The Department of Justice seems to thinking, at least in principle, about potential antitrust action in and around banking. Assistant Attorney General Christine Varney spoke about this on April 11, but her wording is open to interpretation, “I have to ask if too big to fail is a failure of antitrust enforcement.” (The press release was uninformative on this point.)
More encouraging was the background briefing given to the New York Times, as seen in this paragraph:
Ms. Varney is expected to say that the Obama administration will be guided by the view that it was a major mistake during the outset of the Great Depression to relax antitrust enforcement, only to try to catch up and become more vigorous later. She will say the mistake enabled many large companies to engage in pricing, wage and collusive practices that harmed consumers and took years to reverse.
The thinking among antitrust experts has been that there is not much market power, conventionally defined, in financial services. But this thinking may change, for at least three reasons:
- There is definitely less competition now in investment banking (no more Lehman Brothers or Bear Stearns). Banks are bragging that their fees and trading profits will consequently be higher.
- Reportedly aggressive action by investment banks, vis-à-vis particular countries or securities, grab headlines. One way to think about these alleged actions is an exercise of (socially destructive) market power. Predatory practices are surely easier to get away with in a period of global confusion.
- Changes in fees for overdrafts are beginning to attract attention. This may be a matter for bank regulators rather than antitrust enforcement, or even for a financial products consumer protection agency to be named later (remember Joe Stiglitz’s recent testimony), but it does make you ask: What is the market structure that allows banks to do this?
There is an awkwardness to these concerns, of course, because Phase II of Larry Summers’ Recovery Model calls for banks to earn their way back to reasonable capital levels. Banks know they now have a high level of political cover and are likely to act accordingly. If the Department of Justice moves toward banks, it will presumably be stalled by Treasury and others.
Still, the legal system has a dynamic of its own. And Carl Shapiro, Deputy Assistant Attorney General for Economic Analysis, is completely capable of thinking clearly about our new “Too Big To Fail” economy: Start on page 108 of his book for ideas that begin to be more broadly relevant to the debate on finance today. With some help, he and his DoJ colleagues can figure out how best to bring public policy to bear.