According to the New York Times, The U.S. Senate Permanent Subcommittee on Investigations found that “two Goldman employees, Deeb Salem and David Swenson, tried to manipulate prices of securities used to bet against mortgages. Both tried to help Goldman pile on larger bets against the mortgage market, and they wanted to be able to buy such negative bets more cheaply, the report said. Goldman, as a broker, was able to affect prices in the market through the bids and offers it gave out. Mr. Swenson wrote in May 2007 that the bank should try to ‘start killing’ prices on certain positions so that Goldman would be able to ‘pick some high quality stuff,’ according to the Senate report. The strategy, Mr. Swenson wrote, would ‘have people totally demoralized.’ The pair were [sic] unsuccessful in their attempt, and both denied making it to the Senate committee. Mr. van Praag said last week that the report had no evidence of manipulation. Still, the Senate report said that ‘trading with the intent to manipulate market prices, even if unsuccessful, is a violation of the federal securities laws.’”
Price-making rather than taking is a classic trait of an oligopoly or monopoly. As of the beginning of 2011, in the U.S. the top ten banks held 77% of the bank-assets. One effect of the financial crisis of 2008 and the related U.S. Government’s TARP program was to make the big banks that survived even bigger.
As a result, the big boys on the street that came out of the financial crisis could potentially (or in actuality) affect markets and perhaps even presume that they could break (or even make!) the law with impunity. That is to say, the consolidation of the banking sector is a threat not only to the economic world of Adam Smith, but also to the political world of Thomas Jefferson. Competition is the currency of efficient and effective markets, and representation is the signature of virtuous and vibrant republics. Price-taking and law-taking rather than price-making and law-making are proper for any business firm in a republic.
Where banks have gotten too big for their breeches with respect to being in a republic rather than a plutocracy (i.e., rule by wealth), it is the responsibility of the people and their elected representatives to look through the marketing campaigns and banking lobbyists and enact legislation breaking up those banks into competitive bits. Lest it be protested that large MNCs need big banks, we might apply our Adams-Jefferson criteria to those companies as well.
Just as it is unclear whether executive compensation had to go from five to ten percent of corporate income, it is far from evident that now that big business is here, it is necessary and here to stay. For a commercial form so young to engage in the pretense of historical necessity is a bit like gilding a lily whose flower has fallen over on itself. Just as it is in the interest of the CEOs on boards’ compensation committees to overstate executive compensation, it is utterly unremarkable when PR people in mega-corporations claim that the latter are vital to the modern economy. Let us depend rather on a less self-interested party to make such judgments—namely, government of the people, by the people, for the people.
Click to add a question or comment on whether Wall Street Banks are too big to compete (TBTC).
Louise Story and Gretchen Morgenson, “S.E.C. Case Stands Out Because It Stands Alone,” The New York Times, May 31, 2011.
See related essay: “Too Big to Fail: The Trillion Dollar Club”