largest and most connected firms in each industry, and ask themselves essentially the same question that crisis situations already force them to answer: “Would the sudden failure of this company generate intolerable knock-on effects for the wider economy?” If the answer is “yes,” the firm could be required to downsize, or shed business lines in an orderly manner until regulators are satisfied that it no longer poses a serious systemic risk. Correspondingly, proposed mergers and acquisitions could be reviewed for their potential to create an entity that could not then be permitted to fail.

Of course, our system has been headed in precisely the opposite direction, largely thanks to the “best and brightest” now at Treasury and the Fed. As Simon Johnson puts it, we “pay too much deference to the expertise and presumed wisdom of a sector that screwed up massively.”

Google Book Search Scrutiny

Writing in Slate, Mark Gimein knocks down a number of straw man arguments against the Google Book search deal. I look forward to seeing how he grapples with more serious concerns, like those raised by James Grimmelmann. I’ve also been impressed by Christopher Suarez’s working paper on the need for antitrust scrutiny of the proposed deal . Suarez proposes a number of sensible settlement modifications that I hope the court will take seriously. It doesn’t have much time to get this right, as the following conference announcement shows:
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Toward a Public Alternative in Digital Archiving and Search

With inimitable clarity, Cory Doctorow made the case for an open alternative to Google in The Guardian earlier this month. He focused on the secrecy of search:

[S]earch engines routinely disappear websites for violating unpublished, invisible rules. Many of these sites are spammers, link-farmers, malware sneezers and other gamers of the system. . . . The stakes for search-engine placement are so high that it’s inevitable that some people will try anything to get the right placement for their products, services, ideas and agendas. Hence the search engine’s prerogative of enforcing the death penalty on sites that undermine the quality of search.

[Nevertheless, i]t’s a terrible idea to vest this much power with one company, even one as fun, user-centered and technologically excellent as Google. It’s too much power for a handful of companies to wield.

Search engines like Google have some good reasons for keeping their algorithms confidential–if they were public, manipulators could quickly swamp Google users with irrelevant results. However, just as Comcast cannot circumvent net neutrality regulation by saying all its traffic management and spam-fighting methods are trade secrets, search engines should not be able to use such arguments to escape regulation altogether. Moreover, there are ways of developing a qualified transparency that would let a trusted third party examine a search engine’s conduct without exposing its business methods for all the world to see.

But Doctorow does not want regulation here–he wants an alternative. Having made a similar case for a “public option” in the case of health insurance, I like this line of argument, but I think Doctorow is underestimating the barriers to entry. Though he’s aware of the failure of Wikia, Doctorow wonders if a “wikipedia for search” could be built:

We can imagine a public, open process to write search engine ranking systems, crawlers and the other minutiae. But can an ad-hoc group of net-heads marshall the server resources to store copies of the entire Internet? . . . . It would require vast resources. But it would have one gigantic advantage over the proprietary search engines: rather than relying on weak “security through obscurity” to fight spammers, creeps and parasites, such a system could exploit the powerful principles of peer review that are the gold standard in all other areas of information security.

The “rival public system” approach has been suggested for search engines a few times before. About a decade ago, Introna & Nissenbaum demonstrated that “the conditions needed for a marketplace to function in a ‘democratic’ and efficient way are simply not met in the case of search engines.” Recognizing this, Jean-Noel Jeanneny made a case for a French language alternative to dominant US-based search engines. The Quaero project in the EU appears to be answering that call, though in a far more dirigiste manner than Doctorow would probably like.

I have a few thoughts on a “public option” in search, building on a talk I gave at Yale Law’s Library 2.0 conference in the spring.
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An Antitrust Angle on the Public Plan

Is genuine health reform possible?  Several recent developments are promising.  President Obama’s big Congressional majorities (plus the Specter defection) are reminiscent of the Johnson-era milieu that led to Medicare and Medicaid.*   Key interest groups are less “Harry and Louise” and more “try to appease.”  Most importantly, the failures of managed care, consumer-directed health care, and other artifacts of the “ownership society” are now self-evident.  As unemployment rises, lack of insurance spikes, compounding the misery of many of those unlucky enough to get thrown out of work.

What could derail real health reform? Most likely, fake health care reform, particularly the kind that assumes there is something near a “free market” in operation now. As health care antitrust scholar Thomas Greaney argued yesterday, markets for health care are often very concentrated or riddled with barriers to entry:

The unfortunate fact is that a majority of the country is served by a few dominant insurers. (In 16 states, one insurer accounts for more than 50 percent of private enrollment; in 36 states, three insurers have more than 65 percent of enrollment). Likewise, because of lax antitrust enforcement, most markets are characterized by dominant hospital systems and little competition among high-end physician specialists.

In these circumstances, which economists call ‘bilateral monopoly,” the players often reach an accommodation in which they share the monopoly profits rather than compete vigorously. A prime example is the experience in Massachusetts, where Blue Cross/Blue Shield, the dominant insurer, reached an understanding with the dominant hospital system, Partners Healthcare, that entrenched higher prices for health insurance and hospital care.

Some might hold out hope that the Obama administration’s new emphasis on antitrust enforcement might solve that problem, but I would not hold my breath. After losing seven hospital merger cases in a row, the government is not exactly in a position to go storming into health care markets to demand competition. Only new antitrust laws are likely to accomplish much in that direction, and even if they were by some miracle adopted this year, I can’t imagine them having much effect within any reasonable time frame.
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