Joshua Wright headshot

Professor of Law
Antonin Scalia Law School

Joshua D. Wright is University Professor and the Executive Director of the Global Antitrust Institute at Scalia Law School at George Mason University. In 2013, the Senate unanimously confirmed Professor Wright as a member of the Federal Trade Commission (FTC), following his nomination by President Obama.

Antitrust
Financial Regulation

Antitrust Financial Regulation

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Fin Reg and Too Big to Fail: A New Kind of Antitrust?

Simon Johnson argues that the conventional antitrust tools of Sherman Act are outdated and ill-equipped to deal with the power of big banks:

Why are these antitrust tools not used against today’s megabanks, which have become so powerful that they can sway legislation and regulation massively in their favor, while also receiving generous taxpayer-financed bailouts as needed?

The answer is that the kind of power that big banks wield today is very different from what was imagined by the Sherman Act’s drafters – or by the people who shaped its application in the early years of the twentieth century. The banks do not have monopoly pricing power in the traditional sense, and their market share – at the national level – is lower than what would trigger an antitrust investigation in the non-financial sectors.

Effective size caps on banks were imposed by the banking reforms of the 1930’s, and there was an effort to maintain such restrictions in the Riegle-Neal Act of 1994. But all of these limitations fell by the wayside during the wholesale deregulation of the past 15 years.

Now, however, a new form of antitrust arrives – in the form of the Kanjorski Amendment, whose language was embedded in the Dodd-Frank bill. Once the bill becomes law, federal regulators will have the right and the responsibility to limit the scope of big banks and, as necessary, break them up when they pose a “grave risk” to financial stability.

This is not a theoretical possibility – such risks manifested themselves quite clearly in late 2008 and into early 2009. It remains uncertain, of course, whether the regulators would actually take such steps. But, as Representative Paul Kanjorski, the main force behind the provision, recently put it, “The key lesson of the last decade is that financial regulators must use their powers, rather than coddle industry interests.”

And Kanjorski probably is right that not much would be required. “If just one regulator uses these extraordinary powers [to break up too-big-to-fail banks] just once,” he says, “it will send a powerful message,” one that would “significantly reform how all financial services firms behave forever more.”

Regulators can do a great deal, but they need political direction from the highest level in order to make genuine progress. Teddy Roosevelt, of course, preferred to “Speak softly and carry a big stick.” The Kanjorski Amendment is a very big stick. Who will pick it up?

Geoff and I have both offered some skeptical thoughts on introducing too big to fail as an antitrust concept.  For example, Geoff responded to an earlier Johnson column and linked Johnson’s call “new antitrust” to the “old antitrust” of the structure-conduct-performance paradigm — which nearly all modern antitrust scholars agree is not a great predictor of economic performance or consumer welfare.  Geoff also made the important point that, while Johnson is is pretty confident in his assumption that hitting stuff with the “very big stick” of the Kanjorski amendment will make us better off (apparently no matter who does the hitting, so long as the target is big banks), there are certainly social costs to this approach.  As Geoff noted, encouraging “antitrust investigations with the intention of developing new theories of antitrust that can justify the a priori policy conclusion that banks are violating the antitrust laws” is not sound policy advice — especially coming from an economist.

Also, I have no idea why Johnson would advocate a major antitrust investigation of the banks — while apparently recognizing that the banks conduct does not violate current law.  It is one thing to call for a change in current law to make illegal things that are currently legal.  But what, exactly, are the gains from announcing to the world that the antitrust enforcers are willing and able to threaten prosecution of conduct they know falls outside the scope of that prohibited by the Sherman Act?  These laws apply to non-financial firms as well.  The chilling effects of such an approach to law enforcement would be significant.

I’ve also been critical of too big to fail as an antitrust concept:

Antitrust has come a long way since its economically unprincipled approach several decades ago to its current state.  It has done so largely by staying relatively hinged to microeconomics.  This approach has done antitrust well as evidenced by the evolution of the doctrine over the past 30 or so years.  We now have a substantial body of economic theory and empirical evidence that tells us quite a bit about sensible approaches to at least cartel and merger enforcement that are likely to help rather than harm consumers on net.  Injecting “too big to fail” as an antitrust concept whether under the Clayton Act or otherwise is not a minor tweak to the system.  Too big to fail is not an antitrust concept and attempts to operationalize it within the antitrust framework are likely to cause more harm than good by undermining the progress that has been made by sticking to a disciplined economic approach.  As I commented for a related story in The Deal, and consistent with some of my own research on economic education and complexity in antitrust cases,  “Consumer welfare is complicated enough” for judges and enforcement agencies as is.  But the threat is not just increasing the risk of errors associated with introducing this factor into the antitrust calculus, but also allowing it to substitute for and gradually subsume the economic approach which has served us well.Obviously, the types of social costs associated with the risks of firms becoming “too big to fail” are real.  The argument is simply that antitrust is an inappropriate vehicle for addressing those problems and its use here would introduce problems of its own that I have not frequently seen discussed in this context.

The debate about too big to fail as an antitrust metric has much in common with the case against the expansion of Section 5 as articulated by some of its proponents.

Filed under: antitrust, business, economics, financial regulation, mergers & acquisitions