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Hearing Of The Courts And Competition Policy Subcommittee Of The House Judiciary Committee - Too Big To Fail?: The Role Of Antitrust Law In Government- Funded Consolidation In The Banking Industry

Statement

By:
Date:
Location: Washington, DC

Chaired By: Rep. Hank Johnson

Witnesses: Albert A. Foer, President, American Antitrust Institute; C.R. "Rusty" Cloutier, President And Chief Executive Officeer, Midsouth Bank; William Askew, Senior Policy Advisor, Financial Services Roundtable; Deborah A. Garza, Former Attorney General, Division Of Antitrust, Department Of Justice; Mark N. Cooper, Director Of Research, Consumer Federation Of America

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REP. HANK JOHNSON (D-GA): The Subcommittee on Courts and Competition Policy will now come to order. Without objective, the chair will be authorized to declare a recess of the hearing. And I'll now recognize myself for a short statement.

First of all, good evening -- good afternoon to everyone. This is a topic that many of us want to learn about. The single most important issue on the minds of people today is the state of the global economy. The statistics are grim. We are in the midst of an economic downturn that, by some measures, is the deepest since the great depression: 12.5 million Americans or 8.1 percent of our workforce are unemployed. The net worth of U.S. households declined by nearly $11 trillion in 2008, erasing 18 percent of American work in a single year. Every week local businesses and big national retailers alike announce losses, layoffs, or bankruptcy.

The origins of our economic downturn can be traced in part to the issuance of high-risk mortgaged back securities in the earlier part of the decade. When the housing bubble collapsed in late 2007, anyone holding these mortgages or securities derived from these mortgages got caught in a downward spiral. In spring of 2008, the rapid devaluation of these mortgaged-backed securities shook investor confidence, and was partially responsible for the credit crisis that began gripping our economy.

Bear Stearns was sold over a weekend to JPMorgan Chase, and the federal government put Fannie Mae and Freddie Mack into receivership. Last September hopes for a quick recovery were dashed when Merrill Lynch had to be sold to Bank of America. Lehman Brothers was allowed to -- or I'll say forced into bankruptcy if you will. And AIG, the now well-known company asked the federal government for a $40 billion bridge loan, which has since escalated I think into about $180 billion -- or $170 billion, something like that.

Since August of 2008, the federal government has invested hundreds of billions of dollars into financial institutions, either directly into these institutions, which are -- which were -- are and have been deemed too big to fail -- or through the TARP program, the Troubled Asset Recovery Program. Although the stated goal of the TARP funding was to increase liquidity in the credit markets and stimulate lending, some of the funds were used by recipient banks to acquire competing banks that in some cases were -- had been denied TARP funding.

It's not my intention, ladies and gentlemen, to suggest that either the previous or the current administration should have sat idly by as the economy plummeted. I believe that my colleagues on both sides of the aisle can agree that the intention of both administrations was to protect a fragile economy from further destabilization.

Our purpose here, as the Courts and Competition Policy Subcommittee is to determine whether or not this economic downturn was worsened by antitrust. In particular, there are two interrelated issues I'd like for us to consider: one, this concept of "too big to fail." Are there such things as institutions that are too big to fail, and if so, should antitrust have prevented them from becoming so embedded in the economy?

The second is the use of TARP money and bank consolidation. When the federal government provides funds to the acquiring bank but denies it to the acquired bank, is antitrust law adequately suited to evaluate the competitive effects of these acquisitions when the government by the stroke of a pen can radically shift market power? And by doing so, are we simply creating the next generation of institutions that are too big to fail?

At the end of today, I hope that our panel will have provided us with guidance as to what we can do and what we should do to prevent this type of crisis from reoccurring. I know recognize my honorable colleague, Mr. Howard Coble, the ranking member of his subcommittee for his opening remarks.

REP. HOWARD COBLE (R-NC): Thank you, Mr. Chairman, and good to welcome the panel with us this afternoon. I thank you, Mr. Chairman, for calling this hearing of the Courts and Competition Policy Subcommittee.

Without a doubt -- you've touched on it to some extent -- the current economic crisis has altered the way that we view government intervention with business. Many, including me, were wary of giving large sums of money to financial institutions in the wake of the failure of Lehman Brothers last September. I reluctantly voted for the initial dispersion of emergency economic stabilization fund because of the outcry for many of my constituents who viewed as their only means to protect their life savings. I continue, Mr. Chairman, to be very skeptical of the approach we've taken to stabilize and stimulate our economy. The current AIG bonus controversy is a prime example

That said, today's hearing gives us the opportunity to examine how past government intervention, specifically antitrust enforcement may have contributed to the current situation. First, this hearing will examine whether mergers created some of the institutions that were too big to fail. It will also examine whether antitrust law as it has been traditionally understood could or should have prevented some of these institutions from getting to the point that the government felt compelled to bail them out.

Secondly, the course of providing relief funds under the government's TARP program, it appears that the government has in at least one instance deliberately supplied money to one bank for the purpose of acquiring another. In other cases, banks have used the TARP funds to assist in the purchase of other banking institutions.

This hearing gives us the opportunity to explore whether the existing antitrust review properly protects taxpayers from ultimately having to save other institutions that are, again, too big to fail. As a North Carolinian, Mr. Chairman, I'm proud that my state is home to two very large financial institutions. One of those, the Bank of America, has received TARP funds, and has acquired troubled financial institutions including Merrill Lynch and Countrywide Financial. The other, Wachovia, was not so fortunate.

It was recently acquired by Wells Fargo, as you know.

Whether they will be acquired or doing the acquiring, these transactions have had and will continue to have a significant impact on the residents in my state and upon other states. Not unlike all the members, I have a number of small banks and credit unions in my district, Mr. Chairman, as no doubt you do. It is my hope that these essential institutions are not forgotten in this debate or by policy- makers here in D.C.

Finally, I'd like to know that we're facing a bipartisan problem here. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which enabled banks to operate across state lines was passed with strong bipartisan support under a Democratic president and by a Democratically controlled Congress. The Gramm-Leach-Bliley Act, which allowed banks to expand into broader areas of business, including insurance and secretaries, also enjoyed broad bipartisan support and was passed by a Republican-controlled Congress.

Similarly, President Clinton's antitrust division presided over the merger of Citicorp with the Traveler's Group in 1998, which created Citigroup, while President Bush's antitrust division presided over the Wells-Fargo (symbol for dash ?) Wachovia deal among others. Undoubtedly the Obama administration will face similar mergers as the financial crisis continues and deepens. All of this Mr. Chairman, is to say that this is neither a Democratic nor a Republican problem; it is an American problem. And I appreciate your willingness, Mr. Chairman, to invite -- to have invited a balanced panel -- a panel to discuss these issues. And with that, I yield back the balance of my time and look forward to hearing from our witnesses.

REP. JOHNSON: I thank the gentleman -- excuse me. I thank the gentleman for his statement, and without objection any additions that you want to make to it will be included in the record as well. Do any of my other colleagues on this subcommittee wish to make opening statements?

REP. MELVIN L. WATT (D-NC): Mr. Chairman, I'll just -- I won't take the full five minutes. I do think it's interesting that as a result of serving on both the financial services committee and the judiciary committee on the same day in two separate committees of jurisdiction, we are dealing in one respect or another with the question of "too big to fail."

I did want to be here to hear the testimony because I'm not sure that -- whether an institution is acquired or is acquiring another financial institution, and that in and of itself makes it too big to fail, is something that ought to be an independent criteria for evaluation by the Justice Department under the antitrust law. So while I think this is an interesting inquiry and certainly a topical inquiry, I hope we don't go too far overboard in that direction because I think that might be an overreaction to what's going on in the current economic context.

That said, I'll be very anxious to hear the testimony. And it's certainly a matter that, when it involves antitrust implications, is a matter of the jurisdiction of this committee and this subcommittee. And I'll be interesting in knowing how these witnesses tie this all together.

So with that, I'll yield back. I appreciate the gentleman having the hearing. I guess the more I can talk about "too big to fail" whether in the context of antitrust laws, or in the context of how you create a systemic regulator to supervise it, the better off I am because the more I understand about the issue, the better we are able to legislate on it. And I appreciate it and yield back.

REP. JOHNSON: Thank you, Congressman Watt out of California (sic), one of our resident legal scholars on this committee, and especially on this subcommittee. I want to welcome also.

REP. WATT: I thought you were introducing Mr. Chairman. I'm from North Carolina.

REP. JOHNSON: He's another one. (Chuckles.) But I also want to recognize my colleague from Utah, Mr. Jason Chaffetz. And he is a brand-new member. We welcome you to the subcommittee. And if there are any other opening statements, I see that my colleague the cerebral Mr. Brad Sherman out of California cannot help himself. He must share his knowledge with us, and we'd definitely appreciate it.

REP. BRADLEY J. "BRAD" SHERMAN (D-CA): Thank you, Mr. Chairman. "Too big to fail," those words are an affront to capitalism. Capitalism can only work when entities are allowed to fail. The "too big to fail" is not only an attack on the taxpayers, say you must bail us out. We have created this house of cards; we did it for our own benefits, and you must ensure us against risk, but it is also an attack on competition because if an entity claims to be too big to fail, what they're really saying is don't just look at our balance sheet to see whether we're credit-worthy; look at the balance sheet of the United States federal government. That is available to you. And so these entities are able to borrow at reduced interest rates, giving the "too big to fail" a chance to get bigger at the expense of those who are small enough to fail.

You know, we faced this in my own community. When you have a financial institution that becomes insolvent, the FDIC takes them over, the insured depositors have paid for that insurance because they get a little lower yield, and the bank has to pay into the FDIC fund. And you paid for the insurance, and to the extent you're insured, the federal government is there to pay on the insurance that you paid for to the federal government.

But everybody else, the bond holders of that local bank, the accounts that are in excess of FDIC insurance, they don't get any taxpayer money. Why? Well, that bank wasn't too big to fail; that's why we have receivership.

In contrast you have a dozen or so of the largest financial institutions in the country whose general creditors are being paid with taxpayer money. And the fact that they're being paid is, if anything, proof, that if you have to lend money, lend it to somebody who's too big to fail. Give them the good interest rate. Give them the chance to succeed.

And so what we ought to have done, and what we can still do is to put into receivership those financial institutions that are insolvent and deal with them the same way we deal with everyone else. Now, this will turn them into much stronger financial institutions because the way you clean up a balance sheet is not by taking off assets, even, quote, "toxic" assets. The way you clean up a balance sheet is you take off liabilities. And that's what happens in receiverships. You give a haircut to the general creditors.

These companies are not too big to fail; it is said that they are too interconnected to fail. I don't think that's true either. They are too well-connected to fail. And so the general creditors are coming here, and so far they have been successful in getting a federal bailout. What we see here is a casino, a casino created at AIG's financial products division. Well, a lot of people were smart, but not smart enough. They placed the winning bets. They went to the AIG casino, and they bet against the mortgages being valuable, and they were right on their bet. But there were so many of them that they broke the bank.

And now these gamblers are here in Washington having us bail out the bank that they have broken. That is not the right role for the federal government, and it is not the right competition model for the future where smaller banks and larger banks should all live by the same rules, and that is you either -- if you pay for federal insurance, you get it up to the terms of that insurance, and otherwise, the general creditor is a general creditor. And when you're a general creditor of an insolvent financial institution, you take a huge haircut.

Mr. Chairman, I thank you for the time.

REP. JOHNSON: I will say that it was unexpected to hear you mention the term "haircut" twice. (Laughter.)

I'm now pleased, ladies and gentlemen, and I'm glad you have such a great sense of humor, Congressman. We're all laughing with you, not at you. (Laughter.) And I don't want to put myself in line for replies either. But I'm pleased now to introduce the witnesses for today's hearing.

The first is Mr. Bert Foer, the president of the American Antitrust Institute. Mr. Foer is a recognized antitrust expert who served previously as assistant director and acting deputy director of the Federal Trade Commission's Bureau of Competition.

Welcome, Mr. Foer.

Next is Mr. C.R. "Rusty" Cloutier. I've been struggling with that for a while, Mr. Cloutier. And Mr. Cloutier is president of the MidSouth Bank. He's also past chairman of the Independent Community Bankers of America. And in 2004, he was honored by the city of Lafayette, Louisiana. He was given the highest award, the Civic Cup for his civic actions. We appreciate you being here also, sir.

Next is Mr. William Askew, senior policy advisor for the Financial Services Roundtable. In addition to his role with the roundtable, Mr. Askew is a senior executive vice president of Regions Financial Corporation. Regions Financial Corporation made Forbes Platinum 400 list of America's best big companies. As head of the retail banking for regions from 1987 to 2006, Mr. Askew played a leadership role in the acquisition of the consortium of banks that created regions. Welcome, Mr. Askew.

Also on the panel is Ms. Deborah Garza, former assistant attorney general for the Department of Justice's Antitrust Division. Prior to her most recent tenure at the department, Ms. Garza chaired the antitrust modernization commission, which is a bipartisan panel created by Congress to evaluate the U.S. antitrust laws and policy recommendations, and also to make policy recommendations to the Congress and to the president.

And I'd like to add that the members of the commissions, as well as its recommendations are held in highest regard by the subcommittee. And we thank you and your colleagues for all of the work that you have put in and for the benefit of the citizens as well as the commercial interest that are so important in this -- for this country.

And last but not least, I'd like to recognize Dr. Mark Cooper, who is also on our panel. He's the director of research at the Consumer Federation of America. And he has provided expert testimony in over 250 cases for public interest clients, ranging from attorneys general to citizen interveners before state and federal agencies, courts and legislatures in the United States as well as Canada.

And I want to welcome you all to this important hearing. And just one housekeeping matter, any opening statements that have not been presented orally may be submitted in writing, and there will be five business days within which that can happen. And the same goes for the panelists also. Your written statement will be placed into the record, and we wish to ask you that you limit your oral presentation to five minutes. You'll note that we have a lighting system which is right in front of you. It starts with a green light, and then at four minutes, it displays a yellow light, and thereafter, we all know what red means.

After each witness has presented his or her testimony, subcommittee members will be permitted to ask questions subject to the five-minute rule. Mr. Foer will please proceed with your testimony.

ALBERT A. FOER: Thank you, Mr. Chairman, members of the committee. If the committee wishes to discuss haircuts further, I'm happy to take you on.

I'm going to pose five questions and try to answer them very briefly, perhaps cryptically. My written statement contains elaboration.

First, what do we mean by "too big to fail"? It's important at the outset to observe that the chief issues are not large size alone or even inadequate competition. The "too big to fail" problems relate to, one, creation of large organizations that are so deeply embedded in the economy that their failure is likely to have ripple effects which cumulatively are just not acceptable to the polity, combined with, two, failure of governmental oversight to require relevant disclosure of escalating risks; that is, the information that would be necessary if government were to determine to inhibit the formation of such organization or to protect against their failure.

Question two: Was antitrust policy responsible for allowing the "too big to fail" problem? Well, it's the more broadly conceived competition policy that I think has failed. The more narrowly defined antitrust enterprise -- that is, the Sherman Clayton and FTC Acts -- was not empowered to stop mergers on the basis of either the absolute size of the resulting institution or a calculation of the systemic consequences of their eventual failure. We lack a workable antitrust mechanism for stopping large conglomerate mergers that create giant corporations without at the same time reducing competition in specific markets.

My third question: Can current antitrust law protect us from future mergers that will create a "too big to fail" problem? And my answer cryptically is no, not most of the time.

My fourth question: Can current antitrust law be used to break up financial services or other organizations that are deemed too big to fail? And my cryptic answer again is no.

So let me turn to the final question: What should Congress do? And I have four suggestions. First, Congress should create within the Department of Justice Antitrust Division, and should appropriately budget a new position: deputy assistant attorney general for emergency restructuring. The purpose is to give competition policy an important place at the table as regulatory and legislative policies are developed to deal with the recession. I think this should be a high priority as decisions are being made now that may have long-term competitive effects. Congress should assure that a loud competition voice is heard in a timely and respectful way in the councils that are restructuring our economy.

Second, Congress should emphasize that competition policy concerns be taken into account during a recession, and even during emergency consolidation situation. History suggests that industries faced with downsizing seek ways to do so jointly. The three C's of consumer catastrophe are consolidation, cartelization, and constraints on trade. These strategies have not worked in the past, and we need to remain especially vigilant against them now.

My third proposal: Congress should consider creating legislation that will give the government an opportunity to stop the formation of new organizations that are too big to fail. In my statement, I develop a procedure for facilitating governmental review of mergers that potentially create or exacerbate an unreasonable systemic risk. And when such mergers are identified, they could not be consummated for a period of time during which a taskforce of relevant regulators, including antitrust officials could report on both the beneficial effects and the risks of the merger. The president would be empowered to make a final decision to stop the merger. The process could be truncated during an emergency.

The predictions required by this process will be quite difficult, but we should err on the side of not generating new risks of substantial catastrophe even if the probability of occurrence is low. I see I'm about out of time. Let me make one final point please. For the longer term, Congress should create a process for rethinking where we are, and where we want to be after the current crisis has settled down. And in my paper, I propose what I call TNEC- Two, a new version of the Temporary National Economic Committee that served during the new deal. I won't have time to go into that right now, but I would be pleased to answer your questions.

REP. JOHNSON: Thank you, sir. And before we proceed to Mr. Cloutier, I'd like to welcome and recognize the presence of our esteemed chairman of the full committee, the honorable John Conyers from Michigan. And I would also ask you, sir, whether or not you wanted to make an opening statement. Okay. So thank you, sir, and we shall proceed with the panel. Mr. Cloutier.

C.R. "RUSTY" CLOUTIER: Chairman Johnson, Representative Coble, and members of the committee. My name is Rusty Cloutier. I'm the president and CEO of MidSouth Bank Corp, a $936 million bank holding company located in Lafayette, Louisiana. We operate in all of south Louisiana and most of Southeast Texas. We are community-oriented, and focused primarily on offering commercial and consumer loan, and deposit serves to individuals in small businesses, middle-market businesses, et cetera. I am pleased to represent the Community Bankers of America and ICBA's 5,000 members at this important hearing.

While recent government funding has encouraged consolidation in banking, this is nothing new. For decades, antitrust laws, banking laws, and banking regulations have all contributed to consolidation of the banking and financial industry. I personally have spent years warning policy-makers of the systemic risk that were being created in our nation by unbridled growth in the nation's largest banks and financial firms. But I was told I just didn't get it, I didn't understand the new global economy, that I was a protectionist, and that I was afraid of competition, that I needed to get with the modern times.

Sadly, we know what modern times look like, and it hasn't been pretty. Excessive concentration has led to systemic risk and the credit crisis we now face. Banking and antitrust laws were much too narrow to prevent these risks. Antitrust laws are supposed to maintain competitive geographic and product markets. If there were enough competitors in a particular market, that ends the requirement.

This often prevented local banks from merging, but it does nothing to prevent the creation of the giant nation-wide franchises. Banking regulation is simple -- is similar: The agencies acts only if a given merger will enhance the safety and soundness of the individual firms. They generally answer bigger is always necessary to make a stronger financial institution. It can, many say, spread the risk across geographic areas and business lines. No one wonders what would have happened if it and its counterparts jumped off a cliff and made billions in unsound mortgages -- we now know the economy is in a crisis.

The four largest banking companies, many of which have been bailed out by the United States government, now control over 40 percent of the nation's deposits, and more than 50 percent of the U.S. bank assets. This is not in the public interest. A more diverse financial system would reduce risk and promote competition, innovation, and the availability of credit to the consumers of various means and business sizes.

We can prove this. Despite the challenges we face, the community bank segment of the financial system is still working and working well. We, the community banks, are opened for business. We are making loans, and we are ready to help all Americans weather these difficult times without government assistance.

But I must report the community banks are angry. Almost every Monday morning they wake up to the news that the government has bailed out yet another "too big to fail" institution, while on Saturdays, they hear that the FDIC has summarily closed one or two "too small to fail" institutions. And just recently the FDIC proposed a huge special premium to pay for the losses imposed by large institutions.

This inequity must end, and only Congress can do it. The current situation will damage community banks and the consumers and the small businesses that we serve. What can we do? ICBA recommends the following measures: Congress should direct a fully staffed interagency taskforce to immediately identify systemic-risked institutions. They should be put immediately under federal supervision.

The federal systemic risk agency should impose two fees on these institutions, that one, would compensate the agencies for the cost of their -- their supervision, and capitalize a systemic risk fund comparable to the FDIC so the United States taxpayers do not have to pick up their losses in the future.

The FDIC should impose a systemic risk premium on any insured bank that is affiliated with a systemic-risk firm. The systemic risk regulator should impose higher capital charges to provide a cushion against systemic risk.

The Congress should direct the systemic risk regulator and the FDIC to develop procedures to resolve the failure of a systemic risk institution. The Congress should direct the interagency systemic risk taskforce to order the breakup of systemic risk institutions that cause problems for America. Congress should direct a systemic risk regulator to block any merger that will result in the creation of system risk institution in the future. And finally, it should directly the systemic risk regulator to block any financial activity that threatens to impose systemic risk.

The current crisis provides you an opportunity to strengthen our nation's financial system and the economy by taking these important steps. They will protect the taxpayers, create a vibrant banking system where small and large institutions are able to fairly compete. ICBA urges Congress to quickly seize this opportunity, and I look forward to answering any questions you may have. Thank you.

REP. JOHNSON: Thank you, Mr. Coutier. We'll -- we're in the middle of voting on the floor, but we have time for at least one more opening statement. And so Mr. Askew, would you proceed?"

MR. ASKEW: Yes, sir. Chairman Conyers, Chairman Johnson, and ranking member Coble -- it's on -- and members of the committee. I'm Bill Askew, senior advisor to the Financial Services Roundtable. At this hearing I am representing the roundtable, but I actually wear two hats as I am also a banker. During the last 25 years, I worked within the antitrust laws as we acquired and merged a number of banks. I know the antitrust division of the Department of Justice, the Federal Reserve, and antitrust mechanisms are working well because I have experienced them first hand.

Divestiture have been one of the most challenging and difficult parts of my job over the last two decades. It is not just deposits that you give up in a divestiture; there's customers, associates, brick-and-mortar, and hard-fought market share all built over many years. But as difficult as this was, the point is the system works and antitrust laws do the job as they are intended to do.

As part of this process, the laws are straightforward. Banks know when they agree to merge that certain market-share concentrations will probably require divestitures. The Justice Department selects the specific branches based upon independent review. This is the function of antitrust law, to review pending acquisitions and prevent mergers that would substantially lessen competition or restrain trade in any section of the country.

Given the number of participants in the markets today, we access the financial services sector is highly competitive. As of 2007, the financial industry included 5,000 registered broker dealers, 1,250 thrift, 8,000 credit unions, 7,250 commercial banks, 1,200 life insurance companies, and 2,700 property and casualty companies.

We believe that the current crisis is not a result of failure of antitrust laws; rather, it is a combination of several unprecedented and interrelated financial events. Large amounts of savings investments flowing into the United States financial system searching for a higher return, a booming housing market with home prices increasing at record levels, served by an under-regulated mortgage lending engine, innovation in largely unregulated credit derivatives, collateralized debt obligations, and credit default swaps, and excessive leverage in firms who failed to put the breaks on their own borrowing in the midst of cheap money supply.

A fragmented system of national and state financial regulations straddled these market conditions, and in the end, no federal agency was responsible for examining the totality of the risk created in interconnected firms and markets. Decades of ad-hoc legislation and regulatory updates, not our antitrust laws, has created significant gaps in financial regulations that permitted some financial services firms to operate with minimal oversight.

To address these shortcomings, the routable has developed a proposed financial regulatory architecture as illustrated in my written testimony. It has six key features. First, we propose an expansion of the president's working group with the financial market coordinating council. Second, to address systemic risk, we propose the Federal Reserve be authorized to act as a market stability regulator. Third, to eliminate gaps in regulation, we propose the consolidation of several existing federal agencies into single national financial institutions regulator.

Fourth, to focus greater attention on the stability of the financial markets, the creation of a national capital markets agency. Fifth, we propose the Federal Deposit Insurance Corporation be reconstituted as an insurer for bank deposits, retail insurance policies written by nationally charted insurance companies, and for investors who have claims against broker dealers. Finally, as the market stability regulator interacts with regulators, there's an evident need to create a national insurance regulator.

Mr. Chairman, as a result of this crisis, some financial firms have been labeled too big to fail. Their counterparty obligations in global reach required that they be treated by the Fed and Treasury differently than typical institutions.

It does not, however, make them examples of market power in a trust -- in the trust sense of the antitrust law -- in the truest sense of the antitrust law, excuse me.

The troubling financial services sector has exposed severe flaws, regulatory and otherwise, which I have detailed, but a lack of competition and choice for consumers is not one of them. We commend you and other members of Congress for your work to modernize and strengthen financial regulation. This work is of the highest priority, and I will, I am confident, produce -- and it will, I am confident, produce a regulatory regime that will help us and every American consumer and the confidence with whom they choose to do business, emerge from this crisis stronger than before. Thank you. I look forward to answering your questions.

REP. JOHNSON: Thank you, Mr. Askew. And at this time, it would best for us to go into a recess. We'll be back in about maybe 20, 25 minutes. We appreciate you all's patience. Thank you.

(Recess.)

REP. JOHNSON: We will call the hearing back into order and grant our -- give you our appreciation for your time. And thank you for your statement, Mr. Askew. And now we'll turn it over to Ms. Gardner (ph) -- Ms. Garza, I'm sorry.

MS. GARZA: Thank you, Chairman Johnson, ranking member Coble, and when they get here, if they do, other distinguished members of the House Judiciary Committee Subcommittee on Courts and Competition Policy. It is a privilege to be invited to speak today about the role of antitrust enforcement in the current financial crisis. I am not appearing today on behalf of any organization. I do not purport to express the views of either the Antitrust Modernization Commission or the Justice Department. However, my written statement does discuss several relevant recommendations of the AMC.

In addition to discussing those recommendations, my written testimony makes a few points in response to the subcommittee's specific questions about what role antitrust should play in bank mergers today, particularly those funded by the Troubled Asset Relief Program or TARP, and whether the antitrust law should be used to block mergers on the basis that the resulting financial firms that might subsequently be deemed too big to fail.

To briefly summarize, first, antitrust enforcement and sound competition policy remain relevant in the current financial crisis. Competitively operating financial markets drive economic growth and ensure the consumers benefit from lower prices, higher quality, innovation, and diversity of products. Although we urgently need to strengthen and protect the banking system in order to prevent further deterioration of the economy, we must also be mindful of the longer term competitive effects of consolidation.

Second, there is no apparent necessary conflict between current antitrust enforcement policy and achieving stability in banking markets. The Justice Department's Antitrust Division should continue to assess the likely competitive effects of mergers including those funded through TARP or involving banks in which the U.S. government has taking equity interest.

Third, there is no evidence that the current economic crisis resulted from a failure of antitrust merger enforcement in the banking industry or that current merger law needs to be changed to address bank mergers.

Fourth, antitrust enforcement should continue to focus on weather markets are functioning competitively rather than on whether a bank or other financial firm is too big or too systematically significant to fail. Those concepts present political and regulatory issues that are better handled outside the realm of antitrust enforcement. The AMC made six recommendations relevant to the subcommittee's questions. One, the AMC recommended that there is no need revise the antitrust laws to apply different standards to different industries. Current law, including the horizontal merger guidelines applied by the Antitrust Division, is sufficiently flexible to address specific competitive circumstances in the banking or any other industry.

Secondly, the AMC recommended that there is no need to revise Section 7 of the Clayton Act or the general framework used by the enforcement agencies and courts to address mergers. The AMC found broad-based consensus that merger enforcement policy has become increasingly predictable, transparent and analytically sound. This has resulted in a broad consensus in support of current enforcement policy which has become the paradigm for enforcement around the world.

Third, the AMC recommended that the Antitrust Division and the Federal Trade Commission should work to increase understanding of the basis for and the efficacy of U.S. merger enforcement policies. Notwithstanding the general consensus that exists in support of current policy, the empirical basis supporting assumptions about the effective concentration, for example, is arguably limited. Although some studies in the banking industry suggest that there is a relationship between concentration in market power, there is substantially less sense about the level at which antitrust should bite. Focused study of this issue could improve the enforcement authority's ability to effectively enforce the antitrust laws. Extrapolating from this recommendation, it may be an appropriate time to review the empirical data and existing studies.

Fourth, the AMC recommended that the Antitrust Division and the Federal Trade Commission should increase the transparency of their decision-making to enhance public understanding of the agency's merger enforcement policy. It may be a good time for the Antitrust Division to focus such efforts specifically on bank mergers.

Fifth, the AMC recommended that Congress should not displace free market competition without extensive, careful analysis and compelling evidence that either competition cannot achieve important (societal ?) goals or that trump consumer welfare or market failure requires the regulation of prices, costs and entry in place of competition. Failing to enforce the antitrust laws where they would otherwise be enforced under current policy is unlikely to resolve the current economic crisis, but it could cause further harm to the economy in the future after markets have stabilized.

Finally, the AMC recommended that even an industry subject to economic regulations, such as the banking industry, the Antitrust Agency should have full merger enforcement authority under the Clayton Act. The banking merger review regime closely fits the model proposed by the AMC.

Thank you for your attention. And I look forward to answering any questions.

REP. JOHNSON: Thank you, Ms. Garza.

And next and certainly not least, Dr. Cooper, would you grace us with your presentation?

MR. COOPER: Thank you, Mr. Chairman, and members of the committee.

This hearing is about one of the most important problems arising in the inadequately regulated financial sector that has plunged this nation into the worst economic crisis in three-quarters of a century, the moral hazard of too big to fail. But the technical definition of moral hazard does not convey the full implications of this problem in the current financial crisis, so let me put a finer point on it. Capitalism without bankruptcy is like Catholicism without hell. It lacks a sufficiently strong motivational mechanism to ensure good behavior.

The financial system never should have been allowed to become exposed to a plague of banks, shadow banks and financial products that are too big to fail. And worse still, we have discovered that it's not only size that kills in the financial sector but complexity and lack of transparency. Complex and opaque products and interconnections among firms that spread like a virus through the financial system and are nearly impossible to unwind also pose systemic risk.

The bipartisan theory of market fundamentalism that got us into this current mess offered the proposition that all we needed to protect us from these problems was the market. But Alan Greenspan, the high priest of market fundamentalism, recently admitted that there's a flaw in his theory. Quote, "Those of us who look to the self-interests of lending institutions to protect shareholder's equity, myself included, are in a state of shocked disbelief.

I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were capable of protecting their own shareholders and their equity in their firm." If they can't protect the private interests, you can imaging the mess they make of the public interests.

The flaw in market fundamentalism teaches us that competition alone is not enough to ensure the proper functioning of the financial system. It is clear that the only way to prevent the public from being exposed to the moral hazard of too big or too complicated to fail is to regulate financial institutions and products in a manner that imposes effective discipline on their behavior. And regulation must also address the other problems that afflict this inadequately regulated financial sector, including asymmetric information, agency conflicts of interest, perverse incentives and unfairness. All of these are well-beyond the reach of the antitrust laws.

Effective prudential regulators should establish the framework within which competition works. When the New Deal created the institutions of prudential regulation to repair the financial sector after the crash that followed the roaring '20s, it did not repeal the antitrust laws. It layered prudential regulation on top of the antitrust laws. The result was the most remarkable half century, the only half century that was free of a major domestic financial crisis in the history of the republic.

There is much to do to restore effective regulation but also much to restore effective antitrust oversight. Let me suggest four critical steps that would have helped to reduce the size of this problem. Could never have solved it, but it might have helped to reduce it.

First, federal authorities should take their own guidelines more seriously, challenging mergers more consistently in the highly concentrated markets. The theory of the dynamic duopoly has proven to be just as wrong as market fundamentalism.

Second, antitrust authorities must return to the fundamentals of head-to-head competition as the foundation of antitrust action. Intermodal and potential competition have simply proved ineffective in disciplining market power. Head-to-head competition is what we need.

Third, antitrust has given far too much deference to efficiencies at the expense of competition. The assumption that private actors will be perceptive and well-intentioned in their pursuit of efficiency and share efficiency gains with consumers, even where competition is feeble, never made any sense. And in light of the collapse of market fundamentalism, it must no longer be -- (inaudible). Private actors have proven that they're at least as likely to be myopic, misinformed and maleficent.

Fourth, the digital economy of the 21st century is made up of platforms in which layers of complementary products and services fit atop one another, and they are closely interconnected frequently through technology. This renders the threat of vertical leverage much greater than was the case in the physical markets of the 19th and 20th centuries. Tying anticompetitive bundlings and exclusionary conduct take on much greater significance.

The need for reform does not demand a radical new experiment; rather, it demands a return to the traditional values, institutions and practices of progressive capitalism that served us well in the half century after the New Deal. The market fundamentalism of the past 30 years was the radical experiment, and it has failed miserably. It's time for us to abandon the market fundamentalist view that these regulations and antitrust as the (ex-post ?) cleanup after the occasional market power, instead viewing antitrust and regulation as the (ex-anti-prophylactic ?) to prevent market failure. Thank you.

REP. JOHNSON: Thank you, Dr. Cooper.

I appreciate, and I'm sure we all do, the testimony of you all on this panel. Without objection, members as well as witnesses will have five legislative days within which to submit any additional written questions and responses. Without objection, the record will remain open for these five legislative days for submission of any additional materials. And again, I want to thank everyone for your patience.

It's now time for questions. I will yield to myself five minutes for that purpose. And we will be enforcing the five-minute rule among the congressional representatives as well, though we may go into a second round of questions.

Looking back over how some of these financial institutions became so big and how the federal government responded to their near failures, what are the key lessons that Congress should learn from this economic crisis that we find ourselves in? And I'd like each of you to answer that question, starting with Mr. Foer.

MR. FOER: Well, if we might focus on antitrust, the question -- I think we've all pretty much agreed that antitrust's actual responsibility for the kinds of conglomerate problems we see now is not a failure of enforcement so much as the absence of authority to actually deal with a conglomerate merger. Our merger policy is if there is a direct horizontal overlap, then we eliminate the overlap if it's anticompetitive, and we allow the merger to occur. So to the extent that we're worried about creating very large and complicated organizations whose effects of an eventual failure need to be predicted far down the road, a very difficult prediction, we just don't have a mechanism for dealing with that.

There are other antitrust issues that might go in here that are concentration issues in themselves. There's a lot of competition out there. On the other hand, had we been taking more concern about high levels of concentration, it's possible that some of the very large institutions we're dealing with over time might not have gotten to be this large.

And in that regard, one other area I would mention is the lemming effect. A lot of times we have a merger that we know is going to kick off a series of additional mergers. And yet, we don't have a good mechanism for stopping that in its tracks. The agencies typically say, we will look at one merger at a time.

I'll give you an example. Right now, you've got Pfizer and Wyeth and at the same time you've got Schering and Merck and you've got discussion of at least two, maybe three other mergers that will highly concentrate the pharmaceutical industry virtually overnight if they all go through. I think we need to be able to look at these together. Who knows whether we're going to create, letting these go through one at a time, each one with a couple of overlaps that get laid off but the companies keep getting bigger and bigger and fewer and fewer, whether we might be creating a systemic risk right there in that industry?

REP. JOHNSON: Mr. Foer, thank you for your response. And don't forget about the Ticketmaster-Live Nation situation as well.

MR. CLOUTIER: Mr. Chairman?

REP. JOHNSON: Yes?

MR. CLOUTIER: You know, I'll give you a good example. In the year 2000, there was a hearing held in this building by Congressman Baker on Citicorp buying The Associates. Quite a bit of discussion was held then about the predatory nature of the whole Citicorp operation, which later they plead guilty to that. As you are well aware of, they paid a $200 million fine to the Federal Trade Commission. Citicorp was built on that basis.

And what we have today, and I know many of my colleagues say, well, we've got good competition. I would like anybody to explain to me how you compete with somebody who has the full faith and credit of the United States government. So far, Citicorp has received guarantees on their loans of $380 billion. They have a $10 million guarantee by the FDIC. And I mean, they are too big to fail. It's a perfect example. There are a number other of the large eight that testified before the House Banking Committee that all have the guarantees of the United States government. It makes it very difficult to compete against.

And I mean, they've already got their size to where they're too big to fail, and Congress needs to take immediate action to do something about this. Either that or we continue to pump trillions of dollars into these institutions that are, to a point, they're not competitive, don't have to be competitive.

And I would use as another example AIG who just told the president, good luck, we're doing what we want with our bonuses.

REP. JOHNSON: Yeah. What actions do you think would be appropriate for Congress to make at this particular time?

MR. CLOUTIER: Well, you know, when Congress sits down and they look at the fact that the eight largest financial institutions in America now control 66 percent of the assets in this country, I think that is an anticompetitive, monopoly-type situation, and it needs to be looked at very closely by this committee. And I think that no one would disagree when you have that much concentration in a marketplace, they have some real questions about competitiveness. I understand they say, well, in every market it's competitive. But the fact of the matter is these people control the financial system of America, and it is something that needs to be looked at very carefully.

And all these mergers were done with don't worry we've got control of it. I've been told that so many times, you know, it's unbelievable. And look at where it's led us at the end of the -- (inaudible). We're bailing out the largest financial institutions in America.

REP. JOHNSON: Thank you, sir. And it looks like my time has expired. So I will not turn it over to the Ranking Member Howard Coble for questions.

REP. COBLE: Thank you, Mr. Chairman.

Good to have you all with us today, panel.

Mr. Askew, the Financial Services Roundtable is calling for a streamlined financial regulator, including a national insurance regulator. The insurance industry's antitrust exemption, McCarran- Ferguson, as we all know, is tied to the state regulation of insurance. Has roundtable taken a position on McCarran-Ferguson repeal?

MR. ASKEW: Congressman, we agree with the advent of a national insurance regulator that we talked about. We would agree with the antitrust laws applying to the national insurance.

REP. COBLE: So you would not be in favor of repealing McCarran- Ferguson, or would you?

MR. ASKEW: We would agree -- I guess -- I don't want to mis- answer your question. I will get you a written answer and follow up on that. I don't want to misstate the opinion of the roundtable.

REP. COBLE: And I can appreciate that.

And for the record, Mr. Chairman, I've always been comfortable with state regulation, for what that's worth, but I'll be glad to hear from you.

But let me ask you this, Mr. Askew, what is roundtable's position towards Gramm-Leach-Bliley and Riegle-Neal? And do you all think those laws pretty much accomplished what they were set out to do?

MR. ASKEW: Congressman, we certainly feel that those laws have done what they were set out to do. And we feel comfortable how they are operating.

REP. COBLE: Ms. Garza, what is the process for antitrust review for mergers utilizing TARP funds, a? And b, is it different than the traditional Hart-Scott-Rodino filing process? Is this consistent with the transparency that the Antitrust Modernization Commission recommended? I threw three balls at you simultaneously.

MS. GARZA: The fact that the institution may have been the recipient of TARP funds really doesn't affect the process for review of the transaction. Antitrust review of bank mergers is governed by a set of statutes. It's a little complicated the extent to which Hart- Scott-Rodino applies. But when there is a bank consolidation, that is reviewed by the federal banking agencies. The Justice Department does receive information at the same time that the banking agencies do relevant to the transaction. And there's a 30-day period comparable to the HSR, Hart-Scott-Rodino, period in which they look at the transaction and report to the banking authority.

The way that it has worked, in my understanding, is that the Justice Department Antitrust Division has had the opportunity to look at each of the transactions that have occurred where one of the parties was a recipient of TARP funds. It didn't affect the review of it.

Now, it is the case that some of those transactions were reviewed on an extremely expedited basis because of the (exegeses ?) of the circumstances, not because of TARP funds but because of the economic situation of one of the parties. In those cases, my understanding is that the Antitrust Division was able to conduct the review that it needed to conduct.

In the PNC-National City Corporation transaction, for example, the agency did look at the transaction -- six or seven weeks, I think, is what we took to review it -- and did require divestitures which were agreed to by the parties and incorporated in the order of the (servicer's board ?).

REP. COBLE: Thank you. I think I have time for one more quick question.

Mr. Cloutier, in your testimony, you indicate that the four largest financial institutions control 40 percent of the nation's deposits. Riegle-Neal limits bank holding companies to a maximum of 10 percent of deposits. Would you favor lowering that percentage?

MR. CLOUTIER: Absolutely, sir. And of course, before this crisis started, Ken Lewis at Bank of America were pushing very hard to have that level raised. So absolutely, we prefer lowering it. And be very careful because there are some banks that would like to raise that level.

REP. COBLE: And where would you like to lower it, Mr. Coble.

MR. CLOUTIER: I think 5 percent would be a good place to start to lower it to that level. And make sure that, you know, the 20 top banks in America couldn't control more than 100 percent of the deposits.

REP. COBLE: I want to be the illumination of that red light so the chairman won't come after me with his buggy whip. But Mr. Askew, if you'd get back on my question, I would appreciate that.

Mr. Chairman, I yield back.

REP. JOHNSON: Thank you, Mr. Coble.

Next we will hear from our esteemed chairman of the full committee, Chairman Conyers.

REP. JOHN CONYERS (D-MI): (Off mike) -- unanimous consent to put my statement in the record at this time.

REP. JOHNSON: Without objection. And I was wondering why I saw some of my brethren from the other side of the aisle right here at your spot. And I don't get any laughs on that. (Laughter.) But you all know what I meant. Go ahead, Mr. Chairman.

REP. CONYERS: This is an important hearing, and I really appreciate the selection of the witnesses. Dr. Cooper, of course, has made the statement which I'd like to invite your reactions to. And I'm sure heartened by Howard Coble's review of where McCarran-Ferguson and where Hart-Scott-Rodino come in. But look at AIG, for example, having $78 million in bonuses, 73 people got more than $1 million, some of them not even citizens. And they're explaining to us, well, it's contractual, members of Congress. We contracted to do that, and you don't expect us to go back on our word, do you? AIG -- nine mergers since 1960, nine big ones, and 5,400 mergers just between 1990 and 2005 alone. From Reagan on, mergers have been growing and growing, but it was only, I think, under perhaps the Bush administration that they really got into what we call mega mergers, 74 mergers in which each merger partner had more than $10 billion in assets.

So I am not comfortable to think that the rules are working okay and that mergers are all right. I think there's a connection.

When Greenspan can come clean, I don't think it's hard for any of us not to realize that we've got to do something about it.

I think mergers -- I've never been comfortable about all the mergers that were going on all the time, one administration after another, including the Democratic administrations. And so I would like to get your reactions on that, starting with Dr. Cooper and then Ms. Garza.

MR. COOPER: Well, it's difficult to see how the antitrust laws will solve the underlying problem of too big to fail. I do believe that that problem needs to be solved in prudential regulation, and I'll give you two examples. And what will happen, however, is that effective prudential regulation will make the mergers go away. Because essentially, what we have to do, is make any financial entity has to have the capital and pay the insurance so that its failure will not need recourse through the Treasury. And so what we need is dramatically escalating capital requirements as you get bigger and bigger. And of course, the bankers will tell you, if you require me to have more and more capital, I can't leverage as much, and so I won't be able to do as many deals. Well, then, that's exactly what we want is we want them not to do as many deals.

Second of all, if you dramatically increase the insurance premium and the capital requirements, should they fail the insurance fund would have the resources and the capital would be available to resolve these institutions. Essentially, what we've been told, is that it is impossible to resolve AIG without pulling down other institutions. But if AIG had a very high capital requirement, they would have the assets available to resolve their own mess. If they had been required to pay a heavy insurance premium, those resources would be available to the resolution agency to resolve the mess without the recourse to the Treasury.

So I believe that if we intend to be serious about preventing too big to fail, we will do so in a manner through prudential regulation which will also solve your merger concern.

REP. CONYERS: Can I ask for a little additional time, Mr. Chairman?

Before I go to Ms. Garza, could I ask for Mr. Foer's feelings about this part of our hearing?

MR. FOER: Well, sir, I agree that the problem for this hearing, the too-big-to-fail problem, is something beyond what antitrust was really able to do with. Now, the Celler-Kefauver Act came out of this committee, said that we were going to deal with mergers that concentrate the economy in their incipiency. As the Chicago school became dominant in the setting of antitrust policy, with microeconomic analysis at the core, the burden shifted. The burden that I think Congress wanted back in the '50s was that we would really be worried about mergers and the tendencies they have toward concentration. And we moved away from that. And in a way, we reversed our presumption. The presumption today is that mergers are generally and mostly beneficial because they're efficient, and only a few represent problems.

What I would say is the more we know about these things, the more worried we should be that at least very large mergers at the top of the scale, we should be reversing the burden. And instead of assuming that they're good and forcing the government to prove that they're bad, we should make the opposite assumption. And if we could work with that, only for the very largest and most concentrating types of mergers, I think we might get back toward what Congress originally was at.

REP. CONYERS: Ms. Garza.

MS. GARZA: Obviously, we have a lot of reason to be concerned about the situation we find ourselves in today. But I think that antitrust has very little role to play, has played, in the reason we are where we are. It's not so much that the entities that are being bailed out are large, it's what they've done. The too big to fail, I think there's a relative consensus here, is really not an antitrust concept. Size is certainly relevant to the antitrust analysis of a merger in the sense that it's a starting point. Size in terms of market share is certainly a starting point in the antitrust analysis but it's only that.

Antitrust analysis today has evolved far beyond a knee jerk reaction to a big is bad philosophy and it now rests on a very sophisticated assessment of the likelihood that a merger will result in the acquisition or growth of market power based on solid economic principles.

And it would be, I think, to move backward from that. I don't know how you would incorporate or apply a standard that says simply, size is the problem.

Having said that, I think it, you know, and we looked at this, as you know, at the AMC we spent three years looking in part at the very question of whether current merger enforcement policy was properly calibrated; whether we were not stopping mergers that we should've stopped or stopping mergers that we shouldn't stop. And I think the general consensus was that merger enforcement policy had evolved to about the right place where we were carefully considering the effects of a merger on market power, on consumer welfare, but also, allowing entities to engage in transactions that either, you know, were not anticompetitive or that benefitted the economy through efficiencies.

That balance, I think, is the correct way to go.

Now in the banking area, as I said in my written statement, it may be appropriate at this time to shed some light on this, to look at the number of studies that have been conducted and to consider whether or not increased consolidation in the banking industry has resulted in an effect of higher amounts being paid for loans, lower amounts being paid for deposits, other competitive effects.

It would be worthwhile to look and see whether divestitures that have been ordered in past transactions have been effective in what they sought to accomplish.

It would be worthwhile, I think, to look at what the effects are on the competitive dynamics of a marketplace when you have government intervention. Either, you know, government owning partial --- taking partial stake in companies and subsidizing the operations of companies.

It would be useful to take a look at whether or not national concentration has affected the competitiveness of the interbank money market.

So all those things, I think, to look at but before Congress does anything I would suggest that it consider asking the antitrust division and the banking agencies to look at the data so that when you do act, you're acting out of full sense of what's actually --- what the actual facts are.

Thank you.

REP. JOHNSON (?): You're welcome, Mr. Chairman.

We are joined by our colleague from Texas, Houston as a matter of fact, the Honorable Sheila Jackson Lee. Welcome Congresswoman.

And now we will go to Mr. Chaffetz.

REP. CHAFFETZ: Thank you, Mr. Chairman.

REP. JOHNSON (?): Five minutes.

REP. CHAFFETZ: I appreciate it.

Mr. Cloutier, in your --- has the TARP process been sufficiently transparent from your perspective and that of the independent community bankers of America?

MR. CLOUTIER: You know, we don't have enough information yet on the total TARP program to know if it's totally transparent or not. Of course, I have to tell you very honestly, Mr. Congressman, we wake up every morning under some new rules, so they continue to change. You know, so, you know, is it TARP one, TARP two? So, it continues to change and the bailouts, as we've seen with AIG, continue to change.

REP. CHAFFETZ: And, Ms. Garza, a question for you. From a purely procedural view what steps should the Obama administration take, if any, to ensure the transparency of the merger review process in the context of the TARP funds?

MS. GARZA: You know, the Antitrust Modernization Commission made the recommendation, in fact, that the agencies should focus on transparency and the agencies have taken steps toward that with the merger guidelines, speeches, testimony, reports.

I actually have said in my written statement I think that it may be appropriate to focus some of those efforts more specifically on the banking mergers. It's important for the public to have confidence in what the antitrust agencies are doing and it would help --- confidence in, obviously, with what the government's doing but also what the antitrust agencies are doing their job. So I think it would help with that if the new administration would focus on explaining, not only to Congress but to the public, how it is that they're conducting their investigations with respect to these bank consolidations that involve TARP funds, where enforcement action is taken, why it's not being taken.

I have no particular reason to believe that the agencies won't act appropriately but I do think it's useful for them to explain the standards they're applying and explain the decision making. So I think that would be good.

The other thing I've suggested is that it may be appropriate for the agency to do similar to what it did recently with the telecom industry, which is to have a symposium and report on the state of competition in the financial industry and to clarify what it's standards are going forward.

I noticed that the incoming head of the antitrust division did indicate she had a desire to revisit how bank mergers were being looked at. Hopefully that revisiting will lead to a transparent policy of discovery in this area, discovery of, with respect to the data that exists on where we are now, and then on discussion about what should be done going forward.

REP. CHAFFETZ: Okay, thank you.

Mr. Foer, you seem to be in agreement with Ms. Garza and Mr. Askew that antitrust analysis is not to blame for the current crisis, rather it is a problem of competition policy more broadly defined. If this is not a problem of antitrust why do you advocate for the creation of a new deputy position within antitrust?

MR. FOER: The two issues here. Competition policy really is anything that the government does that effects competition, that includes your sectoral (sp) regulation. Antitrust is just limited to your three laws, the Clayton, Sherman, and FTC Act, primarily.

So the antitrust division has always had an advocacy function, where it goes before other agencies and it explains what the competition implications of given regulation or even a legislative proposal would be and that's a very proper and important function of the antitrust division.

Now what I'm saying is this emergency recession situation, where we are rapidly restructuring the economy and having huge effects on competition is so important that there should be one person designated to report to the assistant to the attorney general, but to have the backing of Congress to sit there in all the meetings, the various planning meetings, to be able to talk with the secretary of the Treasury, with the Federal Reserve bank and with others in the White House who are doing the planning. And then make sure that the voice for competition is heard because we're going to be making some very tough decisions with long term consequences. And in some cases it'll be necessary to make decisions that are anticompetitive. But let's keep those to the minimum when they are absolutely required.

And the other thing is we've got to deal with this in the future. We shouldn't think that these decisions now are necessarily permanent. We've got to come back to all of this after the crisis is over and we've resolved the crisis and then figure out where we want to be. And that's going to take a whole new inventory of where we are. And it's going to take building a consensus about where we want to go. And I think it's too soon to do that because we don't know how far down we're going. We don't know where we're going to be at the bottom.

REP. CHAFFETZ: Thank you.

And thank you, Mr. Chairman.

REP. JOHNSON: Thank you, sir.

Next we'll have questions from Congresswoman Sheila Jackson Lee.

REP. JACKSON LEE: Thank you very much, Mr. Chairman. Let me thank you for this hearing you, as well as the ranking member, Mr. Coble from North Carolina and the, certainly the full committee chair and the ranking member.

I'm going to, I guess, be the skunk of the party and indicate that one, I believe the judiciary committee has a amazingly instrumental and intricately important role, if you will, on this whole question of reordering our markets. Not to suggest that everyone engaged should be held criminally liable in the markets, no. But I think the partnership of regulation and enforcement is key. And not so much enforcement for those of you who are certainly proponents of the free market that we would kill the free market but I'm not totally convinced that the antitrust laws don't have a important role that can be utilized.

And let me just indicate that one of the issues of antitrust laws is monopolization. And I would image that I would be refuted, if you will, on the issue of monopolization of the banking industry by the fact that they carry different names and you're absolutely right.

So you're --- you can't say that Citigroup is a monopoly because there are counterparts, there are equals in the business. But you can say that big banks create a monopoly and it may be that they are intrinsically part of the capitalistic system but the main big banks or the entity big banks are a monopoly.

And you can point out to me what little guy has risen to be a big guy in the last 50 years, short of the big guys buying them up. And you might say, well the big guys are now added so that little guy finally got in. But no, that little guy was eaten up.

So, I frankly believe that maybe we need to breathe life into the antitrust laws that begin to look at industries in a monopolistic --- or that they're monopolistic in a fashion in terms of how they bar growth from others who are competing against them.

Some would say community banks, regional banks, and private banks are not competing; they are. Now those banks have been very proud to say, for example, that it was not us and they are still doing well, they didn't take the marketplace. Mr. Cloutier, -- if I'm pronouncing your name correctly --- you're familiar that you didn't probably take the kinds of mortgages, you probably knew a lot of those who came into you're bank that you gave mortgages to. I don't want to suggest that we don't want to spread the opportunity of homeownership, I was certainly part of that. But I certainly wasn't part of the predatory type form, the subprime, you know, the people who could afford regular mortgages were getting subprime just in a skewed marketplace.

So let me raise some questions. AIG, for example, is a monopoly. How did we allow one company to be the insurer of everything; making bread, going across the street, making movies, every --- that is monopolistic.

Now that's insurance but the marketplace --- it has the marketplace role. I frankly believe that our laws have a responsibility --- antitrust laws --- to address that bigness that injures that marketplace because what happens is AIG is so big and the regulatory process is so limited.

So, Mr. Cloutier, why don't you, since you seem to be the lone wolf, try and argue for this idea for having some involvement. How do you --- how would you suggest that Congress be creative in its thinking on using antitrust laws that, I frankly believe, need to be updated?

And I want to thank Theodore Roosevelt for his, if you will, wise-ness because we've done well since.

How would think we would intervene if we were to use antitrust laws?

MR. CLOUTIER: Well as I mentioned a while ago the answer to the question. I think the first thing you do is you drop the limit on what a large bank particularly can hold in assets.

And I think you're question about AIG ---

REP. JACKSON LEE: Do we kill the market that way?

MR. CLOUTIER: You know, you won't kill the market. I mean, I guarantee you in the state of Texas -- if Citicorp had to sell branches in the state of Texas Don Adams would buy them all and the ones he wouldn't buy Don Powell would. You know, so, you know, you're going to have very good competition. And, you know, I will tell you that, you know, I would just point out that yesterday President Obama and Secretary Geithner reached out to the community bankers, I happen to have the picture here of our current chairman who lives in the state of Texas who made the presentation yesterday with the president about small business lending and getting back to the core of America in that type of lending.

You know, often when these large CEO's buy these companies it's amazing how much they pay themselves for doing that, which has led to where we are today.

REP. JACKSON LEE: If the chairman would indulge me an additional minute to pose my other question with Ms. Garza.

Thank you, Mr. Cloutier, you were talking about the lenders --- Ms. Garza why don't you think modernized antitrust laws could not be affective and would you keep an open mind to the extent that there may need to be some modernizing of our laws? I have some additional --- I ask unanimous consent for an additional minute, Mr. Chairman?

REP. JOHNSON: Without objection.

REP. JACKSON LEE: Thank you.

Ms. Garza.

MS. GARZA: Just to be clear, my position isn't that the antitrust laws have no role to play. In fact, my statement is very clear that I think they do have a role to play.

REP. JACKSON LEE: Thank you for correcting me. Maybe you could expand on that. I'm sorry.

MS. GARZA: Okay. And so, for example, as I said, is while we currently have an interest in shoring up the stability of the markets today, what I have said is I think we have to be awful careful about consolidation that occurs today that may affect the competitiveness of the marketplace in the future.

So I don't think that antitrust should be displaced. I think it has a role to play.

But what I also said is I don't think you can lay the current crisis at the foot of antitrust enforcement. The issues that have brought us --- the problems that have brought us to where we are today are much more complex and different than the size of the institutions. And people here have mentioned what some of those problems are.

Those are --- and I mentioned them in my paper --- those things have to be dealt with but they're beyond the scope of antitrust enforcement.

So what I would suggest is that we don't put the antitrust laws on the shelf, we don't do what was mistakenly done at the time of the depression and say, well, we can't afford the antitrust laws anymore. I think we can afford the antitrust laws. And I do believe that the antitrust laws, the way they are enforced today, are not incompatible with steps that needs to be taken to try to shore up the stability of our financial markets.

REP. JACKSON LEE: Yeah, and I agree with you.

Can you not consider, rather than looking at the isolated main groups, Citigroup and others, look at the big banks banking industry in terms of modernizing our antitrust laws to try to penetrate what, not caused them, but keep them from doing that again?

MS. GARZA: The structure of the market is an important thing to look at and I can't sit here today and say that I have studied the structure of the market or that I think it's monopolistic or oligopolistic.

What I do think is that this is something that would be appropriately tasked to the antitrust division to look at. The antitrust division, after all, does have jurisdiction to review bank mergers. They do have a process that has been in place since 1995 for looking at bank mergers. It does tend to focus on the effects on localized markets where lending is done and deposits are taken. I think that that process has worked well. But to the extent that there are questions about the effective consolidation now, the effect of the interconnectedness, you know, whether that's having --- whether it's affecting prices that are paid, diversities, et cetera. All those things, I think, are legitimate to look at but I, at this point, I can't say that I think that antitrust has failed. The only thing that I can say is that it may be worth further investigation about how the markets are operating.

REP. JACKSON LEE: Thank you.

MS. GARZA: May I just agree with --- may I just say one thing? I agree with Bert Foer, I don't necessarily agree that there needs to be a new deputy assistant attorney general appointed but I do agree with him that the antitrust division and the justice division should be at the table when steps are taken to ensure that there is a voice speaking about the competitive effects of various actions that are taken. I think that the assistant attorney general can probably fill that role and the attorney general

Thank you.

REP. JACKSON LEE: I'd like --- let me thank you.

I'd like to make an inquiry of the chair as I thank him for his leadership in this issue. I think the door that Ms. Garza has opened and the door that I started out on is we're always playing around the edges of antitrust law but we might need some creative updating. I know that one suggestion has been a deputy position and someone has disagreed with him. But a creative updating on how we, in essence, restrain some of the bad act that bigness created. You know, I still think there's a monopolistic scenario with all the big banks. They're in there together and I don't think our antitrust laws may fit that. They usually fit a big entity like GM but they don't fit the collective and we may need to deal with that because we need to get our feet in the door on enforcement. That might help a lot of our citizens who are suffering right now.

Mr. Chairman. And I look forward to working with you on that issue, on that approach.

Thank you.

REP. JOHNSON: Thank you, Congresswoman and your point is well taken. We'll be having further discussions and hearings on that very issue. But thank you.

And time for this hearing has now, I'll say it's expired. And I'm sure that you all are --- that makes you happy.

So again, without objection, members will have five legislative days to submit any additional written questions which we will forward to the witnesses and ask that you answer as promptly as you can and they will be made a part of the record. Without objection the record will remain open for five legislative days for the submission of any additional materials.

And again, I want to thank everybody for their time and their patience.

And this hearing of the subcommittee on courts and competition policy is adjourned.


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