Antitrust Has Role in Restructuring of Economy, Antitrust Institute Chief Testifies

This posting was written by John W. Arden.

In a Congressional subcommittee hearing on antitrust and the government-funded consolidation in the banking industry, American Antitrust Institute President Albert A. Foer urged Congress to (1) continuously consider competition policy concerns, which are at risk during an economic recession, (2) enact legislation that would allow the government to stop the formation of new organizations that may be later considered “too big to fail,” and (3) create the position of Deputy Assistant Attorney General for Emergency Restructuring in the Department of Justice Antitrust Division.

Foer delivered his testimony on March 17 before the U.S. House of Representatives Judiciary Committee, Subcommittee on Courts and Competition Policy. The Subcommittee was conducting a hearing, entitled “Too Big to Fail?: The Role of Antitrust Law in Government-Funded Consolidation in the Banking Industry.”

According to Foer, the chief issues with an organization declared “too big to fail” are not the organization’s size alone or even inadequate competition. The issues relate to the “creation of large organizations that are so deeply embedded in the economy that their failure is likely to have ripple effects” and the lack of government oversight to require the organizations to disclose the escalating risks of failure.

Antitrust agencies were not at fault for the recent emergency consolidations creating firms much too big to fail, he said. And there is likely no basis under current antitrust law to break up financial service and other firms deemed “too big to fail.” However, Congress can take significant steps to protect competition during the economic crisis.

According to Foer, Congress should:

Create a new Deputy Assistant Attorney General for Emergency Restructuring in the Department of Justice Antitrust Division. This person would participate in all aspects of national policy relating to financial institutions and their regulation, as well as other components of financial recovery planning that may impact competition. “If we care about preserving a competitive economy in the long run, we need an authoritative voice for competition policy at the negotiating table in order to ensure that we do not go down a road of permanent consolidation except where it is absolutely necessary to do so,” Foer said in his written statement.

Emphasize that competition policy concerns be taken into account during a recession and emergency consolidation situations. “In the context of emergency bailout consolidations, attention should be given to (a) assuring ultimate divestability of the components and (b) noting expanding the “failing company” defense beyond its traditional narrow limits. Consolidation in time of crisis is not likely to be remedied by market forces when the economy rebounds because entry barriers will be high and lenders and entrepreneurs are likely to be caution for years to come.”

Consider creating legislation allowing government to stop the formation of new organizations that are too big to fail. “In ordinary (non-crisis) economic times, either the Antitrust Division or the FTC would be empowered to declare a merger or acquisition that it has investigated pursuant to the Pre-Merger Notification Act as ‘potentially creating or exacerbating an unreasonable systematic risk’ . . . Flexible guidelines would define the conditions to be taken into consideration in making such a declaration. Such declaration would carry with it an automatic suspension of the merger for a period of ninety days, during which the Treasury Department would consult with the antitrust agencies, the Federal Reserve Board, and other national and international authorities that may have views on the effects of a future failure of the merged entity. The Treasury Department would then prepare a report to the President, taking into account likely beneficial effects as well as risks. If it does recommend stopping the merger, the President would have thirty days to make a final decision.”

Create a process for re-thinking where we are and where we want to be after the current crisis has settled down. Foer envisions the establishment of a special commission similar to the Temporary Economic Committee of the 1930s. The committee “should consider whether we should simplify the regulation of conglomerates by breaking them into smaller single-industry units; whether we should require a downsizing of financial service companies that have been deemed “too big to fail”; whether new governmental institutions are needed to deal with the emerging financial services sector; whether the extant “10% cap” on nationwide domestic deposits remains a viable limitation; whether new law is needed to for the special oversight of organizations deemed “too big to fail” and which cannot reasonably exit from that category; and whether new rules are needed for entities that are not within the financial services sector but represent systemic risks . . .”

Full text of the testimony appears here on the American Antitrust Institute’s website.