In history we see only dimly the contours of the recent past. By contrast, the geography of the distant are clearer: the passage of time has gradually sifted apart the great mass of events into the important and the trivial. Slowly perspective has evolved.
Thus, it is hard to be certain of how the future will finally judge the boom and bust of the 2000s and its relationship to the wider boom and bust of the last 30 years. It will also be interesting to see what is made of the ‘financial’ aspect of this period, not just its role in the immediate mania and crash, but also its wider social and cultural impact – in 1980 almost no intelligent person dreamed of a life in finance or the ‘financial services’ industry but by the mid-2000s it seemed like an entire generation had no higher aspiration than to make it big, and rich, on Wall Street or in the Square Mile.
This was intended as the start of a longer investigation I never got the chance to complete. Perhaps I will get to revisit it some day!
Almost 65 years ago, in 1947, the U.S. government sued 17 leading Wall Street investment banks, charging them with effectively colluding in violation of antitrust laws.
In its complaint – which was front-page news at the time - – the Justice Department alleged that these firms had created “an integrated, overall conspiracy and combination” starting in 1915 “and in continuous operation thereafter, by which” they developed a system “to eliminate competition and monopolize ‘the cream of the business’ of investment banking.”
The U.S. argued that the top Wall Street investment banks - - including Morgan Stanley (MS) (the lead defendant) and Goldman Sachs – had created a cartel by which, among other things, it set the prices charged for underwriting securities and for providing mergers-and-acquisitions advice, while boxing out weaker competitors from breaking into the top tier of the business and getting their fair share of the fees.
The government argued that the big firms placed their partners on their clients’ boards of directors, putting them in the best possible position to know when a piece of business was coming down the pike and to make sure that any competitors were given a very hard time should they dare to try to win it.
The government was spot on: The investment-banking business was then a cartel where the biggest and most powerful firms controlled the market and then set the prices for their services, leaving customers with few viable choices for much needed capital, advice or trading counterparties.
The same argument can be made today.
Even More Powerful
Indeed, following the destruction of Bear Stearns Cos., Lehman Brothers Holdings Inc., Merrill Lynch and countless smaller and foreign competitors during the financial crisis that began in 2007, the investment-banking business is an even more powerful and threatening cartel than it was in 1947.
Today, there are far fewer than 17 firms in control of the investment-banking business. After Goldman Sachs Group Inc. (GS), Morgan Stanley, JPMorganChase & Co. (JPM), Citigroup Inc. (C), Bank of America Corp. (BAC) and Deutsche Bank AG (DBK), one is pretty much at a dead end. The investment-banking business is now both much, much bigger – in terms of revenue and profits – and much, much more concentrated than it ever was close to being in 1947.
How could that have happened? Unfortunately, in October 1953, Harold Medina, the presiding federal judge in the case, threw the antitrust lawsuit out of court. In an extraordinary 417-page ruling – a must-read for anyone interested in the history of Wall Street – Medina decided that the government’s case rested solely on “circumstantial evidence” and that the banks didn’t violate antitrust laws. Yet Medina’s ruling also laid bare the extent to which the 17 Wall Street firms would go to defend their turf and prevent other banks from getting access to lucrative, fee-paying clients. It wasn’t a pretty picture.
- Financial Crisis Report: http://hsgac.senate.gov/public/_files/Financial_Crisis/FinancialCrisisReport.pdf 2012-01-09