The Damnable Politics of Regulation

April 27, 2011

Today's blog is a continuation from yesterday's: The Antitrust Division's Dangerous Bluff with LIBOR
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In his April 25, 2011, Exile on Main Street column: Nasdaq, ICE Scoff At New Synergies In NYSE Merger Forbes contributor  Steve Schaefer stated:

Over the weekend NYSE Euronext touted additional synergies in its proposed merger with Deutsche Börse, but the news was met with skepticism by Nasdaq OMX Group and IntercontinentalExchange, the team of rival bidders trying to break up the deal and win the Big Board for themselves. . .

Of course, a Nasdaq/NYSE marriage - ICE would acquire the derivatives businesses - still faces scrutiny from regulators, and the Wall Street Journal reported Monday that Senator Chuck Schumer (D, N.Y.) is demanding details on how many job losses would result in order to achieve the $740 million in synergies (largely cost-related) touted in their proposal.

As you may recall, in February, I weighed in with my own take on this NYSE deal with: Senator Schumer Cries for the NYSE. In that blog I stated that:

Perhaps you read Senator Schumer's most recent comments about the NYSE? Yes, his points and tone have changed dramatically in seven years. As reported by Aaron Elstein in, "Schumer Calls for New York Stock Exchange to Retain Its Name" (Crains New York Business, February 13, 2010), the Senator said:

Sen. Charles Schumer said the New York Stock Exchange brand must not only survive if the company merges with Deutsche Borse, but it must also come first in whatever name the combined company adopts.

"Some may say what's in a name, but I say a lot," Sen. Schumer said Sunday in his first public remarks on the merger talks, which were revealed last week. "The New York Stock Exchange is a symbol of national prestige, and its brand must not suffer under this merger."

He warned that if Deutsche Borse, whose shareholders stand to own about 60% of the combined company, do not give way on this matter, the entire merger could run into significant regulatory and political roadblocks.

My, how times change! It's no longer a concern that the NYSE be first among international stock exchanges. Now we're up in arms about where the NYSE acronym will be positioned in the new name for the new exchange that will have a majority German owner. You must understand that for the New York Senator, preserving the primacy of the name "New York" in this new exchange is of national urgency. Of course, this coming from the Senator of a state whose two professional football teams play in New Jersey.

Limp Flags

How is it possible for so many in Congress and those charged with antitrust and securities markets' enforcement to have been so blind-sided by the NYSE merger/acquisition issue?  Years ago, did it not occur to anyone that the NYSE's market share and so-called "brand" were fading in the face of increased domestic and international competition?  Frankly, there's little here that should surprise anyone.  The only surprise is the lack of contingency plans and the lack of a contemplated, comprehensive strategy to respond to the situation of the NYSE's acquisition/merger.

A few weeks ago, it was about protecting a brand name and retaining the "New York" in the NYSE.  Now? Oh, now, it's about retaining jobs.  Tomorrow? Who knows.

LIBOR Collusion

In his recent Forbes column: Antitrust Criminal Charges Threaten Survival of Big Banks, Shah Gilani informed us that the Department of Justice's ("DOJ") Antitrust Division is investigating whether as many as 16 major banks colluded from 2006 through 2008 as part of a scheme to manipulate LIBOR. In response to some of Gilani's points, I published LIBOR: The Antitrust Division's Trojan Horse? in which I noted the Antitrust Division's troubling history of taking on too-big-too-fail interests with what I viewed as tepid results.  I also wondered whether the Antitrust Division has embarked upon an overly ambitious agenda that is spreading its assets too thinly over too many key cases.

I remain puzzled as to the growing Antitrust Division agenda. Health care. Muni bonds. LIBOR. NYSE merger. Google. And on and on.  Impressive? Admirable? Sure - but is it a case of an organization's reach exceeding its grasp, and has anyone bothered to ask about the consequences of such ambition?

In my conversations with other reporters, other lawyers, and industry analysts, we often talk about the belated investigations/prosecutions of long simmering regulatory problems.  The muni bond market is crippled - a status caused by unbridled corruption and the lingering effects of the Great Recession.  A more timely Antitrust Division prosecution - say five or ten years ago - would not add a now unwelcome element to an already precarious market.  Remember, that the "market" now includes victimized bondholders, many of whom are little guys, average Joes, who own a small piece or have derivative ownership through a 401(k) or mutual fund. When the headlines hit the media, let's see how much more expensive it becomes for already over burdened counties and municipalities to raise funds. Let's see what happens to the values of those muni bonds that many American workers own, directly or indirectly.

Don't misunderstand - I'm not sympathetic for those who abuse the public trust. There is compelling evidence of corruption in the pricing and sale of munis.  However, that evidence is not merely of recent vintage.  Why this new-found zeal? Similar considerations and questions apply to the LIBOR case.

Several months ago I favorably reported on a settlement involving former J.P. Morgan Banker James Hertz:

Hertz and his co-conspirators engaged in a bid-rigging conspiracy from at least as early as October 2001 until at least November 2006.  As a part of the bid-rigging conspiracy, Hertz and his co-conspirators designated in advance which co-conspirator provider, either his employer or another financial institution, would be the winning bidder for certain investment agreements or other municipal finance contracts.   The co-conspirators also agreed to submit intentionally losing bids for investment agreements or other municipal finance contracts that were steered to other financial institutions, giving the false appearance that these deals had been bid competitively in accordance with relevant U.S. Treasury regulations, or the requirements of the municipality.

Similarly, I would refer you to my article: Real Estate Auction Bid-Rigging Rings Busted (February 9, 2011), in which I reported on the Antitrust Division's commendable prosecution of auction pools:

What's the harm if the property sold at a public auction gets banged out for an artificially lower price as a result of the manueverings of some savvy business persons? For starters, the seller at the public auction was cheated out of the hidden profit realized in the second auction. Yeah, I know, the seller is often a bank and who the hell cares about them these days.  However, sometimes it's the homeowner whose finances are depending upon a legitimate sale. Other times your neighborhood is praying for a fair comparable from the auction.

Then there is a more basic issue.  There's just something about such dirty deals that rubs Americans the wrong way.  You either believe in transparency and free markets or you don't.  Fact is, we got this Sherman Antitrust Act that says we care about such things.  We even have an entire Antitrust Division that's part of the United States Department of Justice.

Unfortunately for the cadre of government regulators, I'm not a cheerleader.  My role is to call ‘em as I see ‘em.  While I am happy to publish the complimentary article and give kudos to those deserving, I am not simply going to sit at my keyboard and compose puff pieces. Yesterday and today's Street Sweeper is my attempt to note that there are serious consequences when meritorious cases are untimely prosecuted.  That is the troubling legacy of the Madoff and Stanford cases.  Such is the apparent situation with the now threatened LIBOR investigation and the ongoing Muni cases.

Been There, Done That

I represented some confidential informants and market participants during the Antitrust Division's NASDAQ investigation in the 1990s, and have represented several whistleblowers before the Division over the years.  I am acutely aware of the personal and professional risks that informants often take when bringing their information to the government. I also know how devastating it is when those same folks perceive that those who engaged in misconduct got off easy.  To say that I and my clients felt betrayed by the Antitrust Division's 1996 settlement would be quite an understatement.

Why did I raise the 1996 NASDAQ settlement? Simply to remind you that the last time that the Antitrust Division and the SEC grappled with a major case against multiple defendants in the financial services sector, things didn't exactly end well.  Frankly, the so-called bad guys got off relatively lightly.  In fact, within a couple of years of that 1996 antitrust settlement, NASDAQ acquired the American Stock Exchange - a merger that never quite worked but managed to get pushed through by what I viewed as perfunctory reviews by both the SEC and the Antitrust Division.  I noted similar concerns about the NYSE's less than sterling recent history in Senator Schumer Cries for the NYSE

As I mused about yesterday in Street Sweeper, one can only wonder how different the events leading up to the Great Recession would have been if both the Antitrust Division and the SEC had gone hammer and tong after the 24 leading NASDAQ market makers (and the old NASD) - not just ending their cases with undertakings and large settlement checks.  Imagine if criminal charges had been filed against the entities and senior management. Imagine if criminal fines and prison sentences were imposed.

But, like I said, that's a thought piece. Still - makes you wonder.  Maybe it would have made Bernie Madoff wonder?  Maybe it would have made the sub-prime lenders and the packagers of collateralized obligations wonder?

Big Boys Get to Write Big Checks

In December of 2010, I lambasted DOJ and the Antitrust Division for what I viewed as the softball resolution of a high-profile case against the Bank of America.  I wrote about that settlement because I thought it sent a terrible message to the public and corporate America. As I noted in that December 2010 article:

What's the big deal about the Bank of America having been the first such financial institution to fess up to the Department of Justice?  I'm sure that many murderers and bank robbers come forward and surrender before they are arrested.  Do those folks get off with merely writing out a check?  Keep in mind that the bank's alleged misconduct is of the magnitude that it is paying $137.3 million in restitution to the IRS and municipalities that were harmed by the bank's anticompetitive conduct.  Not that you'd know that from the press release headline.

When Shah Gilani raised the alarm in 2008 about LIBOR rate-fixing, I'm sure that he didn't expect that some three years later there would have been no substantive regulatory response.  Moreover, given that Gilani raised the provocative "what if" question in connection with a possible Antitrust Division investigation/prosecution of the LIBOR contributing banks, I felt compelled to raise the "what's likely" response. History has shown that the Antitrust Division is more likely to seek an expedient settlement with the major entities and, if anything, beat up on some smaller firms or individual defendants - or, as I often note, there's the law for the whales and the law for the small fry.

Ultimately, it comes back to a single, persistent issue.

When will the Antitrust Division and other regulators file criminal charges against a too-big-to-fail bank or financial services firm?

When will those charges result in jail time - not for some low level shlub but for one of the whales?  And not a case against a firm that's bankrupt or out of business but against one that is still humming along.

At the lower end of the feeding chain, behind the storefronts and in the offices of smaller companies, the individuals who serve as proprietors and senior executives are often handcuffed, booked, arraigned, convicted, and sent to prison.  At the upper end of the feeding chain?  Well, you read the papers and watch television, don't  you?  You tell Shah Gilani if you think his LIBOR contributing banks and their CEOs have anything to worry about.

Childish Infighting

In an April 12, 2011, Wall Street Journal article: This Takeover Battle Pits Bureaucrat vs. Bureaucrat, Thomas Catan noted that

Just when deal-making has snapped back to life, the nation's two main antitrust cops are locked in a series of increasingly tense feuds over which agency should take the lead in big cases.

The latest standoff between the Justice Department and Federal Trade Commission centers on a key piece of the Obama administration's health-care overhaul. That battle has worsened already poor relations between the two agencies, sparking concern that billions in freshly minted business deals could be delayed as they squabble for control.

[A]ll the squabbling is more than a bureaucratic sideshow. The number of business transactions reported to the agencies surged more than 60% in the year that ended Sept. 30, 2010, compared with the crisis-racked year before. Recent weeks have seen several megadeals, including AT&T Inc.'s $39 billion acquisition of T-Mobile USA, Texas Instruments Inc.'s $6.5 billion offer for National Semiconductor Corp. and two competing bids to buy NYSE Euronext.

[T]he Obama administration came to power vowing to "reinvigorate" antitrust enforcement, which made the two agencies more ideologically aligned. But deeper, structural differences persist.

In extreme cases, the squabbling over who gets to review a deal can consume much of the initial 30-day review period established by law. The merging parties are then left with an unappealing choice: face an automatic request for more information to give the agency more time, or refile their pre-merger notification to restart the clock. Most companies reluctantly choose the latter.

Catan's article provided us all with a realistic glimpse behind the curtain.   This is modern day regulation.  This is the politics of regulation.

Valid Versus Value

LIBOR needs to be investigated and, if necessary, fixed to ensure fundamental fairness.  Muni bond practices need to be reformed. Healthcare must be cleaned up.  The Internet must be kept competitive. All valid antitrust concerns. But - is each concern of equal value?  If you had to choose priorities, aren't some of those issues of greater value than others?  If you don't order your priorities, don't you run the risk of multi-tasking beyond the capacity of your memory?  Opening too many cases runs the risk of freezing and crashing the system.

My fear is that right now we've got far too many antitrust fires and far too few firetrucks and fire fighters.  To rush to the flames in one place is to abandon them elsewhere.  As Catan pointed out, sometimes you have two firetrucks competing for the same hydrant - and while the two crews duke it out, valuable time is lost as the flames spread.

I have long railed against the construction of regulatory silos on Wall Street that insulate the industry's cops from each other and build vertical fiefdoms. Those of you familiar with my published content know that I have frequently complained that the investing public is done a disservice by the incessant turf wars among the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Financial Industry Regulatory Authority, the states' securities divisions, and various federal and local criminal agencies.

Apparently, we have failed to contain the practice.  As Catan noted, we have added yet another layer to that idiocy as the FTC, the Antitrust Division, and god only knows how many federal and state prosecutors are elbowing each other out of the way for a new crop of antitrust cases.  Worse, there seems to be an explosion of antitrust matters that may well overwhelm the limited regulatory resources available.  But, hey, someone has to get the headlines and the glory.


After some three decades on Wall Street, I've realized that it's rarely the regulatory investigators, examiners, or staff attorneys to blame (sometimes, "yes," but not overwhelmingly so). More often than not, the blame for failed regulation falls squarely in the lap of those in charge because they often set unrealistic agendas and  have little feeling for the limits of their staff and budget. Then, after the damage is done, they resign for a cushy job and leave behind the rubble of failed policies and overly ambitious plans - rubble that someone else, always someone else, has to clean up.

Where does all of this leave us? Well, pretty much where we're always left. At the mercy of special interests and victimized by politicians and regulators unable to get out of their own way. Alas, we are forever undone by the politics of regulation.