Archive for the ‘Antitrust’ Category

Taking the Anti Out of Antitrust

Thursday, September 18th, 2014

brewopolyThe early episodes of the new Ken Burns documentary on the Roosevelts showing on PBS highlight Teddy’s role as a trust-buster, even addressing the debate between those like TR who wanted to more strictly regulate the giant conglomerates and those who wanted to dismantle them.

Today, much of the “anti” seems to have gone out of antitrust, as little in the way of either regulation or dismemberment is on the agenda. Some of the largest players in already highly concentrated industries have no compunction about trying to take over one another and grow larger still. They take it for granted that such combinations will be sanctioned outright or with cosmetic changes to make the outcomes slightly less anti-competitive.

The latest example of one big fish seeking to swallow another is the reported pursuit by Anheuser-Busch InBev of fellow beer leviathan SABMiller. Those who reach for a Bud or a Miller Lite may not realize that those familiar beverages are no longer all-American products. Anheuser-Busch InBev is a Belgian-Brazilian company that took its name after acquiring A-B in 2008 for more than $50 billion. The combined firm grew much larger after buying Mexico’s Grupo Modelo in 2013. Today AB InBev has more than 200 beer brands around the world and some $43 billion in annual revenue.

Its target, London-based SABMiller, is the result of the 2002 purchase of Miller Brewing by South African Breweries. In 2008 SABMiller created a joint venture with Molson Coors (a 2005 marriage) called MillerCoors to sell their brands together in the United States.

The combination of AB InBev and SABMiller would take an already super-concentrated industry and make competition even more of a joke. Sure, there are a few independents left — such as Pabst, Yuengling and Boston Beer Company, maker of Sam Adams — but they would be up against a company with more than three-quarters of the U.S. market.

AB InBev’s move is just the latest in a series of takeover attempts among companies that are already effective oligopolies. In July, number two U.S. tobacco company Reynolds American announced plans to acquire number three, Lorillard. Dollar General, the largest deep-discount retailer, is seeking to purchase the second-largest, Family Dollar, thereby overturning a deal to acquire that firm by Dollar Tree, the third largest player. Earlier, Sysco announced it would purchase rival distribution giant US Foods.

Not every deal goes through: Rupert Murdoch’s 21st Century Fox dropped its bid for Time Warner and Sprint abandoned its bid for T-Mobile. Comcast, one hopes, will not succeed in its attempt to take over Time Warner Cable. But the fact that these deals were even floated is an indication that mergers that were once unthinkable are now considered serious possibilities.

All this is good news for investment bankers, who have been celebrating the fact that merger activity in the first half of 2014 was the highest in seven years and shows no signs of abating. But it does little for the rest of us.

Increased concentration tends to reduce employment, prop up prices, restrict consumer choices and discourage innovation. There was a time when employees of oligopolies had an easier time winning wage increases, but the weakening of labor unions has largely eliminated even that limited benefit.

Such drawbacks were known at the time of Teddy Roosevelt and became only clearer during the following decades. Today these lessons are frequently forgotten. A country that supposedly celebrates free competition instead bows to the desire of large corporations to absorb their competitors and dictate terms to the market. J.P. Morgan’s arrogant statement “I owe the public nothing,” is echoed every time one of these megadeals is announced.

Real Abuses, Sham Reforms

Thursday, July 17th, 2014

bosses_900It is now a full century since the Progressive Era ended some of the worst abuses of concentrated economic power. This year is the 100th anniversary of the Clayton Act and the Federal Trade Commission Act.   It is 103 years since the dissolution of the Standard Oil trust, 108 years since the passage of the Pure Food and Drug Act.

Yet even a casual reading of the business news these days suggests that we live in an economy disturbingly similar to the age of the robber barons.

Back then, the trusts shifted their incorporation to states such as New Jersey and Delaware that were willing to rewrite their business laws to accommodate the needs of oligopolies. Today large corporations are reincorporating themselves in foreign tax havens to dodge taxes. The practice is reaching epidemic proportions in the pharmaceutical industry.

Back then, unscrupulous drug companies and meatpackers sold adulterated products that could sicken or even kill their customers. Today General Motors is caught in a growing scandal about ignition switch defects that resulted in at least 13 deaths. The news about the automaker’s recklessness grows worse by the day, with the New York Times now reporting that company withheld information from federal regulators about the cause of fatal accidents.

Back then, wheeler-dealers such as James Fisk peddled dubious securities in companies that later collapsed, impoverishing investors. Today we’re still trying to get over the impact of the toxic mortgage-backed securities that the big banks packaged and sold during the housing bubble. Just the other day, Citigroup became the latest of those banks to settle charges brought by the Justice Department. Yet the $7 billion extracted from Citi, like the amounts obtained from the other banks, will cause little pain for the mammoth institution and will thus do little to deter future misconduct. The provision in the settlement for “consumer relief” is too little, too late.

And, of course, back then, the trusts got to be trusts by eliminating their competition. Today concentration is alive and well. Recently, the second largest U.S. tobacco company, Reynolds American, proposed a takeover of Lorillard, the number three in the industry. If this deal goes through, it won’t be long before Reynolds tries to marry Altria/Philip Morris, putting virtually the entire carcinogenic industry in the hands of one player, the way it was a century ago during the reign of the American Tobacco Company, aka the Tobacco Trust.

The movement toward a Media Trust just accelerated with the revelation that Rupert Murdoch’s 21st Century Fox, already huge, is seeking to take over Time Warner. The deal would put a mind-boggling array of entertainment properties under one roof. Murdoch offered to sell off Time Warner’s CNN – a meaningless concession given that the news network has struggled to survive against Murdoch’s despicable Fox News. Murdoch’s move comes as another media octopus, Comcast, is awaiting approval for its deal to take over Time Warner’s previously spun off cable business.

While we have all too many indications of a new Gilded Age, still scarce are signs of an effective response. We’ve got a good amount of muckraking journalism and a fair number of people (and even a few elected officials) who calls themselves progressives. Yet somehow this does not add up to a movement that can take a real bite out of corporate crime.

Part of the problem is that many of those in power professing progressive values are not serious about challenging corporate power. Some historians argue that the original Progressives were, like the New Dealers who came later, mainly concerned with saving capitalism from itself rather than changing the system. Yet they still managed to impose significant restrictions on big business through antitrust and other forms of regulation.

Today’s progressive officials often seem to want nothing more than to give the appearance of reform. That’s the story at the Justice Department, which has raised settlement levels and extracted some token guilty pleas but still allows corporations to buy their way out of serious legal jeopardy. Meanwhile, antitrust enforcement is tepid, and as the GM case increasingly shows, regulation is often a joke.

A resurgence of robber-baron behavior requires real, not sham reform.

Liar’s LIBOR

Thursday, July 5th, 2012

Mainstream economics would have us believe that interest rates are determined by the “invisible hand” of the market, except on those occasions when the Federal Reserve or other central banks intervene to modulate borrowing costs. One of the benefits of the current scandal embroiling the British bank Barclays is that it reveals the flimsy and fishy nature of one of the key rate-setting mechanisms of the global financial system.

That mechanism is the British Bankers’ Association’s London Interbank Offered Rate, an interest rate index that has been around since the 1980s. While LIBOR’s primary function is to represent what it costs big banks to borrow from one another over the short term, it has become the linchpin of hundreds of trillions of dollars of financial transactions ranging from complex interest-rate swaps to adjustable-rate home mortgages.

One would think that something so crucial to the efficient functioning of capitalism would be determined in a rigorous way. LIBOR rates, it turns out, are assembled in a remarkably arbitrary manner. They are based on figures submitted each day by major banks on what they think they would have to pay at that time to borrow in ten different currencies for 15 different periods of time. The upper and lower ends of the range are removed before the actual index is calculated by Thomson Reuters on behalf of the bankers’ association, but the figures are still based on what the banks decide to report as their perceptions.

While there has been debate since the beginning about the use of perceptions rather than actual transactions, serious questions about the integrity of LIBOR date back to the early stages of the financial meltdown in 2008. In April of that year the Wall Street Journal noted growing concerns that banks, whose individual LIBOR figures are made public, were adjusting those submissions downward to disguise the fact that their increasingly shaky condition was forcing them to pay higher rates for short-term loans.

The Journal then published its own analysis concluding that banks such as Citigroup and J.P. Morgan Chase, to avoid looking desperate for cash, had been reporting significantly lower borrowing costs to LIBOR than what other indicators suggested should have been the case.

By 2011, LIBOR discrepancies had moved from the realm of financial analysis to that of government oversight. The Swiss bank UBS disclosed that its LIBOR submissions were being reviewed by U.S. and Japanese regulators, and there were reports that other institutions were involved in the probes. It soon emerged that a group of megabanks were being investigated in various countries for colluding to manipulate the LIBOR rate. This, in turn, prompted a wave of lawsuits filed by institutional investors as well as by municipal governments whose interest rate swaps became less beneficial because of artificially low LIBOR rates.

Barclays is the first bank to be penalized for LIBOR shenanigans. The $453 million it is paying to U.S. and U.K. regulators to settle the case is more an embarrassment than a serious financial burden. Moreover, no executives or traders were charged, despite the smoking-gun emails quoted in the UK Financial Services Authority’s summary of the case. And, in an arrangement that is standard operating procedure for corporate miscreants these days, Barclays negotiated a deal with the U.S. Justice Department that allows it to avoid a criminal conviction.

It was satisfying to see the bank’s CEO Robert Diamond (phot0) forced to resign after the revelation of evidence suggesting that senior executives knew very well what was going on with the LIBOR manipulation. (Diamond, an American, also had to step down as a co-host of a fundraising event in London for Mitt Romney.) Yet we then had to put up with the ridiculous spectacle of Diamond testifying to a parliamentary committee that regulators were partly to blame.

The highlight of the hearing was when Labour MP John Mann told Diamond: “Either you were complicit, grossly negligent or incompetent.” After a pause, Diamond asked. “Is there a question?”

There is no question that the big banks are corrupt and that an interest-rate-setting system that depends on honest reporting by representatives of those institutions has no legitimacy.

A Rogues Gallery of the One Percent

Thursday, October 13th, 2011

For the past 30 years, Forbes magazine has used its annual list of the 400 richest Americans as a platform for celebrating the wealthy. This year, amid the persistent jobs crisis and the growing challenge posed by the Occupy movement, the Forbes list has to be viewed in a different light. Rather than a scorecard of success, it comes across as a rogues gallery of the 1 Percent who have hijacked the U.S. economy.

Start with the overall numbers. Combined, the 400 are worth an estimated $1.5 trillion, up 12 percent from the year before. This at a time when both the net worth and annual income of the typical American household have been sinking. When the first Forbes list was published in 1982 there were only about a dozen billionaires. Today, every single member of the 400 has a ten-figure fortune. Their average net worth is $3.8 billion.

And where did this wealth come from? Forbes tries to justify the skyrocketing assets of the 400 by saying that “an alltime-high 70% are self-made…This is the working elite.” New riches may indeed be better than inherited wealth, but how did this “elite” climb the ladder of success?

The question is all the more pertinent, given the current inclination of conservatives to refer to the wealthy as “job-creators” as a way of rebuffing efforts to get the plutocrats to pay their fair share of taxes.

How much job creation can be attributed to the Forbes 400? In a chart on Sources of Wealth, the magazine notes that the largest single “industry” is investments, accounting for the fortunes of 96 of the 400. By contrast, manufacturing, which is more labor intensive, is listed as the source for only 17 of the tycoons.

Within the investments category, about one-sixth of the people in the top 100 made their fortunes from hedge funds, private equity and leveraged buyouts—activities that are more likely to result in the destruction than the creation of jobs. For example, Sam Zell (net worth: $4.7 billion) was ruthless in laying off workers after his takeover of the Tribune newspaper company.

Forbes no doubt would respond by pointing to the 48 people on the list who got fabulously wealthy from the technology sector. Yet many of these companies create very few jobs: Facebook, which made Mark Zuckerberg worth $17.5 billion, has only about 2,000 employees. Or, like Apple, which gave the late Steve Jobs a $7 billion fortune, they create most of their jobs abroad in low-wage countries such as China rather than manufacturing their gadgets in the United States. The same is now true for Dell—source of Michael Dell’s $15 billion fortune—which has closed most of its U.S. assembly operations.

The few people on the list who are associated with large-scale job creation in the United States got rich from a company known for paying lousy wages and fighting unions. Christy Walton and her immediate family enjoy a net worth of more than $24 billion deriving from the notorious Wal-Mart retail empire (other Waltons are worth billions more). The Koch Brothers ($25 billion) are bankrolling the effort to weaken collective bargaining rights and thereby depress wage levels, while satellite TV pioneer Stanley Hubbard ($1.9 billion) has been an outspoken critic of labor unions and was an aggressive campaigner against the Employee Free Choice Act.

Poor job creation performance and anti-union animus are not the only sins of the 400 and their companies. Some of them have a checkered record when it comes to other aspects of accountability and good corporate behavior.

Start at the top of the list. Bill Gates, whose $59 billion net worth makes him the richest individual in the United States, is known today mainly for his philanthropic activities. Yet it was not long ago that Gates was viewed as a modern-day robber baron and Microsoft was being prosecuted by the European Commission, the U.S. Justice Department and some 20 states for anti-competitive practices. In the 1990s there were widespread calls for the company to be broken up, but Microsoft reached a controversial settlement with the Bush Administration that kept it largely intact.

Today it is Google, whose founders Sergey Brin and Larry Page are estimated by Forbes to be worth $16.7 billion, that is at the center of accusations of monopolistic practices.

Amazon.com, headed by Jeff Bezos ($19.1 billion), has fought against the efforts of a variety of state governments to get the online retailer to collect sales taxes from its customers. By failing to collect taxes on most transactions, Amazon gains an advantage over its brick-and-mortar competitors but deprives states of billions of dollars in badly needed revenue.

Cleaning products giant S.C. Johnson & Son, the source of the combined $11.5 billion fortune of the Johnson family, recently admitted that it has used aggressive tax avoidance practices to the extent that it pays no corporate income taxes at all in its home state of Wisconsin. Forbes ignores this issue, but instead describes in detail the criminal sexual molestation charges that have been filed against one member of the family.

And then there are the environmental offenders, such as Ira Rennert ($5.9 billion.) His Renco Group was for years one of the country’s biggest polluters, and the Peruvian lead smelter of his Doe Run operation is one of the most hazardous sites in the world.

This is only a small sampling of the transgressions of the 400 and their companies. Rather than being hailed as job creators, they should be made to answer for their job destruction, their tax avoidance, their anti-competitive practices, their environmental violations and much more.  Rather than celebration, the Forbes 400 and the rest of the 1 Percent are in need of investigation.

The Price Fix Is Still In

Thursday, September 29th, 2011

Matt Damon in The Informant!

Free market ideologues love to quote Adam Smith, but one passage from The Wealth of Nations that they tend to downplay is Smith’s observation that “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Americans today tend to think of price-fixing as a characteristic of the age of the Robber Barons and something that was dealt with by the Progressive movement. It is true that many anti-competitive practices were outlawed by the 1890 Sherman Act and the 1914 Clayton Act, but those laws did not put an end to attempts by corporations and their executives to keep prices artificially high.

Subsequent decades saw major revelations about price-fixing cartels, such as the big electrical equipment industry conspiracy of the 1950s and early 1960s in which companies such as General Electric were implicated. The 1990s saw, for example, the revelation of a conspiracy by companies such as Archer Daniels Midland to fix the price of the animal feed additive lysine. Unfortunately, what many people may recall of that case has now been colored by the comic way it was depicted in Steven Soderbergh’s 2009 film The Informant!

A spate of recent cases shows that, even at a time of purported hyper-competition, price-fixing conspiracies are still with us:

  • Furukawa Electric Co. Ltd. just agreed to plead guilty and pay a $200 million fine to the Justice Department for its role in a criminal price-fixing and bid-rigging conspiracy involving the sale of parts to automobile manufacturers. Three Furukawa executives, who are Japanese nationals, agreed to plead guilty and serve prison time in the United States ranging from one year to 18 months.
  • Former executives from Panasonic, Whirlpool and Tecumseh Products were recently indicted in federal court on charges that they conspired to fix the prices of refrigerant compressors. Earlier, Panasonic and a Whirlpool subsidiary pleaded guilty to related charges and were sentenced to pay a combined fine of $140 million.
  • Another Japanese company, Bridgestone, agreed recently to plead guilty and pay a $28 million criminal fine to the Justice Department for its role in conspiracies to rig bids and to make corrupt payments to foreign government officials in Latin America related to the sale of marine hose and other products.
  • More than a dozen carriers, including Singapore Airlines, have been caught up in an investigation of a conspiracy to fix air freight prices for shipments going to and from the United States.

Although Asian companies seem to have predilection for price-fixing, U.S. firms are not immune. During recent months the Justice Department has obtained guilty pleas from domestic firms such as aftermarket automobile light distributors in California and ready-mix concrete companies in Iowa.

As in the refrigerant compressor case cited above and the 1990s lysine case, U.S. firms often join with their foreign “competitors” in the conspiracies. The big European paraffin cartel that came to light in 2008 involved secret meetings at a moat-ringed French chateau with representatives of ExxonMobil, Royal Dutch Shell, Repsol of Spain and Sasol of South Africa. European antitrust officials fined Procter & Gamble along with Unilever earlier this year for fixing prices of laundry detergent.

At a time of modest inflation, including falling prices for some popular electronic products, it may be tempting to brush aside price-fixing as an insignificant problem. The fact that the conspiracies often involve industrial components means that consumers do not readily see the effects of anti-competitive practices.

Price-fixing does have an impact. A survey by John M. Connor of Purdue University found that over the long run price-fixing cartels result in overcharges of more than 20 percent.

The fact that price-fixing is still a frequent occurrence is yet another rebuttal to those libertarian and laissez-faire types who insist that government regulation of business is unnecessary and counter-productive. We can’t forget the lesson learned by the Progressive movement more than a century ago: Left to their own devices, large corporations will not act in the public interest and will even undermine the very principle of competition on which capitalism is supposed to be based.

A Good Merger for a Change

Thursday, March 24th, 2011

AT&T’s proposed $39 billion acquisition of its smaller cell-phone rival T-Mobile has been widely criticized as anti-competitive and bad for consumers. Normally, I would be joining in such a chorus, but this is a special case.

Giant mergers are usually bad news not only for consumers but also for workers, especially if they happen to be unionized. Acquisitions are typically followed by layoffs and sometimes by efforts to bust unions at the firm being purchased. This was seen, for instance, after the acquisition of Northwest Airlines by Delta, which has been accused of intimidating flight attendants and other Northwest workers into decertifying their unions last year.

A very different dynamic is at work in the T-Mobile/AT&T deal. This is a rare instance in which the acquiring company has a vastly better labor relations record than the target.

Let’s start with T-Mobile. The cell phone provider, owned by Deutsche Telekom, has aggressively opposed an organizing drive launched by the Communications Workers of America (CWA) after the German company entered the U.S. market a decade ago. The company’s anti-union crusade, not widely reported in the mainstream media, has employed the usual techniques of targeting workers with propaganda, misinformation, captive meetings and warnings that unionization would lead to job losses.

What makes T-Mobile’s practices all the more egregious is that Deutsche Telekom has good relations with unions in Germany. It is one of numerous European companies that operate under a global double standard: cooperating with unions at home while fighting them tooth and nail in the United States. It was one of those firms singled out in a report issued last year by Human Rights Watch with the title A Strange Case: Violations of Workers’ Freedom of Association in the United States by European Multinational Corporations.

The report charges that “T-Mobile USA’s harsh opposition to workers’ freedom of association in the  United States betrays Deutsche Telekom’s purported commitment to social responsibility, impedes constructive dialogue with employee representatives, and in several cases, has violated ILO and OECD labor and human rights standards.”

These findings reinforced the conclusions of an earlier report written by John Logan for the American Rights at Work Education Fund.

Consider, by contrast, the case of AT&T, which in its current incarnation is the result of the 2006 recombination of various parts of the old Bell system that had been broken up in 1984. Its mobile phone business is what was previously known as Cingular Wireless.

Before the creation of the new AT&T, Cingular had adopted a policy of strict neutrality with regard to union organizing drive—the stance that the law requires but which is rarely adhered to by U.S. employers. That policy carried over into AT&T, which in 2007 was honored by American Rights at Work for its enlightened labor practices. A report issued by the group at the time quoted an AT&T executive as saying that the company “has long taken pride in our cooperative and respectful relationship with the unions that represent our employees.”

In keeping with this position, AT&T recently told a reporter from BNA’s Labor Relations Week (subscribers only) that it would maintain strict neutrality regarding union organizing after acquiring T-Mobile. This means that an estimated 23,000 T-Mobile employees would have an excellent chance of finally gaining union representation.

It is thus no surprise that CWA and the AFL-CIO have voiced support for the merger. This should not be viewed as a matter of narrow self-interest. The remarkable response to Wisconsin’s attack on union rights has revived the old labor solidarity principle that an injury to one is an injury to all. A corollary to that is that a boon to the rights of one group of workers is a boon to all.

The achievement of collective bargaining rights by 20,000-plus T-Mobile employees would be one of the largest labor gains in the U.S. private sector in many years and could serve as an important lesson about the willingness of workers to embrace unions when management thuggery is taken out of the picture.

Also keep in mind that if AT&T does not acquire T-Mobile, it might end up in the hands of the other industry giant, Verizon Wireless, which also has a dismal record on labor relations.

All this is not to discount the concerns of consumer groups. The fact that AT&T is union-friendly does not give it a pass in other areas. It wouldn’t hurt if the CWA works with consumer groups to be sure that AT&T does not abuse its bigger position in the market.

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Corporations Want It All

Friday, October 22nd, 2010

Most of U.S. Big Business seems to be on a capital strike these days, refusing to invest and create new jobs. A notable exception is semiconductor giant Intel, which just announced that it will spend up to $8 billion upgrading its chip fabrication plants in the United States and build a new one in Oregon.

What’s odd is that Intel CEO Paul Otellini is just as critical of American economic policies, especially those promoted by the Obama Administration, as many other companies that use that vote of no confidence to justify their redlining of the USA. One of Otellini’s main gripes is that the United States provides too little in the way of tax breaks and other incentives to corporations compared to other countries. Speaking at a recent event at the Council on Foreign Relations, he proposed “that we take a page from others’ playbooks and provide attractive incentives for companies to build factories here that will employ our workers.”

This is a truly bizarre comment from the head of company that has received more in economic development subsidies than just about any other corporation in the United States. Over the past two decades, taxpayers in states such as New Mexico, Arizona and Oregon have underwritten the company’s rise to its dominant position in the semiconductor market.

New Mexico. The process began in 1993, when Intel announced plans for what was then an unprecedented $1 billion investment in a new chip plant, to be built in a suburb of Albuquerque called Rio Rancho. The company pressured local officials to provide what would ultimately amount to about $455 million in property tax abatements and sales tax exemptions on the equipment purchased for the facility.

Arizona. Soon after getting its way in New Mexico, Intel put the squeeze on officials in Arizona, where it proposed to build another plant in Chandler, a suburb of Phoenix. The company received some $82 million in property tax abatements, sales tax exemptions and corporate income tax credits. In 2005 Intel strong-armed the state to change the method by which it calculates corporate taxes to a system known as single sales factor, which allowed Intel and other companies with lots of property and a big payroll but relatively low sales in the state to enjoy enormous tax reductions.

Oregon. In 1999 Intel announced plans for a large expansion of its semiconductor operations in Oregon but made it clear that the investment was contingent on receiving a huge property tax abatement. Actually, what Intel was demanding was an extension of tax breaks it previously received in the state, where its manufacturing operations dated back to 1974. Those breaks were enabled by the state’s Strategic Investment Program (SIP), which was adopted in 1993 with Intel in mind. The company’s new SIP deal reduced Intel’s property tax bill by an estimated $200 million over 15 years. In 2005 Intel got the county to extend the property tax break to 2025, locking in an estimated $579 million in additional savings. In addition to these property tax breaks, Intel enjoyed a substantial reduction in corporate income taxes thanks to Oregon’s decision to join the single sales factor bandwagon.

So what is Otellini complaining about? Perhaps his real gripe is that the Federal Trade Commission sued Intel last December, charging that the company “illegally used its dominant market position for a decade to stifle competition and strengthen its monopoly.” The parties settled the case in August, with Intel agreeing to end some of the pressure tactics it applies to computer makers.

Yet it is likely that Otellini’s comments reflect a broader attitude on the part of Big Business. The Supreme Court ruling in the Citizens United case and the resulting flood of corporate money into the current electoral campaigns appear to have given CEOs like Otellini the idea that they are entitled – entitled to buy elections and entitled to have government policy oriented to their serve their every need. The way things are going, those corporate titans may get their wish.

A Business Backlash?

Friday, June 25th, 2010

By all rights, the laissez-faire crowd should be silent these days. Recent months have been marked by one example after another of the perils of deregulation and the folly of trusting large corporations to do the right thing. From Toyota to Goldman Sachs to Massey Energy to BP, 2010 has been the year of big business irresponsibility.

As in 2002 (after the accounting scandals involving Enron, WorldCom et al.) and 2008 (the meltdown of Wall Street), we’re now at one of those moments, following an outbreak of corporate misconduct, in which public sentiment about business is up for grabs, as is public policy.

The business camp is already working hard to regain support, in ways ranging from BP’s seemingly benign vow to “make things right” to Rep. Joe Barton’s shameless “shakedown” outburst designed to turn the Obama Administration into the villain. Here are some other signs that corporations and their defenders are already going back on the offensive:

  • A federal judge with personal investments in the petroleum industry struck down the Obama Administration’s moratorium on deepwater drilling, despite evidence brought to light by Congressional investigators that the practice is much more dangerous than we had been led to believe and none of the oil giants have adequate accident response plans. The challenge to the moratorium had been brought by smaller oil service firms, but the judge’s decision was hailed by majors such as Chevron and Royal Dutch Shell.
  • Massey Energy, apparently hoping for a like-minded judge, has filed suit against the federal Mine Safety and Health Administration in a brazen effort to pin the blame on regulators for the April explosion at the Upper Big Branch mine in West Virginia that killed 29 workers.
  • Verizon Communications CEO Ivan Seidenberg, the current head of the Business Roundtable, recently gave a speech in which he challenged regulatory initiatives in the telecom and financial sectors, criticized efforts to limit tax avoidance by multinational companies, and declared: “It’s time for us all to raise our game and embrace the power of the private sector that will create real value and real growth for our country.”

If business advocates are emboldened to speak out so soon, that suggests that corporations have not been reprimanded adequately for their misconduct. The criticism expressed by the Obama Administration and Congressional Democrats has had a ritualistic quality about it—a Kabuki dance of disapproval that may not result in any real change.

Even the $20 billion BP escrow fund feels inadequate, given the fact that there is no end in sight to the disaster. Although BP’s shareholders are agonizing over the suspension of the dividend payment, the company itself does not seem very put out by the creation of the fund, especially since it is being allowed to spread out the cost over several years.

The ability of BP to buy its way out of the crisis contributes to the sense that large corporations can do the most outrageous things and emerge relatively unscathed. It is unlikely that the forthcoming criminal case against the company will cause much more discomfort. The company has already been through that process with previous disasters involving oil spills in Alaska and a deadly refinery explosion in Texas. It paid the resulting penalties with no problem, and the fact that it was put on probation has had little practical effect.

What’s needed is a more dramatic response to corporate negligence. It might be the arrest of a top executive or an announcement that the federal government will no longer do business with companies with serious regulatory violations or an antitrust initiative to try to break up large firms which think that their size somehow makes them above the law. Only then might corporations think twice about lashing back and returning to business as usual.

Are Strange-Bedfellows Alliances the Way to Cut the Big Banks Down to Size?

Thursday, December 17th, 2009

glass-steagall-actBipartisanship is rare these days, and rarer still are cases in which Democrats and Republicans come together to urge new restrictions on business. Yet here we have Democratic Senator Maria Cantwell of Washington joining Arizona Republican John McCain to propose a reinstatement of the Glass-Steagall Act. The long shot idea would turn back the clock on a key facet of ruinous financial deregulation.

In case you have forgotten, Glass-Steagall was one of the signature reforms of the New Deal era, signed into law by FDR as part of the Banking Act of 1933 (photo).  Reacting to Wall Street’s excesses of the 1920s and the stock market crash, the law mandated a separation between the speculative world of investment banking and the supposedly more prudent business of commercial banking. This forced big institutions such as J.P. Morgan to spin off their securities operations, leading to the formation of firms such as Morgan Stanley.

While many credited Glass-Steagall with promoting financial stability, by the 1980s commercial banks began clamoring to get back into the more exciting (and potentially more profitable) game of underwriting corporate securities and providing other investment services. Little by little, the Federal Reserve gave in, which only emboldened the big players. In 1998 wheeler-dealer Sandy Weill directly defied Glass-Steagall by arranging a merger of Travelers Group and Citicorp, thus creating the behemoth we know today as Citigroup. What was left of Glass-Steagall was repealed by the 1999 Gramm-Leach-Bliley Act.

The near-meltdown of the financial system has engendered new interest in the principles that had been embodied in Glass-Steagall. McCain and Cantwell are not the only ones talking about reviving the 1930s legislation. Several progressive members of the House made a similar proposal earlier this month. The idea has also been endorsed by former Federal Reserve Chairman Paul Volcker and prominent economist Joseph Stiglitz.

Glass-Steagall redux would not, by itself, solve the problems of the U.S. financial system, and it is not a substitute for wide-ranging reform. But it would put a significant crimp in the casino culture that has taken root throughout the banking world. Another advantage is that it would by necessity bring about a reduction in the size of many mega-institutions that are now considered “too big to fail” and thus must be bailed out when they screw up in a spectacular way.

The McCain-Cantwell bill, for example, would require the likes of Citigroup and Bank of America to decide within a year whether they wanted to focus on lending or securities. B of A, for instance, would have to give up its branches or its ownership of Merrill Lynch. At the same time, a purer investment bank such as Goldman Sachs could no longer pretend to be a bank holding company, the designation it adopted last year to qualify for TARP funds.

If the bill proceeds, it could also serve as the foundation for an aggressive left-right response to the financial mess. Ever since the Bush Administration and the Federal Reserve started on the road to bank bailouts last year, many progressives and many conservatives have expressed outrage at the practice but have generally talked past one another. This has helped the banks avoid having any serious strings put on their rescue packages. And it let them sidestep the most obvious solution to the problem of having financial institutions deemed too big to fail: cutting them down to size.

The biggest obstacle to restoring Glass-Steagall and otherwise curtailing the power of the big banks may turn out to be not the financial lobby but rather the Obama Administration, whose chief economist, Larry Summers, championed the final repeal of Glass-Steagall while heading the Clinton Administration Treasury Department a decade ago. Despite Obama’s recent swipe at “fat cat” bankers, he and his advisors seem to think that it’s preferable to let the financial leviathans remain in place while putting some modest restrictions on their operations.

The problem is that the giant banks have become increasingly addicted to activities such as trading — the main source of the supposed rebound in the sector — and show less and less interest in mundane matters such as lending to businesses and consumers. The Obama Administration thus comes across as a defender of aloof Big Finance while the country struggles to finance an economic rebound. The fact that progressives can find more common ground on this issue with someone like McCain suggests that strange-bedfellows alliances may accomplish more than toeing the pro-business centrist line.

Trust-Busting Shows New Signs of Life

Friday, May 15th, 2009

varney2“Everywhere you look, powerful forces are driving American industries to consolidate into oligopolies—and the obstacles are less formidable.” That’s the way a February 25, 2002 front page story in the Wall Street Journal began, and for the following seven years those obstacles grew yet more feeble.

With a few notable exceptions, such as the Federal Trade Commission’s long-running effort to block Whole Foods from acquiring its rival Wild Oats Markets, major mergers have sailed through. Last fall the Bush Justice Department issued a policy paper on antitrust that was so soft on anti-competitive practices that three FTC commissioners took the unusual step of issuing a public statement denouncing it.

Now the Obama Administration is repudiating the policy. Christine Varney (photo), head of the Justice Department’s Antitrust Division, gave identical speeches to the Center for American Progress and the U.S. Chamber of Commerce heralding the change of course. She made a telling comparison to the late 1930s, arguing that today, as then, the tightening of competition policy is part of the way government should respond to an economic crisis.

She reinforced this principle by separately stating that the Antitrust Division would work with federal agencies to prevent contractors from unlawfully profiting from stimulus projects funded by the $787 billion Recovery Act signed by the President in February.

Varney’s declarations were all the more significant in that they were soon followed by the announcement of a record antitrust fine – the equivalent of about $1.5 billion – imposed by the European Commission on Intel for unfairly dominating the computer chip market.  During the Bush Administration U.S. officials had declined to go after Intel.

It would be a wonderful thing for the United States to rejoin Europe and take the enforcement of competition laws seriously. Varney is talking a good line now, but the Obama Administration has to make up for an overly tolerant stance toward certain oligopolies—above all in banking policy, where Treasury Secretary Timothy Geithner has accepted the notion that the likes of Citigroup and Bank of America are too big to fail and, rather than cutting them down to a reasonable size, wants to go on propping them up with taxpayer funds. And in the health care arena, the Administration seems to take it for granted that the giant health insurance carriers, who use their power to deny as much care as possible, will go on playing a central role.

At a time when an increasing number of Americans recognize the shortcomings of giant corporations, the federal government cannot afford to be seen to support any oligopolies. And if it really wanted to promote competition, the Justice Department should go after the biggest antitrust scofflaw of them all: Wal-Mart.