How Obama could prevent firms from becoming 'too big to fail'

Greater enforcement of antitrust laws needed to address deals by investment banking 'Geishas.'

By , Columnist

Like some other nations, the United States faces a "too big to fail" conundrum.Some of its companies made bad decisions and deserve bankruptcy, but they've grown so big that the government keeps bailing them out because their toppling could set off a dangerous chain reaction.

How did America – an international model for antitrust law – get into this jam?

Japanese geishas. Or, at least, investment bankers acting like them, says Nell Minow, editor of the Corporate Library, an independent research group. Bankers cozied up to CEOs at already large companies and told them: "You are such a big, strong man. Wouldn't it be fun to buy something?"

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The actual words are probably different. But the fact is investment bankers do make a point of visiting with CEOs to encourage various mergers, bond and stock issues, and purchases of other firms.

Most deals – more than 70 percent of them – lose money, Ms. Minow says, because the acquiring companies fail to improve efficiency enough to benefit shareholders. Company boards failed to "keep an eye on the ball," she holds, allowing CEOs to go ahead with ambitious plans. And Washington rarely intervened.

But that may be changing. Antitrust experts figure President Obama will revitalize the Federal Trade Commission (FTC) and the antitrust division of the Department of Justice (DOJ), the two agencies primarily responsible for curbing the anticompetitive effects of mergers.

During his presidential campaign, Mr. Obama charged that the Bush administration had "what may be the weakest record of antitrust enforcement of any administration in the last half century." Between 1996 and 2000, Obama noted, the FTC and the DOJ challenged, on average, more than 70 mergers a year on grounds that they would harm consumers. In contrast, the two agencies averaged only 33 merger challenges a year from 2001 through 2006.

Obama's appointment of Christine Varney as assistant attorney general for antitrust and Jon Leibowitz as chairman of the FTC is a signal of a more aggressive antitrust policy, says Albert Foer, president of the American Antitrust Institute (AAI).

Unfavorable court decisions could weaken the Obama appointees' antitrust push, notes Mr. Foer. Perhaps helpful, though, will be a change in the nation's mood as a result of the financial crisis "from worship of big corporations to skepticism of the role they play," he says.

It's reported that many in the bureaucracy of these antitrust agencies are keen to challenge more merger proposals.

Obama "has got more important stuff on his plate" than antitrust policy, notes F. M. Scherer, professor of public policy at Harvard University. But one signal of his administration's intentions will be the filing of more requests for additional information from companies announcing mergers and acquisitions, he notes.

Renewed Washington action on antitrust policy will also empower more activity at the state level, says Diana Moss, vice president of AAI. The US has been a model for an explosion of antitrust activities in more than 100 nations over the past 15 to 20 years, she says.

Preventing future mergers that risk creating a "too big to fail" problem may require new legislation, cautions Foer, since current antitrust law protects only against large mergers that threaten significantly to reduce head-to-head competition in specific product and geographic markets.

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