Antitrust

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

glass-steagall-act Bipartisanship 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 What was left of Glass-Steagall was repealed by the 1999 Gramm-Leach-Bliley Act.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

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.

Merger of Miscreants

Monday may be remembered as the day when American big business announced some 50,000 layoffs, but one large company seemed to take a step toward growth. Pharmaceutical giant Pfizer unveiled plans that day to acquire its smaller competitor Wyeth in a stock and cash deal estimated at $68 billion. Pfizer crowed that the merger would create “the world’s premier biopharmaceutical company.”

While the deal may grow Pfizer’s revenues, it’s unclear who will benefit. The combined workforce of the two companies will be slashed by nearly 20,000 jobs. This will continue a policy of downsizing pursued by Pfizer CEO Jeffrey Kindler (photo) since he came to the giant drug firm from McDonald’s, of all places, in 2006.

Although Pfizer claims that the merged company will be better positioned to “respond more quickly and effectively to meet changing health care needs,” it is doubtful that patients will gain much from the creation of the mega-corporation. Pfizer has been feasting on the profits generated by Lipitor, but the company’s patent rights to the cholesterol drug expire in 2011 and there is nothing major in its pipeline to replace it. Even the Wall Street Journal editorial page sees the Wyeth acquisition as a sign of the “decline of innovation” in the drug industry.

Rather than developing new breakthrough products, companies like Pfizer seem mostly preoccupied with their legal issues. Kindler’s background, after all, is in litigation rather than science or even finance. Apart from patent issues, he has had to contend with the company’s regulatory problems. In fact, while everyone was focused on the merger, Pfizer announced that it had agreed to pay $2.3 billion (a record amount) to settle federal charges in connection with its off-label marketing of the now-withdrawn painkiller Bextra. The revelation was buried in a long press release announcing the company’s fourth-quarter financial results.

Bextra is not Pfizer’s only controversy. In October, for example, the New York Times published a story alleging that the company had manipulated the publication of scientific research to bolster the use of its epilepsy treatment Neurtonin for other disorders while suppressing research that didn’t support those uses. In 2006 the company was accused of testing an unapproved drug on children in Nigeria.

Pfizer’s bride-to-be Wyeth (formerly known as American Home Products) also has a record that is far from unblemished. The summary of legal proceedings in the company’s last annual financial report goes on for 14 pages. Most of the lawsuits are product liability cases involving hormone therapy, childhood vaccines, the anti-depressant Effexor, the contraceptive Norplant and, most importantly, the combination diet drug known as fen-phen, which was withdrawn from the market more than a decade ago after reports that its use was linked to possibly fatal heart valve damage. The findings unleashed a wave of tens of thousands of lawsuits against the company, including a case in Texas in which a jury awarded a single plaintiff more than $1 billion in damages. The company set up a $3.75 billion fund as part of the attempted resolution of a national class action case. Another $1.3 billion was added to the fund in 2006. Many plaintiffs opted out of the class and negotiated individual settlements with the company.

Big mergers are often justified with the claim that the combination will enhance product innovation. The main synergy likely to emerge from the marriage of Pfizer and Wyeth will be in its litigation department.