[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
`TOO BIG TO FAIL?': THE ROLE OF ANTITRUST LAW IN GOVERNMENT-FUNDED
CONSOLIDATION IN THE BANKING INDUSTRY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS AND
COMPETITION POLICY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MARCH 17, 2009
__________
Serial No. 111-33
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
U.S. GOVERNMENT PRINTING OFFICE
48-102 WASHINGTON : 2009
-----------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092104 Mail: Stop IDCC, Washington, DC 20402�090001
COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas DANIEL E. LUNGREN, California
MAXINE WATERS, California DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts J. RANDY FORBES, Virginia
ROBERT WEXLER, Florida STEVE KING, Iowa
STEVE COHEN, Tennessee TRENT FRANKS, Arizona
HENRY C. ``HANK'' JOHNSON, Jr., LOUIE GOHMERT, Texas
Georgia JIM JORDAN, Ohio
PEDRO PIERLUISI, Puerto Rico TED POE, Texas
LUIS V. GUTIERREZ, Illinois JASON CHAFFETZ, Utah
BRAD SHERMAN, California TOM ROONEY, Florida
TAMMY BALDWIN, Wisconsin GREGG HARPER, Mississippi
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DEBBIE WASSERMAN SCHULTZ, Florida
DANIEL MAFFEI, New York
[Vacant]
Perry Apelbaum, Staff Director and Chief Counsel
Sean McLaughlin, Minority Chief of Staff and General Counsel
------
Subcommittee on Courts and Competition Policy
HENRY C. ``HANK'' JOHNSON, Jr., Georgia, Chairman
JOHN CONYERS, Jr., Michigan HOWARD COBLE, North Carolina
RICK BOUCHER, Virginia JASON CHAFFETZ, Utah
ROBERT WEXLER, Florida BOB GOODLATTE, Virginia
CHARLES A. GONZALEZ, Texas F. JAMES SENSENBRENNER, Jr.,
SHEILA JACKSON LEE, Texas Wisconsin
MELVIN L. WATT, North Carolina DARRELL ISSA, California
BRAD SHERMAN, California GREGG HARPER, Mississippi
[Vacant]
Christal Sheppard, Chief Counsel
Blaine Merritt, Minority Counsel
C O N T E N T S
----------
MARCH 17, 2009
Page
OPENING STATEMENTS
The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in
Congress from the State of Georgia, and Chairman, Subcommittee
on Courts and Competition Policy............................... 1
The Honorable Howard Coble, a Representative in Congress from the
State of North Carolina, and Ranking Member, Subcommittee on
Courts and Competition Policy.................................. 2
The Honorable Melvin L. Watt, a Representative in Congress from
the State of North Carolina, and Member, Subcommittee on Courts
and Competition Policy......................................... 4
The Honorable Brad Sherman, a Representative in Congress from the
State of California, and Member, Subcommittee on Courts and
Competition Policy............................................. 4
WITNESSES
Mr. Albert A. Foer, President, American Antitrust Institute,
Washington, DC
Oral Testimony................................................. 7
Prepared Statement............................................. 9
Mr. C. R. ``Rusty'' Cloutier, President and Chief Executive
Officer, Midsouth Bank, N.A., Lafayette, LA
Oral Testimony................................................. 19
Prepared Statement............................................. 21
Mr. William Askew, Senior Policy Advisor, Financial Services
Roundtable, Washington, DC
Oral Testimony................................................. 32
Prepared Statement............................................. 34
Ms. Deborah A. Garza, former Assistant Attorney General, Division
of Antitrust, U.S. Department of Justice, Washington, DC
Oral Testimony................................................. 47
Prepared Statement............................................. 49
Mr. Mark Cooper, Director of Research, Consumer Federation of
America, Washington, DC
Oral Testimony................................................. 63
Prepared Statement............................................. 65
APPENDIX
Material Submitted for the Hearing Record........................ 85
`TOO BIG TO FAIL?': THE ROLE OF ANTITRUST LAW IN GOVERNMENT-FUNDED
CONSOLIDATION IN THE BANKING INDUSTRY
----------
TUESDAY, MARCH 17, 2009
House of Representatives,
Subcommittee on Courts and
Competition Policy
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:06 p.m., in
room 2141, Rayburn House Office Building, the Honorable Henry
C. ``Hank'' Johnson, Jr. (Chairman of the Subcommittee)
presiding.
Present: Representatives Johnson, Conyers, Jackson Lee,
Watt, Sherman, Coble, Chaffetz, and Goodlatte.
Staff Present: (Majority) Christal Sheppard, Subcommittee
Chief Counsel; Anant Raut, Counsel; Elisabeth Stein, Counsel;
Rosalind Jackson, Professional Staff Member; and (Minority)
Stewart Jeffries, Counsel.
Mr. Johnson. This hearing of the Subcommittee on Courts and
Competition Policy will now come to order.
Without objection, the Chair is authorized to declare a
recess of the hearing.
I will now recognize myself for a short statement.
First of all, good afternoon to everyone. This is a topic
that many of us want to learn about. The single most important
issue on the minds of people today is the state of the global
economy.
The statistics are grim. We are in the midst of an economic
downturn that, by some measures, is the deepest since the Great
Depression: 12.5 million Americans, or 8.1 percent of our
workforce, are unemployed. The net worth of U.S. households
declined by nearly $11 trillion in 2008, erasing 18 percent of
American wealth in a single year. Every week, local businesses
and big national retailers alike announce losses, layoffs, or
bankruptcy.
The origins of our current economic downturn can be traced,
in part, to the issuance of high-risk mortgage-backed
securities in the earlier part of the decade. When the housing
bubble collapsed in late 2007, anyone holding these mortgages,
or securities derived from these mortgages, got caught in a
downward spiral. In spring of 2008, the rapid devaluation of
these mortgage-backed securities shook investor confidence and
was partially responsible for the credit crisis that began
gripping our economy.
Bear Stearns was sold over a weekend to JP Morgan Chase,
and the Federal Government put Fannie Mae and Freddie Mac into
receivership. Last September, hopes for a quick recovery were
dashed when Merrill Lynch had to be sold to Bank of America;
Lehman Brothers was allowed to--or forced into bankruptcy, if
you will; and AIG, the now well-known company, asked the
Federal Government for a $40 billion bridge loan, which has
since escalated, into about $180 billion or $170 billion.
Since August of 2008, the Federal Government has invested
hundreds of billions of dollars into financial institutions,
either directly into these institutions, which have been deemed
too big to fail, or through the TARP program, the ``Troubled
Asset Recovery Program.'' Although, the stated goal of the TARP
funding is to increase liquidity in the credit markets and to
stimulate lending; some of the funds were used by recipient
banks to acquire competing banks that, in some cases, had been
denied TARP funding.
It is not my intention, ladies and gentlemen, to suggest
that either the previous or the current Administration should
have sat idly by as the economy plummeted. I believe that my
colleagues on both sides of the aisle can agree that the
intention of both Administrations was to protect a fragile
economy from further destabilization.
Our purpose here, as the Courts and Competition Policy
Subcommittee, is to determine whether or not this economic
downturn was worsened by antitrust. In particular, there are
two interrelated issues I would like for us to consider: one,
this concept of ``too big to fail.'' Are there such things as
institutions that are too big to fail? And, if so, should
antitrust have prevented them from becoming so embedded in the
economy?
The second is the use of TARP money in bank consolidation.
When the Federal Government provides funds to the acquiring
bank but denies it to the acquired bank, is antitrust law
adequately suited to evaluate the competitive effects of these
acquisitions when the government, by the stroke of a pen, can
radically shift market power? And, by doing so, are we simply
creating the next generation of institutions that are too big
to fail?
At the end of today, I hope that our panel will have
provided us with guidance as to what we can do and what we
should do to prevent this type of crisis from reoccurring.
I now recognize my honorable colleague, Mr. Howard Coble,
the Ranking Member of this Subcommittee, for his opening
remarks.
Mr. Coble. Thank you, Mr. Chairman.
And it is good to welcome the panel with us this afternoon.
I thank you, Mr. Chairman, for calling this hearing of the
Courts and Competition Policy Subcommittee.
Without a doubt--and you have touched on it, to some
extent--the current economic crisis has altered the way that we
view government intervention with business. Many, including me,
were wary of giving large sums of money to financial
institutions in the wake of the failure of Lehman Brothers last
September. I reluctantly voted for the initial disbursement of
emergency economic stabilization funds because of the outcry
from many of my constituents, who viewed it as their only means
to protect their life savings.
I continue, Mr. Chairman, to be very skeptical of the
approach we have taken to stabilize and stimulate our economy.
The current AIG bonus controversy is a prime example. That
said, today's hearing gives us the opportunity to examine how
past government intervention, specifically antitrust
enforcement, may have contributed to the current situation.
First, this hearing will examine whether mergers created
some of the institutions that were too big to fail. It will
also examine whether antitrust law, as it has been
traditionally understood, could or should have prevented some
of these institutions from getting to the point that the
government felt compelled to bail them out.
Secondly, in the course of providing relief funds under the
government's TARP program, it appears that the government has
in at least one instance deliberately supplied money to one
bank for the purpose of acquiring another. In other cases,
banks have used the TARP funds to assist in the purchase of
other banking institutions. This hearing gives us the
opportunity to explore whether the existing antitrust review
properly protects taxpayers from ultimately having to save
other institutions that are, again, too big to fail.
As a North Carolinian, Mr. Chairman, I am proud that my
State is home to two very large financial institutions. One of
those, Bank of America, has received TARP funds and has
acquired troubled financial institutions, including Merrill
Lynch and Countrywide Financial. The other, Wachovia, was not
so fortunate. It was recently acquired by Wells Fargo, as you
know.
Whether they were being acquired or doing the acquiring,
these transactions have had and will continue to have a
significant impact on the residents in my State and upon other
States. Not unlike all Members, I have a number of small banks
and credit unions in my district, Mr. Chairman, as no doubt you
do. It is my hope that these essential institutions are not
forgotten in this debate or by policymakers here in D.C.
Finally, I would like to note that we are facing a
bipartisan problem here. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, which enabled banks to
operate across State lines, was passed with strong bipartisan
support under a Democratic President and by a Democratically
controlled Congress. The Gramm-Leach-Bliley Act, which allowed
banks to expand into broader areas of business, including
insurance and securities, also enjoyed broad bipartisan support
and was passed by a Republican-controlled Congress.
Similarly, President Clinton's Antitrust Division presided
over the merger of Citicorp with The Travelers Group in 1998,
which created Citigroup, while President Bush's Antitrust
Division presided over the Wells Fargo-Wachovia deal, among
others. Undoubtedly, the Obama administration will face similar
mergers as the financial crisis continues and deepens.
All of this, Mr. Chairman, is to say that this is neither a
Democratic nor a Republican problem; it is an American problem.
And I appreciate your willingness, Mr. Chairman, to have
invited a balanced panel to discuss these issues.
And, with that, I yield back the balance of my time and
look forward to hearing from our witnesses.
Mr. Johnson. I thank the gentleman for his statement. And,
without objection, any additions that you want to make to it
will be included in the record, as well.
Do any of my other colleagues on this Subcommittee wish to
make opening statements?
Mr. Watt. Mr. Chairman, I won't take the full 5 minutes.
I do think it is interesting that, as a result of serving
on both the Financial Services Committee and the Judiciary
Committee, on the same day in two separate Committees of
jurisdiction we are dealing, in one respect or another, with
the question of ``too big to fail.''
I didn't want to be here to hear the testimony, because I
am not sure that whether an institution is acquired or is
acquiring another financial institution and that, in and of
itself, makes it too big to fail is something that ought to be
an independent criteria for evaluation by the Justice
Department under the antitrust law. So, while I think this is
an interesting inquiry and certainly a topical inquiry, I hope
we don't go too far overboard in that direction, because I
think that might be an overreaction to what is going on in the
current economic context.
That said, I will be very anxious to hear the testimony,
and it is certainly a matter that, when it involves antitrust
implications, is a matter of the jurisdiction of this Committee
and this Subcommittee. And I will be interested in knowing how
these witnesses tie this all together.
So, with that, I will yield back. I appreciate the
gentleman having the hearing. I guess the more I can talk about
``too big to fail,'' whether in the context of antitrust laws
or in the context of how you create a systemic regulator to
supervise it, the better off I am, because the more I
understand about the issue, the better we are able to legislate
on it. And I appreciate it and yield back.
Mr. Johnson. Thank you, Congressman Watt, out of
California, one of our resident legal scholars on this
Committee and especially on this Subcommittee.
I want to welcome also----
Mr. Watt. I thought you were introducing Mr. Sherman. I am
from North Carolina.
Mr. Johnson. I also want to recognize my colleague from
Utah, Mr. Jason Chaffetz. And he is a brand-new Member.
We welcome you to the Subcommittee.
And if there are any other opening statements--I see that
my colleague, the cerebral Mr. Brad Sherman out of California,
cannot help himself. He must share his knowledge with us, and
we definitely appreciate it.
Mr. Sherman. Thank you, Mr. Chairman.
``Too big to fail''--those words are an affront to
capitalism. Capitalism can only work when entities are allowed
to fail. But ``too big to fail'' is not only an attack on the
taxpayers, saying, ``You must bail us out, we have created this
house of cards, we did it for our own benefit, and you must
ensure us against risk,'' but it is also an attack on
competition. Because if an entity claims to be too big to fail,
what they are really saying is, ``Don't just look at our
balance sheet to see whether we are credit-worthy, look at the
balance sheet of the United States Federal Government. That is
available to you.'' And so these entities are able to borrow at
reduced interest rates, giving the ``too big to fail'' a chance
to get bigger at the expense of those who are small enough to
fail.
You know, we have faced this in my own community. When you
have a financial institution that becomes insolvent, the FDIC
takes them over. The insured depositors have paid for that
insurance because they get a little lower yield, and the bank
has to pay into the FDIC fund, and you paid for the insurance,
and, to the extent you are insured, the Federal Government is
there to pay on the insurance that you have paid for to the
Federal Government. But everybody else--the bondholders of that
local bank, the accounts that are in excess of FDIC insurance--
they don't get any taxpayer money. Why? Well, that bank wasn't
too big to fail. That is why we have receivership.
In contrast, you have a dozen or so of the largest
financial institutions in the country whose general creditors
are being paid with taxpayer money. And the fact that they are
being paid is, if anything, proof that if you have to lend
money, lend it to somebody who is too big to fail. Give them
the good interest rate, give them the chance to succeed.
And so, what we ought to have done, what we can still do,
is to put into receivership those financial institutions that
are insolvent and deal with them the same way we deal with
everyone else.
Now, this will turn them into much stronger financial
institutions, because the way you clean up a balance sheet is
not by taking off assets, even, quote, ``toxic assets''; the
way you clean up a balance sheet is you take off liabilities.
And that is what happens in receivership. You give a haircut to
the general creditors.
These companies are not too big to fail. It is said that
they are too interconnected to fail. I don't think that is true
either. They are too well-connected to fail. And so the general
creditors are coming here, and so far they have been successful
in getting a Federal bailout.
What we see here is a casino, a casino created at AIG's
financial products division, where a lot of people were smart
but not smart enough. They placed the winning bets. They went
to the AIG casino and they bet against the mortgages being
valuable, and they were right on their bet. But there were so
many of them that they broke the bank. And now these gamblers
are here in Washington, having us bail out the bank that they
have broken.
That is not the right role for the Federal Government, and
it is not the right competition model for the future, where
smaller banks and larger banks should all live by the same
rules. And that is, if you pay for Federal insurance you get it
up to the terms of that insurance, and otherwise the general
creditor is a general creditor. And when you are a general
creditor of an insolvent financial institution, you take a huge
haircut.
Mr. Chairman, I thank you for the time.
Mr. Johnson. Thank you, Congressman. And I will say that it
was unexpected to hear you mention the term ``haircut'' twice.
I am now pleased, ladies and gentlemen--and I am glad you
have such a great sense of humor, Congressman. We are all
laughing with you, not at you. And I don't want to put myself
in line for replies either.
But I am pleased now to introduce the witnesses for today's
hearing.
The first is Mr. Bert Foer, president of the American
Antitrust Institute. Mr. Foer is a recognized antitrust expert
who served previously as assistant director and acting deputy
director of the Federal Trade Commission's Bureau of
Competition.
Welcome, Mr. Foer.
Next is Mr. C. R. ``Rusty'' Cloutier.
I have been struggling with that for a while, Mr. Cloutier.
And Mr. Cloutier is president of the MidSouth Bank. He is
also past chairman of the Independent Community Bankers of
America. And, in 2004, he was honored by the city of:
Lafayette, Louisiana, he was given the highest award, the Civic
Cup, for his civic actions.
So we appreciate you being here also, sir.
Next is Mr. William Askew, senior policy advisor for the
Financial Services Roundtable. In addition to his role with the
Roundtable, Mr. Askew is a senior executive vice president of
Regions Financial Corporation. Regions Financial Corporation
made Forbes' Platinum 400 list of America's best big companies.
As head of the retail banking for Regions from 1987 to 2006,
Mr. Askew played a leadership role in the acquisition of the
consortium of banks that created Regions.
Welcome, Mr. Askew.
Also on the panel is Ms. Deborah Garza, former Assistant
Attorney General for the Department of Justice's Antitrust
Division. Prior to her most recent tenure at the Department,
Ms. Garza chaired the Antitrust Modernization Commission, which
is a bipartisan panel created by Congress to evaluate the U.S.
antitrust laws and policy recommendations and also to make
policy recommendations to the Congress and to the President.
And I would like to add that the members of the commission,
as well as its recommendations, are held in highest regard by
this Subcommittee. And we thank you and your colleagues for all
the work that you have put in for the benefit of the citizens
as well as the commercial interests that are so important for
this country.
And last but not least, I would like to recognize Dr. Mark
Cooper, who is also on our panel. He is the director of
research at the Consumer Federation of America. And he has
provided expert testimony in over 250 cases for public interest
clients, ranging from attorneys general to citizen intervenors,
before State and Federal agencies, courts, and legislatures in
the United States as well as Canada.
And I want to welcome you all to this important hearing.
And just one housekeeping matter: Any opening statements
that have not been presented orally may be submitted in
writing. And there will be 5 business days within which that
can happen.
And the same goes for the panelists, also. So your written
statement will be placed into the record. And we wish to ask
you that you limit your oral presentation to 5 minutes. You
will note that we have a lighting system, which is right in
front of you. It starts with a green light, and then at 4
minutes it displays a yellow light. And then, thereafter, we
all know what red means.
After each witness has presented his or her testimony,
Subcommittee Members will be permitted to ask questions,
subject to the 5-minute rule.
Mr. Foer, please proceed with your testimony.
TESTIMONY OF ALBERT A. FOER, PRESIDENT,
AMERICAN ANTITRUST INSTITUTE, WASHINGTON, DC
Mr. Foer. Thank you, Mr. Chairman, Members of the
Committee. And if the Committee wishes to discuss haircuts
further, I am happy to take you on.
I am going to pose five questions and try to answer them
very briefly, perhaps cryptically. My written statement
contains elaboration.
First, what do we mean by ``too big to fail''? It is
important at the outset to observe that the chief issues are
not large size alone or even inadequate competition. The ``too
big to fail'' problems relate to, one, creation of large
organizations that are so deeply embedded in the economy that
their failure is likely to have ripple effects which,
cumulatively, are just not acceptable to the polity; combined
with, two, failure of governmental oversight to require
relevant disclosure of escalating risks--that is, the
information that would be necessary if government were to
determine to inhibit the formation of such organizations or to
protect against their failure.
Question two: Was antitrust policy responsible for allowing
the ``too big to fail'' problem? Well, it is the more broadly
conceived competition policy that I think has failed. The more
narrowly defined antitrust enterprise--that is, the Sherman,
Clayton, and FTC Acts--was not empowered to stop mergers on the
basis of either the absolute size of the resulting institution
or a calculation of the systemic consequences of their eventual
failure. We lack a workable antitrust mechanism for stopping
large conglomerate mergers that create giant corporations
without, at the same time, reducing competition in specific
markets.
My third question: Can current antitrust law protect us
from future mergers that will create a ``too big to fail''
problem? And my answer, cryptically, is no, not most of the
time.
My fourth question: Can current antitrust law be used to
break up financial services or other organizations that are
deemed too big to fail? And my cryptic answer again is, no.
So let me turn to the final question: What should Congress
do? And I have four suggestions.
First, Congress should create within the Department of
Justice Antitrust Division and should appropriately budget a
new position: Deputy Assistant Attorney General for Emergency
Restructuring. The purpose is to give competition policy an
important place at the table as regulatory and legislative
policies are developed to deal with the recession. I think this
should be a high priority, as decisions are being made now that
may have long-term competitive effects. Congress should assure
that a loud competition voice is heard in a timely and
respectful way in the councils that are restructuring our
economy.
Second, Congress should emphasize that competition policy
concerns be taken into account during a recession and even
during emergency consolidation situations. History suggests
that industries faced with downsizing seek ways to do so
jointly. The three C's of consumer catastrophe are
consolidation, cartelization, and constraints on trade. These
strategies have not worked in the past, and we need to remain
especially vigilant against them now.
My third proposal: Congress should consider creating
legislation that will give the government an opportunity to
stop the formation of new organizations that are too big to
fail. In my statement, I develop a procedure for facilitating
governmental review of mergers that potentially create or
exacerbate an unreasonable systemic risk. And when such mergers
are identified, they could not be consummated for a period of
time, during which a task force of relevant regulators,
including antitrust officials, could report on both the
beneficial effects and the risks of the merger. The President
would be empowered to make a final decision to stop the merger.
The process could be truncated during an emergency. The
predictions required by this process will be quite difficult,
but we should err on the side of not generating new risks of
substantial catastrophe, even if the probability of occurrence
is low.
I see I am about out of time. Let me make one final point,
please.
For the longer term, Congress should create a process for
rethinking where we are and where we want to be after the
current crisis has settled down. And, in my paper, I propose
what I call a TNEC-Two, a new version of the Temporary National
Economic Committee that served during the New Deal. I won't
have time to go into that right now, but I would be pleased to
answer your questions.
[The prepared statement of Mr. Foer follows:]
Prepared Statement of Albert A. Foer
__________
Mr. Johnson. Thank you, sir.
And before we proceed to Mr. Cloutier, I would like to
welcome and recognize the presence of our esteemed Chairman of
the full Committee, the Honorable John Conyers from Michigan.
And I would also ask you, sir, whether or not you wanted to
make an opening statement.
Mr. Conyers. No.
Mr. Johnson. Okay. So thank you, sir, and we shall proceed
with the panel.
Mr. Cloutier?
TESTIMONY OF C. R. ``RUSTY'' CLOUTIER, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, MIDSOUTH BANK, N.A., LAFAYETTE, LA
Mr. Cloutier. Chairman Johnson, Representative Coble, and
Members of the Committee, my name is Rusty Cloutier. I am the
president and CEO of MidSouth Bank Corp., a $936 million bank
holding company located in Lafayette, Louisiana.
We operate in all of south Louisiana and most of southeast
Texas. We are community-oriented and focus primarily on
offering commercial and consumer loan and deposit services to
individuals and small businesses, middle-market businesses, et
cetera.
I am pleased to represent the Community Bankers of America
and ICBA's 5,000 members at this important hearing.
While recent government funding has encouraged
consolidation in banking, this is nothing new. For decades,
antitrust laws, banking laws, and banking regulations have all
contributed to consolidation of the banking and financial
industry.
I personally have spent years warning policymakers of the
systemic risks that were being created in our Nation by
unbridled growth in the Nation's largest banks and financial
firms. But I was told I just didn't get it, I didn't understand
the new global economy, that I was a protectionist and that I
was afraid of competition, that I needed to get with the modern
times. Sadly, we know what modern times look like, and it
hasn't been pretty. Excessive concentration has led to systemic
risk and the credit crisis we now face.
Banking and antitrust laws were much too narrow to prevent
these risks. Antitrust laws are supposed to maintain
competitive geographic and product markets. If there were
enough competitors in a particular market, that ends the
requirement. This often prevented local banks from merging, but
it does nothing to prevent the creation of the giant,
nationwide franchises.
Banking regulation is similar. The agencies ask only if a
given merger will enhance the safety and soundness of the
individual firms. They generally answer, ``bigger'' is always
necessarily a ``stronger'' financial institution. It can, many
say, spread the risk across geographic areas and business
lines. No one wonders what would have happened if it and its
counterparts jumped off a cliff and made billions in unsound
mortgages. We now know. The economy is in a crisis.
The four largest banking companies, many of which have been
bailed out by the United States Government, now control over 40
percent of the Nation's deposits and more than 50 percent of
the U.S. bank assets. This is not in the public interest. A
more diverse financial system would reduce risk and promote
competition, innovation, and the availability of credit to the
consumers of various means and business sizes.
We can prove this. Despite the challenges we face, the
community bank segment of the financial system is still working
and working well. We, the community banks, are open for
business. We are making loans, and we are ready to help all
Americans weather these difficult times without government
assistance.
But I must report that community banks are angry. Almost
every Monday morning they wake up to the news that the
government has bailed out yet another ``too big to fail''
institution, while on Saturdays they hear that the FDIC has
summarily closed one or two ``too small to save'' institutions.
And just recently, the FDIC proposed a huge special premium to
pay for the losses imposed by large institutions.
This inequity must end, and only Congress can do it. The
current situation will damage community banks and the consumers
and the small businesses that we serve. What can we do? ICBA
recommends the following measures.
Congress should direct a fully staffed, interagency task
force to immediately identify systemic risk institutions. They
should be put immediately under Federal supervision. The
Federal systemic risk agency should impose two fees on these
institutions that, one, would compensate the agencies for the
cost of their supervision, and capitalize a systemic risk fund,
comparable to the FDIC, so that the United States taxpayers do
not have to pick up their losses in the future.
The FDIC should impose a systemic risk premium on any
insured bank that is affiliated with a systemic risk firm. The
systemic risk regulator should impose higher capital charges,
to provide a cushion against systemic risk.
The Congress should direct the systemic risk regulator and
the FDIC to develop procedures to resolve the failure of a
systemic risk institution. The Congress should direct the
interagency systemic risk task force to order the breakup of
systemic risk institutions that cause problems for America.
Congress should direct the systemic risk regulator to block
any merger that will result in the creation of a systemic risk
institution in the future. And finally, it should direct the
systemic risk regulator to block any financial activity that
threatens to impose systemic risk.
The current crisis provides you an opportunity to
strengthen our Nation's financial system and the economy by
taking these important steps. They will protect the taxpayers
and create a vibrant banking system where small and large
institutions are able to fairly compete. The ICBA urges
Congress to quickly seize this opportunity.
And I look forward to answering any questions you may have.
Thank you.
[The prepared statement of Mr. Cloutier follows:]
Prepared Statement of C. R. ``Rusty'' Cloutier
__________
Mr. Johnson. Thank you, Mr. Cloutier.
We are in the middle of a vote on the floor. We have time
for at least one more opening statement.
So, Mr. Askew, would you proceed?
TESTIMONY OF WILLIAM ASKEW, SENIOR POLICY ADVISOR, FINANCIAL
SERVICES ROUNDTABLE, WASHINGTON, DC
Mr. Askew. Chairman Conyers, Chairman Johnson, Ranking
Member Coble, and Members of the Committee, I am Bill Askew,
senior advisor to the Financial Services Roundtable.
At this hearing, I am representing the Roundtable, but I
actually wear two hats, as I am also a banker. During the last
25 years, I worked within the antitrust laws as we acquired and
merged a number of banks. I know the Antitrust Division of the
Department of Justice, the Federal Reserve, and antitrust
mechanisms are working well because I have experienced them
firsthand.
Divestitures have been one of the most challenging and
difficult parts of my job over the last 2 decades. It is not
just deposits you give up in a divestiture; it is customers,
associates, brick and mortar, and hard-fought market share, all
built over many years. But, as difficult as this was, the point
is, the system works and antitrust laws do the job as they are
intended to do.
As part of this process, the laws are straightforward.
Banks know when they agree to merge that certain market share
concentrations will probably require divestitures. The Justice
Department selects the specific branches based upon independent
review. This is the function of antitrust law, to review
pending acquisitions and prevent mergers that would
substantially lessen competition or restrain trade in any
section of the country.
Given the number of participants in the market today, we
assess the financial services sector as highly competitive. As
of 2007, the financial industry included 5,000 registered
broker/dealers, 1,250 thrifts, 8,000 credit unions, 7,250
commercial banks, 1,200 life insurance companies, and 2,700
property and casualty companies.
We believe that the current crisis is not a result of
failure of antitrust laws. Rather, it is a combination of
several unprecedented and interrelated financial events: large
amounts of savings investments flowing into the United States
financial system searching for a higher return; a booming
housing market with home prices increasing at record levels,
served by an under-regulated mortgage lending engine;
innovation in largely unregulated credit derivatives,
collateralized debt obligations, and credit default swaps; and
excessive leverage in firms who failed to put the brakes on
their own borrowing in the midst of cheap money supply.
A fragmented system of national and State financial
regulations straddled these market conditions. And, in the end,
no Federal agency was responsible for examining the totality of
the risk created in interconnected firms and markets. Decades
of ad-hoc legislation to regulatory updates, not our antitrust
laws, has created significant gaps in financial regulation that
permitted some financial services firms to operate with minimal
oversight.
To address these shortcomings, the Roundtable has developed
a proposed financial regulatory architecture, as illustrated in
my written testimony. It has six key features.
First, we propose an expansion of the President's Working
Group with the Financial Markets Coordinating Council. Second,
to address systemic risk, we propose that the Federal Reserve
be authorized to act as a market stability regulator.
Third, to eliminate gaps in regulation, we propose the
consolidation of several existing Federal agencies into a
single national financial institutions regulator. Fourth, to
focus greater attention on the stability of the financial
markets, the creation of a national capital markets agency.
Fifth, we propose the Federal Deposit Insurance Corporation
be reconstituted as an insurer for bank deposits, retail
insurance policies written by nationally chartered insurance
companies, and for investors who have claims against broker/
dealers. Finally, as the market stability regulator interacts
with regulators, there is an evident need to create a national
insurance regulator.
Mr. Chairman, as a result of this crisis, some financial
firms have been labeled ``too big to fail.'' Their counterparty
obligations and global reach required that they be treated by
the Fed and Treasury differently than typical institutions. It
does not, however, make them examples of market power in the
truest sense of the antitrust law. The trouble in the financial
services sector has exposed severe flaws, regulatory and
otherwise, which I have detailed, but a lack of competition and
choice for consumers is not one of them.
We commend you and the other Members of Congress for your
work to modernize and strengthen financial regulations. This
work is of the highest priority. And it will, I am confident,
produce a regulatory regime that will help us and every
American consumer and the companies with whom they choose to do
business emerge from this crisis stronger than before.
Thank you. I look forward to answering your questions.
[The prepared statement of Mr. Askew follows:]
Prepared Statement of William Askew
__________
Mr. Johnson. Thank you, Mr. Askew.
And, at this time, it would be best for us to go into a
recess. We will be back in about maybe 20, 25 minutes. We
appreciate you all's patience. Thank you.
[Recess.]
Mr. Johnson. We will call the hearing back into order and
give you our appreciation for your time.
And thank you for your statement, Mr. Askew.
And now we will turn it over to Ms. Garza.
TESTIMONY OF DEBORAH A. GARZA, FORMER ASSISTANT ATTORNEY
GENERAL, DIVISION OF ANTITRUST, U.S. DEPARTMENT OF JUSTICE,
WASHINGTON, DC
Ms. Garza. Thank you, Chairman Johnson, Ranking Member
Coble, and when they get here, if they do, other distinguished
Members of the House Judiciary Committee Subcommittee on Courts
and Competition Policy. It is a privilege to be invited to
speak today about the role of antitrust enforcement in the
current financial crisis.
I am not appearing today on behalf of any organization. I
do not purport to express views of either the Antitrust
Modernization Commission or the Justice Department. However, my
written statement does discuss several relevant recommendations
of the AMC.
In addition to discussing those recommendations, my written
testimony makes a few points in response to the Subcommittee's
specific question about what role antitrust should play in bank
mergers today, particularly those funded by the Troubled Asset
Relief Program, or TARP, and whether the antitrust laws should
be used to block mergers on the basis that the resulting
financial firms might subsequently be deemed ``too big to
fail.''
To briefly summarize, first, antitrust enforcement and
sound competition policy remain relevant in the current
financial crisis. Competitively operating financial markets
drive economic growth and ensure that consumers benefit from
lower prices, higher quality, innovation, and diversity of
products. Although we urgently need to strengthen and protect
the banking system in order to prevent further deterioration of
the economy, we must also be mindful of the longer-term
competitive effects of consolidation.
Second, there is no apparent necessary conflict between
current antitrust enforcement policy and achieving stability in
banking markets. The Justice Department's Antitrust Division
should continue to assess the likely competitive effects of
mergers, including those funded through TARP or involving banks
in which the U.S. Government has taken an equity interest.
Third, there is no evidence that the current economic
crisis resulted from a failure of antitrust merger enforcement
in the banking industry or that current merger law needs to be
changed to address bank mergers.
Fourth, antitrust enforcement should continue to focus on
whether markets are functioning competitively rather than
whether a bank or other financial firm is too big or too
systematically significant to fail. Those concepts present
political and regulatory issues that are better handled outside
the realm of antitrust enforcement.
The AMC made six recommendations relevant to the
Subcommittee's questions.
One, the AMC recommended that there is no need to revise
the antitrust laws to apply different standards to different
industries. Current law, including the Horizontal Merger
Guidelines applied by the Antitrust Division, is sufficiently
flexible to address specific competitive circumstances in the
banking or any other industry.
Secondly, the AMC recommended that there is no need to
revise section 7 of the Clayton Act or the general framework
used by the enforcement agencies and courts to assess mergers.
The AMC found broad-based consensus that merger enforcement
policy has become increasingly predictable, transparent, and
analytically sound. This has resulted in a broad consensus in
support of current enforcement policy, which has become the
paradigm for enforcement around the world.
Third, the AMC recommended that the Antitrust Division and
the Federal Trade Commission should work to increase
understanding of the basis for and the efficacy of U.S. merger
enforcement policy. Notwithstanding the general consensus that
exists in support of current policy, the empirical basis
supporting assumptions about the effect of concentration, for
example, is arguably limited. Although some studies in the
banking industry suggest that there is a relationship between
concentration and market power, there is substantially less
consensus about the level at which antitrust should bite.
Focused study of this issue could improve the enforcement
authority's ability effectively to enforce the antitrust laws.
Extrapolating from this recommendation, it may be an
appropriate time to review the empirical data and existing
studies.
Fourth, the AMC recommended that the Antitrust Division and
the Federal Trade Commission should increase the transparency
of their decision-making to enhance public understanding of the
agency's merger enforcement policy. It may be a good time for
the Antitrust Division to focus such efforts specifically on
bank mergers.
Fifth, the AMC recommended that Congress should not
displace free-market competition without extensive, careful
analysis and compelling evidence that either competition cannot
achieve important societal goals that trump consumer welfare or
a market failure requires the regulation of prices, costs, and
entry in place of competition. Failing to enforce the antitrust
laws where they would otherwise be enforced under current
policy is unlikely to resolve the current economic crisis, but
it could cause further harm to the economy in the future after
markets have stabilized.
Finally, the AMC recommended that even in industries
subject to economic regulation, such as the banking industry,
the antitrust agencies should have full merger enforcement
authority under the Clayton Act. The bank merger review regime
closely fits the model proposed by the AMC.
Thank you for your attention, and I look forward to
answering any questions.
[The prepared statement of Ms. Garza follows:]
Prepared Statement of Deborah A. Garza
__________
Mr. Johnson. Thank you, Ms. Garza.
And next, and certainly not least, Dr. Cooper, would you
grace us with your presentation?
TESTIMONY OF MARK N. COOPER, DIRECTOR OF RESEARCH, CONSUMER
FEDERATION OF AMERICA, WASHINGTON, DC
Mr. Cooper. Thank you, Mr. Chairman, Members of the
Committee.
This hearing is about one of the most important problems
arising in the inadequately regulated financial sector that has
plunged this Nation into the worst economic crisis in three-
quarters of a century, the moral hazard of ``too big to fail.''
But the technical definition of ``moral hazard'' does not
convey the full implications of this problem in the current
financial crisis, so let me put a finer point on it: Capitalism
without bankruptcy is like Catholicism without hell. It lacks a
sufficiently strong motivational mechanism to ensure good
behavior.
The financial system never should have been allowed to
become exposed to a plague of banks, shadow banks, and
financial products that are too big to fail. And, worse still,
we have discovered that it is not only size that kills in the
financial sector, but complexity and lack of transparency.
Complex and opaque products and interconnections among firms
that spread like a virus through the financial system and are
nearly impossible to unwind also pose systemic risk.
The bipartisan theory of market fundamentalism that got us
into this current mess offered the proposition that all we
needed to protect us from these problems was the market. But
Alan Greenspan, the high priest of market fundamentalism,
recently admitted that there is a flaw in his theory. Quote,
``Those of us who looked to the self-interest of lending
institutions to protect shareholders' equity, myself included,
are in a state of shocked disbelief. I made a mistake in
presuming that the self-interest of organizations, specifically
banks and others, were such that they were best capable of
protecting their own shareholders and their equity in their
firms.'' If they can't protect the private interest, you can
imagine the mess they make of the public interest.
The flaw in market fundamentalism teaches us that
competition alone is not enough to ensure the proper
functioning of the financial system. It is clear that the only
way to prevent the public from being exposed to the moral
hazard of ``too big or too complicated to fail'' is to regulate
financial institutions and products in a manner that imposes
effective discipline on their behavior.
And regulation must also address the other problems that
afflict this inadequately regulated financial sector, including
asymmetric information, agency, conflicts of interest, perverse
incentives, and unfairness. All of these are well beyond the
reach of the antitrust laws.
Effective, prudential regulation should establish the
framework within which competition works. When the New Deal
created the institutions of prudential regulation to repair the
financial sector after the crash that followed the Roaring
Twenties, it did not repeal the antitrust laws; it layered
prudential regulation atop the antitrust laws. The result was a
most remarkable half-century, the only half-century that was
free of a major domestic financial crisis in the history of the
Republic.
There is much to do to restore effective regulation but
also much to restore effective antitrust oversight. Let me
suggest four critical steps that would have helped to reduce
the size of this problem. Could never have solved it, but it
might have helped to reduce it.
First, Federal authorities should take their own guidelines
more seriously, challenging mergers more consistently in highly
concentrated markets. The theory of the dynamic duopoly has
proven to be just as wrongheaded as market fundamentalism.
Second, antitrust authorities must return to the
fundamentals of head-to-head competition as the foundation of
antitrust action. Intermodal and potential competition have
simply proved ineffective in disciplining market power. Head-
to-head competition is what we need.
Third, antitrust has given far too much deference to
efficiency at the expense of competition. The assumption that
private actors will be perceptive and well-intentioned in their
pursuit of efficiency and share efficiency gains with
consumers, even where competition is feeble, never made any
sense. And in light of the collapse of market fundamentalism,
it must no longer be relied upon. Private actors have proven
that they are at least as likely to be myopic, misinformed, and
maleficent.
Fourth, the digital economy of the 21st century is made up
of platforms in which layers of complementary products and
services sit atop one another, and they are closely
interconnected, frequently through technology. This renders the
threat of vertical leverage much greater than was the case in
the physical markets of the 19th and 20th centuries. Tying,
anticompetitive bundling, and exclusionary conduct take on much
greater significance.
The need for reform does not demand a radical new
experiment. Rather, it demands a return to the traditional
values, institutions, and practices of progressive capitalism
that served us well in the half-century after the New Deal. The
market fundamentalism of the past 30 years was the radical
experiment, and it has failed miserably. It is time for us to
abandon the market fundamentalist view that sees regulation and
antitrust as the ex-post cleanup after the occasional market
failure, instead viewing antitrust and regulation as the ex-
ante prophylaxis to prevent market failure.
Thank you.
[The prepared statement of Mr. Cooper follows:]
Prepared Statement of Mark Cooper
__________
Mr. Johnson. Thank you, Dr. Cooper.
I appreciate, and I am sure we all do, the testimony of you
all on this panel.
Without objection, Members as well as witnesses will have 5
legislative days within which to submit any additional written
questions and responses. Without objection, the record will
remain open for at least 5 legislative days for submission of
any additional materials.
And again, I want to thank everyone for your patience, and
it is now time for questions. I will yield to myself 5 minutes
for that purpose, and we will be enforcing the 5-minute rule
among Congressional Representatives as well, though we may go
into a second round of questions.
Looking back over how some of these financial institutions
became so big and how the Federal Government responded to their
near failures, what are the key lessons that Congress should
learn from this economic crisis that we find ourselves in?
And I would like for each of you to answer that question,
starting with Mr. Foer.
Mr. Foer. Well, if we might focus on antitrust, the
question, I think we have all pretty much agreed that
antitrust's actual responsibility for the kinds of conglomerate
problems we see now is not a failure of enforcement so much as
the absence of authority to actually deal with a conglomerate
merger.
Our merger policy is if there is a direct horizontal
overlap, then we eliminate the overlap if it is anti-
competitive, and we allow the merger to occur.
So to the extent that we are worried about creating very
large and complicated organizations whose effects of an
eventual failure need to be predicted far down the road, a very
difficult prediction, we just don't have a mechanism for
dealing with that.
There are other antitrust issues that might go in here, but
I don't think the issues that we are looking at are
concentration issues in themselves. There is a lot of
competition out there.
On the other hand, had we been taking more concern about
high levels of concentration, it is possible that some of the
very large institutions we are dealing with over time might not
have gotten to be this large. And in that regard, one other
area I would mention is the lemming effect.
A lot of times we have a merger that we know is going to
kick off a series of additional mergers, and yet we don't have
a good mechanism for stopping that in its tracks. The agencies
typically say we will look at one merger at a time. I will give
you an example right now. You have got Pfizer and Wyeth, and at
the same time you have got Schering and Merck, and you have got
discussions of at least two, maybe three other mergers that
will highly concentrate the pharmaceutical industry virtually
overnight if they all go through.
I think we need to be able to look at these together. Who
knows whether we are going to create--letting these go through
one at a time, each one with a couple of overlaps that get laid
off, but the companies keep getting bigger and bigger and fewer
and fewer, whether we might be creating a risk, a systemic risk
right there in that industry.
Mr. Johnson. Mr. Foer, thank you for your response. And
don't forget about the Ticket Master/Live Nation situation as
well.
Mr. Cloutier. Mr. Chairman, I will give you a good example.
In the year 2000, there was a hearing held in this building by
Congressman Baker on Citicorp buying the associates. Quite a
bit of discussion was held then about the predatory nature of
the whole Citicorp operation, which later they pled guilty to
that, as you are well aware of. They paid a $200 million fine
to the Federal Trade Commission. Citicorp was built on that
basis.
And what we have today--and I know many of my colleagues
here say, well, we have got good competition--I would like
anybody to explain to me how you compete with somebody who has
the full faith and credit of the United States Government. So
far Citicorp has received guarantees on their loans of $380
billion, they have a $10 billion guarantee by the FDIC, and I
mean they are too big to fail. It is a perfect example. There
are a number of other of the large eight that testified before
the House Banking Committee that all had the guarantees of the
United States Government. That makes it very difficult to
compete again, and they already have got to a size where they
are too big to fail, and Congress needs to take immediate
action to do something about this. Either that or we continue
to pump trillions of dollars into these institutions that are,
to a point that they are not competitive, don't have to be
competitive.
I would use as another example AIG, who just told the
President, ``Good luck. We are doing what we want with our
businesses.''
Mr. Johnson. What actions do you think would be appropriate
for Congress to make at this particular time?
Mr. Cloutier. When Congress sits down and looks at the fact
that the eight largest institutions in America now control 66
percent of the assets in this country, I think that is an anti-
competitive, monopoly-type of situation and needs to be looked
at very closely by this Committee. And I think that no one
would disagree when you have that much concentration in a
marketplace, they have some real questions about
competitiveness.
I understand they say, well, in every market it is
competitive, but the fact of the matter is these people control
the financial system of America, and it is something that needs
to be looked at very carefully.
And all of these mergers were done with, ``Don't worry. We
have got control of it.'' I have been told that so many times
it is unbelievable. And look at where it has led us. We are
bailing out the largest financial institutions in America.
Mr. Johnson. Thank you, sir.
It looks like my time has now expired. So, I will now turn
it over to the Ranking Member, Howard Coble, for questions.
Mr. Coble. Thank you, Mr. Chairman. Good to have you all
with us today, Panel.
Mr. Askew, the Financial Services Roundtable is calling for
a streamlined financial regulator, including a national
insurance regulator. The insurance industry's antitrust
exemption, McCarran-Ferguson, as we all know is tied to the
State regulation of insurance. Has Roundtable taken a position
on the McCarran-Ferguson appeal?
Mr. Askew. Congressman, we agree with the advent of a
national insurance regulator that we talk about. We would agree
with then the antitrust laws applying to the national
insurance.
Mr. Coble. So you would not be in favor of repealing
McCarran-Ferguson, or would you?
Mr. Askew. I am--we would agree with the--I guess--I don't
want to misanswer your question. I will get you a written
answer. I don't want to misstate the opinion of the Roundtable.
Mr. Coble. I can appreciate that. And for the record, Mr.
Chairman, I have always been comfortable with State regulation,
for what that is worth, but I will be glad to hear from you.
Mr. Askew, what is Roundtable's position toward Gramm-
Leach-Bliley and Riegle-Neal and do you think those laws have
pretty much accomplished what they were set out to do?
Mr. Askew. Congressman, we certainly feel those laws have
done what they were set out to do, and we feel comfortable with
how they are operating.
Mr. Coble. Ms. Garza, what is the process for antitrust
reviews for mergers utilizing TARP funds, A, and B, is it
different than the traditional Hart-Scott-Rodino filing
process? Is this consistent with the transparency that the
Antitrust Modernization Commission recommended?
Again, I threw three balls at you simultaneously.
Ms. Garza. The fact that the institution may have been the
recipient of TARP funds really doesn't affect the process for
review of the transaction. Antitrust review of bank mergers is
governed by a set of statutes. It is a little complicated, the
extent to which Hart-Scott-Rodino applies. But when there is a
bank consolidation that is reviewed by the Federal banking
agencies, the Justice Department does receive information at
the same time that the banking agencies do relevant to the
transaction, and there is a 30-day period, and comparable to
the HSR, Hart-Scott-Rodino, period, in which they look at the
transaction and report to the banking authorities.
The way that it has worked, in my understanding, is that
the Justice Department Antitrust Division has had the
opportunity to look at each of the transactions that have
occurred where one of the parties was the recipient of TARP
funds. So it didn't affect the review of it.
Now, it is the case that some of those transactions were
reviewed on an extremely expedited basis because of the
exigencies of the circumstances, not because of TARP funds but
because of the economic situation of one of the parties.
In those cases, my understanding is that the Antitrust
Division was able to conduct the review that it needed to
conduct. In the PNC-National Citicorp transaction, for example,
the agency did look at the transaction--6 or 7 weeks, I think,
is what DOJ took to review it--and did require divestitures,
which were agreed to by the parties and incorporated in the
order of the Federal Reserve Board.
Mr. Coble. Thank you. I think I have time for one more
quick question.
Mr. Cloutier, in your testimony you indicate that the four
largest financial institutions control 40 percent of the
Nation's deposits. Riegle-Neal limits bank holding companies to
a maximum of 10 percent of deposits. Would you favor lowering
that percentage?
Mr. Cloutier. Absolutely, sir. And, of course, before this
crisis started Ken Lewis of Bank of America was pushing very
hard to have that level raised. So absolutely we would prefer
lowering it. And be very careful because there are some banks
that would like to raise that limit.
Mr. Coble. And where would you like to lower it, Mr.
Cloutier?
Mr. Cloutier. I think 5 percent would be a good place to
start to lower it to that level and make sure the 20 top banks
in America couldn't control more than 100 percent of the
deposits.
Mr. Coble. I want to beat the illumination of that red
light so the Chairman won't come after me with his buggy whip.
Mr. Askew, if you will get back on my question, I would
appreciate that.
Mr. Chairman, I yield back.
Mr. Johnson. Thank you, Mr. Coble.
Next we will hear from our esteemed Chairman of the full
Committee, Chairman Conyers.
Mr. Conyers. Thank you. I ask unanimous consent to put my
statement in the record at this time.
Mr. Johnson. Without objection.
And I was wondering why I saw some of my brethren from the
other side of the aisle right here at your spot.
And I don't get any laughs on that. But you all know what I
meant.
Go ahead, Mr. Chairman.
Mr. Conyers. This is an important hearing, and I really
appreciate the selection of witnesses.
Dr. Cooper, of course, has made the statement which I would
like to invite your reactions to. And I am sure heartened by
Howard Coble's review of where McCarran-Ferguson and Hart-
Scott-Rodino come in.
But look at AIG, for example: $178 million in bonuses, 73
people got more than a million dollars, some of them not even
citizens. And they explained to us, well, it is contractual,
Members of Congress. We contracted to do that and you don't
expect us to go back on our word, do you?
AIG, nine mergers since 1960. Nine big ones. And 5,400
mergers just between 1990 and 2005 alone. From Reagan on,
mergers have been growing and growing. But it was only, I think
under perhaps the Bush administration, that they really got
into what we call mega mergers, 74 mergers in which each merger
partner had more than $10 billion in assets.
So I am not comfortable to think that the rules are working
okay and that mergers are all right. I think there is a
connection. When Greenspan can come clean, I don't think it is
hard for any of us not to realize that we have got to do
something about it.
I have never been comfortable about all the mergers that
were going on, all the time, one Administration after the
other, including the Democratic administrations.
I would like to get your reactions on that, starting with
Dr. Cooper and then Ms. Garza.
Mr. Cooper. Well, it is difficult to see how the antitrust
laws will solve the underlying problem of ``too big to fail.''
I do believe that that problem needs to be solved in prudential
regulation, and I will give you two examples. And what will
happen, however, is that effective prudential regulation will
make the mergers go away because essentially what we have to do
is make--any financial entity has to have the capital and pay
the insurance so that its failure will not need recourse to the
Treasury.
So what we need is dramatically escalating capital
requirements as you get bigger and bigger. And, of course, the
bankers will tell you if you require me to have more and more
capital I can't leverage as much, and so I won't be able to do
as many deals. Well, then that is exactly what we want, is we
want them not to do as many deals.
Second of all, if you dramatically increase the insurance
premiums and the capital requirements, should they fail the
insurance fund would have the resources and the capital would
be available to resolve these institutions.
Essentially, what we have been told is that it is
impossible to resolve AIG without pulling down other
institutions. But if AIG had a very high capital requirement,
they would have the assets available to resolve their own mess.
If they had been required to pay heavy insurance premiums,
those resources would be available to the resolution agency to
resolve the mess without recourse to the Treasury.
So I believe that if we intend to be serious about
preventing ``too big to fail,'' we will do so in a manner
through prudential regulation, which will also solve your
merger concern.
Mr. Conyers. Can I ask for a little additional time, Mr.
Chairman.
Mr. Johnson. Sure.
Mr. Conyers. Can I ask Mr. Foer's feelings about this part
of our hearing.
Mr. Foer. Well, sir, I agree that the problem for this
hearing, the ``too big to fail'' problem, is something beyond
what antitrust was really able to do with.
Now, the Cellar-Kefauver Act came out of this Committee. It
said that we were going to deal with mergers that concentrate
the economy in their incipiency. As the Chicago School became
dominant in the setting of antitrust policy, with microeconomic
analysis at the core, the burden shifted. The burden that I
think Congress wanted back in the 1950's is that we would
really be worried about mergers and the tendencies they have
toward concentration. And we moved away from that and in a way
we reversed our presumptions. The presumption today is that
mergers are generally and mostly beneficial because they are
efficient, and only a few represent problems.
What I would say is the more we know about these things,
the more worried we should be that at least very large mergers
at the top of the scale we should be reversing the burden, and
instead of assuming that they are good and forcing the
government to prove that they are bad, we should make the
opposite assumption. And if we could work with that, only for
the very largest and most concentrating types of mergers, I
think we might get back toward what Congress originally was
after.
Mr. Conyers. Ms. Garza.
Ms. Garza. Obviously, we have a lot of reason to be
concerned about the situation we find ourselves in today, but I
think that antitrust has had very little role to play in the
reasons we are where we are.
It is not so much that the entities that are being bailed
out are large. It is what they have done. ``Too big to fail,''
I think there is a relative consensus here, is really not an
antitrust concept. Size is certainly relevant to the antitrust
analysis of a merger in the sense that it is a starting point--
size in terms of market share--is certainly a starting point in
the antitrust analysis, but it is only that.
The antitrust analysis today this has evolved far beyond a
knee-jerk reaction to a ``big is bad'' philosophy and it now
rests on a very sophisticated assessment of the likelihood that
a merger will result in the acquisition or growth of market
power based on solid economic principles. And it would be, I
think, a mistake to move backward from that. I don't know how
you would incorporate a standard or apply a standard that said
simply size is a problem.
Having said that, I think, you know, and we looked at this,
as you know, at the AMC. We spent 3 years looking in part at
the very question of whether current merger enforcement policy
was properly calibrated, whether we were not stopping mergers
that we should have stopped or stopping mergers that we
shouldn't have stopped.
And the general consensus was that merger enforcement
policy had evolved to about the right place, where we were
carefully considering the effects of a merger on market power,
on consumer welfare, but also allowing entities to engage in
transactions that either were not anti-competitive or that
benefited the economy through efficiencies.
That balance, I think, is the correct way to go.
Now in the banking area, as I said in my written statement,
it may be appropriate at this time to shed some light on this,
to look at the number of studies that have been conducted and
to consider whether or not increased consolidation in the
banking industry has resulted in an effect of higher amounts
being paid for loans, lower amounts being paid for deposits,
other competitive effects.
It would be worthwhile to look and see whether divestitures
that have been ordered in past transactions have been effective
in what they sought to accomplish. It would be worthwhile to
look at what the effects are on the competitive dynamics of a
marketplace when you have government intervention. Either
government owning, taking partial stake in companies, or
subsidizing the operations of companies. It would be useful to
take a look at whether or not national concentration has
affected the competitiveness of the interbank money markets.
All of those things are things to look at. But before
Congress does anything, I would suggest that it consider asking
the Antitrust Division and the banking agencies to look at the
data so that when you do act you are acting on a full sense on
what the actual facts are.
Mr. Conyers. Thank you.
Mr. Johnson. You are welcome, Mr. Chairman.
We are joined by our colleague from Texas, Ms. Sheila
Jackson Lee. Welcome, Congresswoman.
And now we will go to Mr. Chaffetz.
Mr. Chaffetz. Thank you, Mr. Chairman.
Mr. Cloutier, has the TARP process been sufficiently
transparent from your perspective and that of the Independent
Community Bankers of America?
Mr. Cloutier. You know, we don't have enough information
yet on the total TARP program to know if it is totally
transparent or not. I have to tell you very honestly, Mr.
Congressman, that we wake up every morning under some new rules
and they continue to change. So you know, is it TARP I, TARP
II? It continues to change. And the bailouts, as we have seen
with AIG, continue to change.
Mr. Chaffetz. Ms. Garza, from a purely procedural view,
what steps should the Obama administration take, if any, to
ensure the transparency of the merger review process in the
context of the TARP funds?
Ms. Garza. You know, the Antitrust Modernization Commission
made the recommendation in fact that the agencies should focus
on transparency, and the agencies have taken steps toward that
with the merger guideline speeches, testimony, reports.
I actually have said in my written statement I think that
it may be appropriate to focus some of those efforts more
specifically on the bank mergers. It is important for the
public to have confidence in what the antitrust agencies are
doing, and it would help build confidence in not only what the
government is doing but also that the antitrust agencies are
doing their job.
So I think it would help with that if the new
Administration would focus on explaining not only to Congress
but to the public how it is that they are conducting their
investigations in these, with respect to, these bank
consolidations that involve TARP funds, where enforcement
action is taken, why it is not being taken.
I have no particular reason to believe that the agencies
won't act appropriately, but I do think it is useful for them
to explain the standards they are applying and explain the
decision making. So I think that would be good.
The other thing I suggested is that it may be appropriate
for the agency to do something similar to what it did recently
in the telecom industry, which is to have a symposium and
report on the state of competition in the financial industry
and to clarify what its standards are going forward.
I noticed that the incoming head of the Antitrust Division
did indicate she had a desire to revisit how bank mergers were
being looked at. Hopefully, that revisiting will lead to a
transparent policy of discovery in this area, discovery with
respect to the data that exists on where we are now and then a
discussion about what should be done going forward.
Mr. Chaffetz. Mr. Foer, you seem to be in agreement with
Ms. Garza and Mr. Askew that antitrust analysis is not to blame
for the current crisis, rather it is a problem of the
competition policy more broadly defined.
If this is not a problem of antitrust, why do you advocate
for the creation of a new deputy provision within Antitrust?
Mr. Foer. There are two issues here. Competition policy
really is anything that the government does that affects
competition, and that includes your sectoral regulation.
Antitrust is just limited to your three laws, the Clayton,
Sherman, and FTC Act, primarily. The Antitrust Division has
always had an advocacy function, where it goes before other
agencies and it explains what the competition implications of a
given regulation or even a legislative proposal would be, and
that is a very proper and important function of the Antitrust
Division.
No, what I am saying is that this emergency recession
situation where we are rapidly restructuring the economy and
having huge effects on competition is so important that there
should be one person designated to report to the Assistant
Attorney General, but to have the backing of Congress to sit
there in all the meetings, the various planning meetings, to be
able to talk with the Secretary of the Treasury, with the
Federal Reserve Bank, and with others in the White House who
are doing the planning and to make sure that the voice for
competition is heard, because we are going to be making some
very tough decisions with long-term consequences, and in some
cases it will be necessary to make decisions that are anti-
competitive. But let us keep those to the minimum when they are
absolutely required.
And the other thing is we have got to deal with this in the
future. We shouldn't think that these decisions now are
necessarily permanent. We got to come back to all of this after
the crisis is over and we have resolved the crisis and then
figure out where we want to be, and that is going to take a
whole new inventory of where we are and it is going to take
building a consensus about where we want to go. I think it is
too soon to do that now because we don't know how far down we
are going. We don't know when we are going to be at the bottom.
Mr. Chaffetz. Thank you, Mr. Chairman.
Mr. Johnson. Thank you, sir.
Next, we will have questions from Congresswoman Sheila
Jackson Lee.
Ms. Jackson Lee. Thank you very much, Mr. Chairman. Let me
thank you for holding this hearing, you as well as the Ranking
Member, Mr. Coble from North Carolina, and certainly the full
Committee Chair and the Ranking Member.
I am going to, I guess, be the skunk of the party and
indicate that, one, I believe the Judiciary Committee has an
amazingly instrumental and intricately important role, if you
will, on this whole question of reordering our markets, not to
suggest that everyone engaged should be held criminally liable
in the markets, no. But I think the partnership of regulation
and enforcement is key. And not so much enforcement, for those
of you who are certainly proponents of the free market, that we
would kill the free market, but I am not totally convinced that
the antitrust laws don't have an important role that can be
utilized.
And let me just indicate that one of the issues of
antitrust laws have been monopolization. And I imagine I would
be refuted, if you will, on the issue of monopolization of the
banking industry by the fact that they carry different names,
and you are absolutely right. So you can't say that Citigroup
is a monopoly because their counterparts, their equals, are in
the business. But you can say that big banks create a monopoly,
and it may be that they are intrinsically part of the
capitalistic system. But the named big banks or the entity big
banks are a monopoly. And you can point out to me what little
guy has risen to be a big guy in the last 50 years, short of
the big guys buying them up, and you might say, well, the big
guys have now added and so that little guy finally got in. But
no, that little guy was eaten up.
So I frankly believe that maybe we need to breath life into
the antitrust laws that begin to look at industries in a
monopolistic or that they are monopolistic in a fashion in
terms of how they bar growth from others who are competing
against them.
Some would say community banks, regional banks, and private
banks are not competing. They are. Now, these banks have been
very proud to say, for example, that it was not us and they are
still doing well. They didn't take the marketplace.
Mr. Cloutier, you are familiar that you didn't probably
take the kinds of mortgages. You probably knew a lot of those
who came into your bank that you gave mortgages to. I don't
want to suggest that we don't want to spread the opportunity of
home ownership. I was certainly part of that, but I certainly
wasn't part of the predatory-type form, the subprime, you know,
the people who could afford regular mortgages were getting
subprime. Just a skewed marketplace.
So let me raise some questions.
AIG a is a monopoly. How do we allow one company to be the
insurer of everything, making bread, going across the street
making movies. That is monopolistic. Now, that is insurance. It
is a marketplace. It has a marketplace role. I, frankly,
believe that our laws have a responsibility, antitrust laws, to
address that bigness that injures the marketplace because what
happens is AIG is so big and the regulatory process is so
limited.
So Mr. Cloutier, since you seem to be the lone wolf trying
to argue for this idea of having some involvement, how would
you suggest that Congress be creative in its thinking on using
antitrust laws that I frankly believe need to be updated. And I
want to thank Theodore Roosevelt for his wiseness because we
have done well since. But how would you think we would
intervene if we were to use antitrust laws?
Mr. Cloutier. Well, as I mentioned a while ago in answer to
a question, I think the first thing you do is you drop the
limit on what a large bank particularly can hold in assets and
I think you----
Ms. Jackson Lee. Do we kill the market that way?
Mr. Cloutier. You won't kill the market. I guarantee you in
the State of Texas, if Citicorp had to sell branches in the
State of Texas, Don Adams would buy them all, and the ones he
wouldn't buy Don Powell would. So, you know, you are going to
have very good competition.
And I will tell you that I would just point out that
yesterday President Obama and Secretary Geithner reached out to
the community bankers--I happen to have the picture here of our
current chairman, who lives in the State of Texas, who made the
presentation yesterday with the President--about small business
lending and getting back to the core of America in that type of
lending.
Often when these large CEOs buy these companies, Ms. Lee,
it is amazing how much they pay themselves for doing that,
which has led to where we are today.
Ms. Jackson Lee. If the Chairman will indulge me an
additional minute to raise my other question to Ms. Garza.
Thank you, Mr. Cloutier. You are talking about the limits.
Ms. Garza, why don't you think modernized antitrust laws
could be effective? And would you keep an open mind to the
extent there may need to be some modernizing of our laws?
I ask unanimous consent for an additional minute, Mr.
Chairman.
Mr. Johnson. Without objection.
Ms. Jackson Lee. Thank you.
Ms. Garza. Just to be clear, my position isn't that the
antitrust laws have no role to play. My statement is very clear
that I think they do.
Ms. Jackson Lee. Thank you for correcting me. Maybe you
could expand on that.
Ms. Garza. So, for example, while we clearly have an
interest in shoring up the stability of the markets today, what
I have said is that I think we also have to be careful about
consolidation that occurs today that may affect the
competitiveness of the marketplace in the future.
So I don't think that antitrust should be displaced. I
think it has a role to play. But that also says that I don't
think you can lay the current crisis at the foot of antitrust
enforcement. The issues that have brought us to where--the
problems that have brought us to where we are today are much
more complex and different than the size of the institutions,
and people have mentioned what some of those problems are. And
I mentioned them in my paper. Those things have to be dealt
with, but they are beyond the scope of antitrust enforcement.
So what I would suggest is that we don't put the antitrust
laws on the shelf, we don't do what was mistakenly done at the
time of the Depression and say, well, we can't afford the
antitrust laws anymore. I think we can afford the antitrust
laws, and I do believe that the antitrust laws, the way they
are enforced today, are not incompatible with steps that need
to be taken to try to shore up the stability of our financial
markets.
Ms. Jackson Lee. Can we not consider, rather than looking
at the isolated name groups, Citigroup and others, look at the
big banks banking industry in terms of modernizing our
antitrust laws to try to penetrate what--not caused them but to
keep them from doing that again.
Ms. Garza. The structure of the market is an important
thing to look at. And I can't sit here today and say that I
have studied the structure of the market or that I think it is
monopolistic or oligopolistic.
What I do think is that this is something that would be
appropriately tasked to the Antitrust Division to look at. The
Antitrust Division, after all, does have jurisdiction to review
bank mergers. They do have a process that has been in place
since 1995 for looking at bank mergers that does tend to focus
on effects in localized markets where lending is done and
deposits are taken. I think that that process has worked well,
but to the extent there are questions about the effect of
consolidation now, the effect of the interconnectedness,
whether that is having--whether it is affecting prices that are
paid, diversity, et cetera. All of those things I think are
legitimate to look at. But at this point I can't say that I
think antitrust has failed. The only thing I can say is that it
may be worth further investigation of how the markets are
operating.
I agree with Bert Foer. I don't necessarily agree that
there needs to be a new Deputy Assistant Attorney General
appointed, but I do agree with him that the Antitrust Division
and the Justice Department should be at the table when steps
are taken to ensure there is a voice speaking about the
competitive effects of various actions that are taken. I think
the Assistant Attorney General probably can fill that role and
the Attorney General.
Ms. Jackson Lee. I would like to make an inquiry of the
Chair as I thank him for his leadership on this issue. I think
the door that Ms. Garza has opened and the door that I started
out on is we are always playing around the edges of antitrust
law but we might need some creative updating. I know that one
suggestion has been a deputy position and you have disagreed
with it. But a creative updating on how we, in essence,
restrain some of the bad acts that bigness created.
I still think there is a monopolistic scenario with all the
big banks. They are in there together, and I don't think our
antitrust laws fit that. They usually fit a big entity like GM,
but they don't fit the collective, and we may need to deal with
that because we need to get our feet in the door of
enforcement. That might help a lot of our citizens who are
suffering right now, Mr. Chairman.
And I look forward to working with you on that issue, on
that approach.
Mr. Johnson. Thank you, Congresswoman, and your point is
well taken. We will be having discussions and hearings on that
very issue. So thank you.
And the time for this hearing has now expired, and I am
sure that you all are happy.
So, again, without objection, Members will have 5
legislative days to submit any additional written questions
which we will forward to the witnesses and ask that you answer
as promptly as you can and they will be made a part of the
record.
Without objection, the record will remain open for 5
legislative days for the submission of any additional
materials. Again, I want to thank everybody for their time and
their patience.
And this hearing of the Subcommittee on Courts and
Competition Policy is adjourned.
[Whereupon, at 4:29 p.m., the Subcommittee was adjourned.]
A P P E N D I X
----------
Material Submitted for the Hearing Record
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, Chairman, Committee on the
Judiciary, and Members, Subcommittee on Courts and Competition Policy
Thank you, Chairman Johnson, for holding a hearing on this
important issue.
We are in a situation of our own making. We have sat back and let
ourselves be convinced by the argument that bigger is always better.
More than 5400 bank mergers occurred between 1990 and 2005. Those
mergers included 74 ``mega-mergers'' where the buyer and seller each
had more than $10 billion in assets.
As a result of these mergers, the percentage of banking assets and
deposits held by the ten largest banks more than doubled, rising to 55%
and 45%, respectively.
This was done with the approval of the antitrust enforcement
agencies. For years, federal antitrust enforcement has drifted towards
the ``free market'' school of thought, which says that a market with
only two or three huge conglomerates is okay as long as they're
competitive. This school of thought assumes that the market will
correct itself.
But how can you talk about a ``free market'' when CEOs whose
companies went bankrupt walk away with $40 or $50 million?
With incentive structures rewarding short-term risk-taking, Wall
Street is in the business of getting bigger and more complex, and
taking greater risks with other people's money, secure in the fact that
they will reap all of the benefits, squeezing every dime of profit out,
and that the government will bail them out if they fail big enough.
This raises a number of important questions.
First, by picking some banks as winners, and giving them money to
buy their competitors, is the Federal Government creating a whole new
generation of institutions that are ``too big to fail?''
What kind of seat at the table does antitrust get when Treasury
decides which banks get money and which ones don't?
If antitrust law can account for competition from potential
entrants, why can't it also account for systemic risk?
Thank you.
Prepared Statement of the Honorable Sheila Jackson Lee, a
Representative in Congress from the State of Texas, and Member,
Subcommittee on Courts and Competition Policy
Thank you, Mr. Chairman and ranking member for your leadership in
holding today's important oversight hearing on ``Too Big to Fail'': The
Rule of Antitrust Law in Government-Funded Consolidation in the Banking
Industry.'' Today's hearing will examine whether the nation's recent
economic downturn was worsened by the policies regarding the antitrust
laws and the lessons that we should learn to prevent or limit systemic
risk of ``too big to fail'' institutions. This hearing will focus upon
the causes, antitrust enforcement, problems, and possible remedies to
address ``too big to fail'' institutions.
It is interesting that today's hearing comes just a day after
President Obama has signaled that he will freeze releasing additional
TARP funds to AIG because of its mismanagement (i.e., AIG was using
TARP funds to pay for employees bonuses). The TARP bill proscribed the
use of the TARP funds and specified that there would be repercussions
if the TARP funds were used wrongly. AIG has used its funds
inappropriately.
The fist sign of crisis occurred in March 2008 when investment bank
Bear Stearns turned to the federal government and competitor JP Morgan
Chase for assistance in addressing a sudden liquidity crisis. At that
time, the Federal Reserve provided JPMorgan with funds to complete the
merger. Later, in July 2008, the Federal Deposit Insurance Company
seized control of IndyMac, the nation's largest home lender.
In September, the federal government put Fannie Mae and Freddie Mac
into conservatorship. Since August 2008, the federal government has
invested billions of dollars into financial institutions. Much of this
money was given directly to large banking institutions. Other money was
distributed through the Troubled Asset Relief Program. This program was
supposed to increase liquidity in the credit and lending markets. Some
of this money, it was later found was mismanaged and was used to buy
other banks.
The antitrust questions that these events raise are (1) Were these
banks too big to fail and (2) should the antitrust law have prevented
these banks from becoming embedded in the economy such that government
intervention was required?
I am very interested in hearing the testimony today and will listen
with an open mind to whether the antitrust laws have any application to
the present banking situation. On October 3, 2008, under the TARP,
Congress authorized $700 billion for the Treasury to buy troubled assts
to prevent further disruption in the economy. After the Act was passed,
the Administration decided to use a portion of the $700 billion to
recapitalize some of the nation's leading banks by buying their shares.
Despite this purchase by the government, many banks had no intention of
making new loans. In allocating the TARP fund, Treasury made a
determination about which banks would survive and receive funds and
which banks, usually smaller, would not. By the end of 2008, nine of
the largest banks were participating in the TARP program. AIG, Bank of
America, Citigroup all benefitted.
Antitrust does not require that big companies be broken up into
smaller ones. Only monopolization violates the antitrust laws. Section
2 of the Sherman Act governs monopolies. Section 7 of the Clayton Act
prohibits mergers and acquisitions that tend to lessen competition. The
DOJ examines both provisions.
Experts have argued that the mergers should be subject to supply
and demand but they require for the merger to divest if the reviewing
agency determines that it is appropriate. Other experts suggest that
legislation should be introduced to create new standards for merger.
Another group of experts argue that the free market should reign.
I am interested in learning our expert witness' perspective on how
the current economic and financial situation developed. I am also
interested in hearing how antitrust laws can ameliorate the situation.
For some aspects of the present crisis, I believe that there were a
number of conscious decisions undertaken by bankers, financial
institutions, and other lenders that have had a direct and adverse
effect on borrower. I will keep an open mind to the issues. I welcome
today's testimony and I look forward to hearing from today's important
witnesses.
Thank you. I yield back the balance of my time.