Most specific markets can handle three effective competitors with all doing well. Market segmentation opens the door to many participants and constant acquisition and divestiture activity. In fact we can almost propose a rule of three, expecting dominance to shift back and forth over the years.

In the finance industry, market segmentation has been by region, but mostly by product line. In the thirties, the regulators forced segmentation by product line because they knew that the rules applying to a given product line were often in conflict applied to a different product line. The recent blunder was to believe that a human being can balance several such regimes in the same organization. I do not think it can be done because the risk profiles are not complimentary.

In the event what drives all acquisition is improving credit as organization size rises. This credit granting process is inherently wrong and leads quickly to a weakened credit profile.

Proper credit rating would in fact impose a down grade upon any acquisition exceeding ten percent of capital. There are plenty of good reasons for this. We have added fresh uncertainty to the viability of the new enterprise and this will not be sorted out for several quarters.

Strong credit of course induces growth by acquisition rather than by internal growth or even distribution of capital.

Regardless, once a market has lost effective competition through this acquisition process, the winners then push to constrain fresh competition. It is then that anti trust laws should kick in.

The US financial system would be far better served by breaking up the present system into many if not hundreds of boutique firms that openly compete in the capital markets. Most important however is to again split out the product segments.

We cannot have brokers trained to take split second risk positions to have access to a banks capital multiplier effect on money at risk. It was dumb when Clinton opened the door, and dumb to not rein it in quickly whatever the excuses were proffered for continuance.

The hangover continues.

Break Up the Giant, Insolvent Banks Using America's 100-Year Old Anti-Trust Laws

by Washington's Blog

Global Research, September 24, 2009

Washington's Blog - 2009-09-23

I have previously pointed out that we can (and should) break up the giant, insolvent banks under a number of different laws.

Indeed, the government could break up the “systemically dangerous institutions” under 100-year old antitrust laws.

The Sherman Act

The two primary U.S. antitrust laws are the Sherman and the Clayton Acts. I'll give a very brief overview of the two acts.

The Sherman Act (15 U.S.C. Sections 1-7) - enacted in 1890 - makes trusts and cartels illegal.

Section 1 of the Sherman Act is basically violated if there is:

1. 
   
   An agreement


2. 
   
   which unreasonably restrains competition


3. 
   
   and which affects interstate commerce.

Section 2 of the Sherman Act is basically violated if there is:

1. 
   
   The possession of monopoly power in the relevant market and


2. 
   
   the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.

The Clayton Act

The Clayton Act (15 U.S.C. Sections 12-27 and 29 U.S.C. Sections 52-53) - passed in 1914 - makes it illegal to use price discrimination, exclusive dealings, "tying", mergers and acquisitions which substantially lessen competition, or to perform certain other anti-competitive acts.

Have the Giant Banks Violated the Anti-Trust Laws?

The big banks have gotten bigger and bigger.

Noted economist Mark Zandi says we have an oligopoly of banks, and that "the oligopoly has tightened". Oligopolies and cartels are closely interrelated, in that cartels (e.g. agreements to fix prices) arise when there is an oligopoly (i.e. when a few firms control a market).

Indeed, William K. Black - senior regulator during the S&L crisis, professor of Economics and Law, and an expert on white collar financial crime - says that banks intentionally grew themselves by using fraudulent loan practices. As I explained last month:

Black explained that fraud by a financial company usually involves the company:

1) Growing like crazy

2) Making loans to people who are uncreditworthy, because they’ll agree they’ll pay you more, and that’s how you grow rapidly. You can grow really fast if you loan to people who can’t you pay you back

and

3) The use of extreme leverage.

This combination guarantees stratospheric initial profits during the expansion phase of the bubble.

But it guarantees a catastrophic subsequent failure when the bubble loses steam.

And collectively - if a lot of companies are playing this game - it produces extraordinary losses (more than all other forms of property crime combined), and a crash.

In other words, the companies intentionally make loans to people who will not be able to repay them, because - during an expanding bubble phase - they'll make huge sums of money. The top executives of these companies will make massive salaries and bonuses during the bubble (enough to live like kings even even if the companies go belly up after the bubble phase).

As the New York Times noted in May:

President Obama's top antitrust official this week plans to restore an aggressive enforcement policy against corporations that use their market dominance to elbow out competitors or to keep them from gaining market share.

Fortune pointed out in February that the only reason that smaller banks haven't been able to expand and thrive is that the too-big-to-fails have decreased competition:

Growth for the nation's smaller banks represents a reversal of trends from the last twenty years, when the biggest banks got much bigger and many of the smallest players were gobbled up or driven under...

As big banks struggle to find a way forward and rising loan losses threaten to punish poorly run banks of all sizes, smaller but well capitalized institutions have a long-awaited chance to expand.