Business Forum: Wall Street cartel today at its most dangerous

February 25, 2012 12:00 am

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Sixty-five years ago, in 1947, the U.S. government sued 17 leading Wall Street investment banks, charging them with effectively colluding in violation of antitrust laws.

In its complaint -- which was front-page news at the time -- the Justice Department alleged these firms had created "an integrated, overall conspiracy and combination" starting in 1915 "and in continuous operation thereafter, by which" they developed a system "to eliminate competition and monopolize 'the cream of the business' of investment banking."

The U.S. argued that the top Wall Street investment banks -- including Morgan Stanley (the lead defendant) and Goldman Sachs -- had created a cartel by which, among other things, it set the prices charged for underwriting securities and for providing mergers-and-acquisitions advice, while boxing out weaker competitors from breaking into the top tier of the business and getting their fair share of the fees.

The government argued the big firms placed their partners on their clients' boards of directors, putting them in the best possible position to know when a piece of business was coming down the pike and to make sure that any competitors were given a very hard time should they dare to try to win it.

The government was spot on: The investment-banking business was then a cartel where the biggest and most powerful firms controlled the market and then set the prices for their services, leaving customers with few viable choices for much-needed capital, advice or trading counterparties.

The same argument can be made today.

Indeed, following the destruction of Bear Stearns Cos., Lehman Brothers Holdings Inc., Merrill Lynch and countless smaller and foreign competitors during the financial crisis that began in 2007, the investment-banking business is an even more powerful and threatening cartel than it was in 1947.


First Published 2012-02-24 23:20:32

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