Wright: A Step Backward for Antitrust Cases

Notice by the Justice Department that the government will vigorously use antitrust law to restore balance to "distorted" markets such as the banking industry is a plan Professor Joshua Wright feels is misguided.

While banking has traditionally been free from interference by antitrust regulators, some argue that it is time to examine whether some institutions have become such a vital part of the financial system that they are "too big to fail."

Wright disagrees, saying, "We don't have a theory of 'too big to fail' in consumer welfare. We don't have any economic notion of what 'too big to fail' is." He argues that the economic underpinning that drives antitrust cases could be upended.

"Consumer welfare is complicated enough, and [economists] are barely good enough at this in analyzing mergers and cartels," he says, warning that burdening antitrust cases with another layer "could be a huge step backward."

Antitrust's next frontier? The Deal Magazine, May 15, 2009. By Cecile Kohrs Lindell.

"Although the Department of Justice conducts obligatory merger reviews, the agency typically accedes to federal banking regulators regarding bank mergers.

"But some argue that antitrust laws should apply to the financial sector and want antitrust laws to play a central role in checking concentration in the industry. Simon Johnson, an economics professor at the MIT Sloan School of Management, blames ineffective bank regulators for today's financial problems and wants antitrust lawyers to assume some responsibility, particularly by examining whether some institutions have become so critical to the workings of the financial system that they are 'too big to fail.'

Johnson envisions a 'new theory of antitrust' that should be 'fairly bold.' He worries that not only did players such as American International Group Inc., and Bear Stearns Cos. become perceived as too big to fail, but the global financial system had really become 'too complex to fail.' As a result, financial regulators around the world committed trillions propping up troubled financial conglomerates.

"Johnson insists that antitrust remains a better option for dealing with troubled institutions than filing for bankruptcy protection under Chapter 11, as some critics have suggested. Bankruptcy, he says, 'would come with a lot of unknowable, unforeseen problems.'

"Antitrust isn't the only answer to problems in the sector, but 'it could frame the question,' Johnson insists. 'Something has changed. The risks for taxpayers have gone up significantly,' and he argues that people need to seek not only immediate solutions to the crisis but also ask questions about how to regulate the industry in the future."

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