Tuesday, July 29, 2008

Mergers Concentrate Failure Potential

Something I have not heard talked about much during this latest round of negative news in the investment banking, banking, and mortgage related financial businesses is how mergers have concentrated points of failure throughout our financial system. Mergers have been all the rage in the past couple decades, with the big companies getting bigger and bigger through rampant acquisition activity. The end result is a financial system where the top few banks, brokerages houses, investment banks, and mortgage GSEs control an immense amount of assets and liabilities. As such, a failure of any one of these large institutions can lead to a domino effect.

Mergers were sold to everyone as the panacea of financial growth opportunity. Things like "economy of scale" and "improved efficiencies" and even some statements as lame as "it will allow us to compete better" and so on are always cited as the reasons for these mergers that have progressed to mega-mergers (which have led to near monopolies in many industries too). But, people never point out the obvious problem: you concentrate all your risk into one firm too by extending too much power and credit to one firm. It's the old adage "don't put all your eggs in one basket" that comes to mind.

Fact is, our government is supposed to prevent mergers that lead to monopolies or monopolistic-like business practices, but I have utterly lost any hope in our government's ability (or willingness) to reign in the widespread super-consolidation that takes place daily. In fact, every time a new merger announcement comes up that is "subject to regulatory approval", I quickly tell everyone that thinks that an obvious end-result monopoly won't be approved is wrong (i.e., I always bet the government will do purely what business wants and allow the consolidation to occur, even if there exists not a single competitor in the market - just like the XM/Sirius merger of recent). I've watched for years now how the government allowed the former ATT companies all merge back together (why did we waste time breaking them up!?) as well as all sorts of oil companies. And, of course, we've seen financial firms merge and consolidate further and further.

To get back to the point here: allowing this to happen is anti-competitive, and moreso, it puts us all in a position where one large company's failure (or potential failure) can jeopardize the entire economy. Of course, these same firms are now so big that our government decides "they are too big to allow to fail", so we the taxpayers get to back them through a precedence that is forming yet another club of special powers: those firms that have achieved such market dominance that they now have a way to directly access taxpayer-backed funding.

Decentralization is a great method for minimizing the likelihood of catastrophic failure in networks, power-generation, food production, and yes... even in things like banks! So, instead, what do we do? We do anything to prevent widespread "off-grid" decentralized power generation... we allow mega-farms to be formed and corporate controlled... and we allow corporations of all types to merge into behemoths that are "too big to allow to fail".

So much for the day of "ma and pa" stores and businesses. Small businesses typically generate the most jobs, and generally don't take more than they give (as do many LARGE corporations through their endless special-interest tax-credits and other handouts and incentives). Small businesses are not getting a direct line to the taxpayer for their funding, but instead, they have to risk their own personal assets in many cases just to stay afloat. That is what we should reward!

America was founded on principles that shown bright and gave us the "land of opportunity" mantra. It will become increasingly difficult for REAL competition to flourish via small, independent startups, especially when the larger players that already have "economy of scale" on their side also have the government on their side in nearly every conceivable aspect of their business - including direct financing sources now (via you, the taxpayer). Who is going to come in and bail out the little business that is having a rough go of it in this economy, and who doesn't even get a single dime in tax abatements, job-creation-credits, and other incentives only available to larger firms (that quite often take much more than they give if you ever look at the balance of credits and incentives given them vs. what they create in employment taxes, income taxes, etc).

OK, I'm done ranting for now. But, keep in mind, concentrating such power into a few firms is also concentrating further likelihood of catastrophic failure in the future.

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