After most recently addressing his ire at the mental instability of the executives running Wall Street’s major institutions, Bill Cohan this week examines the shrinking competition among the largest Wall Street firms and makes a well-argued case that it represents a pattern of behaviour stretching back to the 1940’s.Specifically, Cohan dissects a 1947 anti-trust case that was brought against 17 firms for colluding to set prices for investment banking services.
While the suit was thrown out in 1953 for what a judge deemed undue reliance on circumstantial evidence, Cohan thinks the government’s argument “was spot on”:
The investment-banking business was then a cartel where the biggest and most powerful firms controlled the market and then set the prices for their services, leaving customers with few viable choices for much needed capital, advice or trading counterparties.
The same argument can be made today.
Using a term associated with drug lords and OPEC, Cohan argues that because the financial crisis drastically reduced the number of top-tier investment banks (you can’t even name 17 ‘top-tier’ investment banks today), and with it the decreased the modicum of competition they engendered, “the investment-banking business is an even more powerful and threatening cartel than it was in 1947.”
The best evidence for cartel-like behaviour today?
The prices charged for services across top-tier firms.
Cohan quotes industry standard rates for stock and debt underwriting, loan syndication and M&A advice, which varying insignificantly from bank to bank and deal to deal.
Another piece of evidence not cited by Cohan that nonetheless supports his point are the strong trading quarters enjoyed by many investment banks in 2009. There simply were fewer competitors and that placed a premium on liquidity, which is fair enough except for the fact that the reduction of market participants had been directly caused by government actions taken with little oversight by the former CEO of a leading investment bank and the government took no countervailing measure to create price competition.
Cohan’s points to Google’s use of the auction method in its IPO as a rare moment when the established system was challenged. But as we’ve noted here before, it’s the brave few founders who are willing to risk unorthodox offering methods. Better to pony up and pay an arguably over the top 7% underwriting fee than see the IPO of the company you founded fail.
So where do we stand now? As Cohan notes, no anti-trust lawsuit against investment banks is in the works. But he does see a glimmer of hope in the Obama Administration’s rejection of the AT&T, Deutsche Telecom merger, in which Wall Street lost millions in fees.
Still, that’s a fee banks would gladly pay for business as usual to stay as such.