Time to Revisit the Anti-Trust Laws
The term “too big to fail” screams for a new look at anti-trust legislation. While original anti-trust legislation looked at the unfair advantage of monopolistic behavior over potential competitors, consumers and later in restricted innovation, the thought that the demise of a single corporation could have a calamitous impact on our country’s economy takes it to another level. It is inconceivable that we should allow this situation to exist.
First we need to put some parameters on what it means to be too big to fail and perhaps more importantly what it doesn’t mean. It is not solely an issue of size. A very large diversified firm may not have a singular presence in any particular critical market that its demise would have much of an impact on the economy as a whole. It also does not mean that the impact of failure would have a serious consequence on the equity market. It may indeed have such an impact, but if that reflects a general market environment that was contributory to the firm’s failure, then it would only be symptom of a general problem.
What it does mean is that the failure of the firm could not be absorbed by free market forces and would necessitate government intervention to mitigate unacceptable consequences. Such firms would typically be focused in a limited number of related oligopolistic markets. It would mean that the remaining players would not be able to absorb market demand for critical products and services and/or acquire the necessary assets of the failing company in order maintain supplies critical to the general economy in what may not be a robust economic environment. It would also suggest that the form of the oligopoly or monopoly was vertically integrated as well.
Exxon Mobil may appear to be a likely firm to be anointed the “too big to fail” moniker, but maybe not. If for whatever reason Exxon Mobil failed, it would no doubt shake the cobblestones out of Wall Street. All other things being equal, the market would not collapse. Oil producing nations would fall all over themselves’ to find other buyers. If demand was there for product, tankers, refineries and retail outlets would be readily available and marketable assets. Being capital intensive, the employment displacement would not be commensurate with the size of the failure. Another key consideration is the nature of the product and the length of a customer’s commitment to the product. Oil and its derivatives are fungible. The consumer has no vested interest in Exxon Mobil after topping off his or her tank. The car doesn’t care if the next tank full comes from Texaco. Likewise, most industrial products would have other sources and brand indifferent customers. This means that a chapter 11 bankruptcy would not be a cure more deadly than the disease. So one of the largest corporations in the world would not in my mind be too big to fail.
By contrast, the failure of General Motors would have considerable collateral damage. Employment is an issue as is the supply chain. There is also, albeit less than in the past, a geographic concentration of employment in the automotive industry creating a potential regional or local depression. The consumer’s vested interested in the supplier is also not momentary. The relationship between the consumer and auto maker is typically around 7 years and then some in order to maintain resale value. A chapter 11 bankruptcy while helpful in solving its labor disaster, would be particularly problematic in maintaining the ongoing business. If it somehow did survive, the labor issue alone would probably force Ford and Chrysler to follow suit. Arguably quite deserving of failure, it would meet my standards for “too big to fail.”
So where does that leave the financial industry. Current events of the day speak for themselves. Where size counts, then regulation is the answer. Where economies of scale are not as real as so often purported, then breaking up the financial juggernauts is in order.
Corporate America and in fact the corporate world is obsessed with being large, very large. There is a preconceived notion that bigger is better. If that is so, why is the breakup value of most companies greater than its current market capitalization? For more on that, you’ll have to look at some prior blogs like “Big Business Looks a Lot like Big Government” and “Executive Pay.”
For my take on how this relates to labor unions, you’ll have to wait for next month.
Richard Gabel
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