It seems clear from ongoing controversies over how to deal with nearly insolvent auto companies or financial conglomerates like Citigroup or Bank of America that neither our society or government has clear views on whether bigness is good or bad in U.S. corporations.
Should we force these behemoths to shed divisions and slim down? That seems the case with the auto companies. Or do we encourage, even coerce them to grow, as reportedly happened in Bank of America’s shotgun merger with Merrill Lynch.
What is it that we want? Do we want big banks and industrial companies or not? Should we try to prevent mergers between competitors, as we did for decades, or encourage them? Right now we have no coherent policy. Instead we make rushed ad hoc decisions in response to emergencies. Is there a better policy?
Some 130 years ago, many saw concentrated power in manufacturing and finance as a danger to the public. Monopoly power on the part of railroads, meatpacking companies, the petroleum, sugar, tobacco, steel and farm machinery industries allowed concentrated firms to abuse the public with unjustifiably high prices.
We enacted the Interstate Commerce Commission to regulate railroad rates and the 1890 Sherman Antitrust Act to break up monopolies formed by de facto mergers. Once we got a president, Teddy Roosevelt, willing to enforce the act, we broke up Standard Oil, International Harvester and other “illegal combinations in restraint of trade,” in the words of the act.
Subsequent administrations followed suit. The antitrust division of the Justice Department was active and eventually was called to rule on even minor mergers. There was little difference between Republican and Democratic administrations. The Johnson Administration filed suit against IBM just a few days before Richard Nixon was inaugurated, but the new administration took the baton and prosecuted the suit vigorously. The Nixon administration itself initiated the suit that broke up ATT.
In the 1970s and 1980s, the underlying economy, presidential attitudes and public opinion all changed. Imports were a bigger factor in competition than the structure of domestic industries. The election of Ronald Reagan initiated a long-term swing to less government regulation, a swing the electorate generally ratified.
Some industries concentrated because of technological change. Four different companies—Boeing, Convair, Douglas and Lockheed—produced first-generation jet airliners. But the number shrank from four to three to two and finally to one with Boeing’s 1997 takeover of McDonnell Douglas. Jetliners had become extremely complex and expensive to design. The market was limited and Airbus posed increasing competition. No one blinked an eye.
Often mergers that would have been banned in the 1950s were quietly encouraged in the 1980s as an alternative to the complete collapse of rust-belt industries. One shaky steel company would buy up an even shakier one. Steel imports enforced competition and it was better to allow consolidation and keep some steelworkers employed than to worry about anti-trust.
After 1980, there was tremendous consolidation in financial services, first within categories – commercial banking, insurance, investment banking – and then across these category boundaries as banks began to offer mutual funds and merge with insurance companies. This reached its zenith with the ill-fated 1998 merger of Citibank and Travelers Group to form Citigroup.
Some mergers were forged across national boundaries. GM acquired Saab and Ford got Volvo, Rover and Jaguar, at least briefly. Daimler bought Chrysler.
Now we are encouraging, or forcing, auto makers to slim down. GM never should have bought Hummer, we say. Ford should sell off Volvo. But this downsizing is driven by the desire to stave off catastrophic insolvencies, not promote competition. Indeed, by the beginning of the 21st century, the auto industry was more competitive than it had been at any time since the 1920s.
Consolidation was dramatic in financial services. By 2000 the number of investment banks and large commercial banks was only a small fraction of what there had been in 1960. Here there was some evidence that mergers were stifling competition. But that bothered neither party nor the general public to any degree.
More importantly, after the government takeover of insolvent Continental Illinois Bank in 1978, critics did warn against the dangers of letting financial institutions grow so large that their failure would endanger all financial markets and the U.S. economy itself.
Those warnings were ignored until the events of 2008 proved the critics right. It had been a mistake to let financial institutions grow so large. But desperation drove the Fed and Treasury to double down and create even bigger institutions to prevent the failure of Bear Stearns, Wachovia or Merrill Lynch from crippling the global economy.
And that is where we are now. We have clear evidence that sheer size and market power create dangers. But no one has a clear program to move in the opposite direction.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.