May292012
Is the banking cartel in violation of the Sherman Antitrust Act?
Unfettered capitalism has its drawbacks. The two most notable among them are key issues in the housing bubble and bust: Ponzi schemes, and monopoly price fixing. Ponzi schemes are destructive because they create artificial demand for goods and services based on unsustainable growth in investment or debt.
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation. The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going.
The system is destined to collapse because the earnings, if any, are less than the payments to investors.
In the case of a debt-based Ponzi scheme like the housing bubble, the payment of interest is made from fresh issuance of debt rather than income from wages or from rents. The system is destined to collapse because it depends on lenders extending ever-increasing amounts of credit. When lenders stop the music, credit violently collapses, and borrowers are exposed as insolvent because they can’t make payments from income or rent.
While the Ponzi virus is spreading, lenders inflate asset values by continually increasing loan balances. Each successive buyer is leveraged more than the last. When the Ponzi scheme collapses, lenders are left with many loans far in excess of what borrowers can repay with their wage income. As a result, lenders are faced with unsavory choices:
- They can foreclose on delinquent debtors, recover a portion of their original capital, and write down their losses.
- They can amend and extend loans and pretend borrowers will repay under the modified terms.
- They can lower interest rates to increase loan balances to improve their capital recovery (if backstopped by the government who absorbs the risk of further loss).
- They can regulate market supply to control market pricing to improve their capital recovery.
Of the three options available to them, ordinarily banking regulators would have forced them to recognize their bad loan losses, foreclose on delinquent borrowers, and recover what they could of their original capital. If regulators had forced that course of action in 2008, the entire banking industry of the United States would have been exposed as insolvent, and the government would have been forced to nationalize the banking system, and management would have been thrown to the wolves. That’s what should have happened. However, instead of nationalizing the banks, we designated them too big to fail and bailed them out with a blank check and gave the managers obscene bonuses.
Since what should have happened didn’t happen, lenders have resorted to their other three options: amend-extend-pretend, lowering interest rates to increase loan balances, and regulating the supply of properties on the market to fix prices. Amend-extend-pretend is a proven failure as 50% or more of loan modifications redefault within a year. Lower interest rates help, and that’s why we have record low rates today. However, their final policy option has a big problem with this everyone is ignoring: Price fixing is illegal.
Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand.
The intent of price fixing may be to push the price of a product as high as possible, leading to profits for all sellers but may also have the goal to fix, peg, discount, or stabilize prices. The defining characteristic of price fixing is any agreement regarding price, whether expressed or implied.
Price fixing requires a conspiracy between sellers or buyers. The purpose is to coordinate pricing for mutual benefit of the traders.
Isn’t what the banks are doing a clear example of price fixing? The banks are not doing it to make a profit but to limit their losses. Does that make it socially acceptable?
In the United States, price fixing can be prosecuted as a criminal federal offense under section 1 of the Sherman Antitrust Act.
Colluding on price amongst competitors, also known as horizontal price fixing, is viewed as a per se violation of the Sherman Act regardless of the market impact or alleged efficiency of the action.
Why aren’t the banks being prosecuted for this? Where’s the consumer outrage? Perhaps such notions of fairness are relics of a bygone era.
America learned the perils of unregulated monopolies in the nineteenth century. Wikipedia notes this about anti-competitive behavior.
It is usually difficult to practice anti-competitive practices unless the parties involved have significant market power or government backing.
Right now, lenders control more than two-thirds of all sales with short-sale approvals or REOs. They are encouraged by the federal reserve, and backstopped by government regulators who look the other way.
Monopolies and oligopolies are often accused of, and sometimes found guilty of, anti-competitive practices. For this reason, company mergers are often examined closely by government regulators to avoid reducing competition in an industry.
Although anti-competitive practices often enrich those who practice them, they are generally believed to have a negative effect on the economy as a whole, and to disadvantage competing firms and consumers who are not able to avoid their effects, generating a significant social cost. For these reasons, most countries have competition laws to prevent anti-competitive practices, and government regulators to aid the enforcement of these laws.
In the nineteenth century trusts controlled nearly every aspect of our economy. Nearly every good or service was provided by a monopoly at a considerably increased cost. The monopolies provided fewer alternatives and lower quality products because they were not driven to improve by competition. The nineteenth century consumer paid a lot of money for low-quality products.
Things were so bad that in 1890, Congress passed and the President signed the Sherman Antitrust Act.
It prohibits certain business activities that reduce competition in the marketplace, and requires the United States federal government to investigate and pursue trusts, companies, and organizations suspected of being in violation. It was the first Federal statute to limit cartels and monopolies, and today still forms the basis for most antitrust litigation by the United States federal government.
The purpose of the Act was, to quote Sherman: “To protect the consumers by preventing arrangements designed, or which tend, to advance the cost of goods to the consumer”.
Isn’t the behavior of the banking cartel in direct opposition to the basic tenets of the Act? Isn’t the cartel’s sole purpose for withholding inventory to drive up the price of goods to the consumer — for today’s homebuyers?
The answer to both those questions is clearly “yes.” The banking cartel is operating on classic monopolistic model of reducing supply to artificially jack up prices to force today’s buyers to pay a higher price than they would in a truly competitive market.
Put another way, it has sometimes been said that the purpose of the Sherman Act is not to protect competitors, but rather to protect competition and the competitive landscape. As explained by the U.S. Supreme Court in Spectrum Sports, Inc. v. McQuillan 506 U.S. 447 (1993),
“The purpose of the [Sherman] Act is not to protect businesses from the working of the market; it is to protect the public from the failure of the market. The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.
Right now we are seeing the results of anti-competitive behavior in the Orange County housing market. Inventory has fallen off a cliff because lenders have decided not to foreclose on delinquent mortgage squatters (thanks to unenforced regulations) and put the resulting inventory on the MLS.
Any first year prosecutor could establish that lenders are in violation of the Sherman Antitrust Act. The real question is why is nothing being done about it? I think we all know the answer to that: the banking lobby has too much power.
The idea that bankrupting our banking system would trigger a depression is bullshit. We could have wiped out the stockholders, forced the bond holders to take a haircut, and recapitalized the banks with fresh money from the government. The government could have sold it’s holdings for a profit once the banks became profitable. That’s what happened with Bears Sterns, Lehman Brothers, and Citibank, and the world didn’t come to an end.
What we have today in banking is a cartel (or perhaps an oligopoly) made of of eight too-big-to-fail banks, Bank of America, Bank of New York Mellon, Citi, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street, and Wells Fargo. Through their lobbying efforts and the federal reserve, they control any key decisions in Washington concerning banking policy and regulation. They have unlimited government backing, and they can speculate wildly without fear of substantive reprisal. The taxpayer will absorb any losses.
California Attorney General Kamala Harris made headlines recently for her pandering to loan owners. If an enterprising and politically ambitious Attorney General wanted to make a real splash, they could prosecute the leaders of the too-big-to-fail banks on racketerring charges under the Racketeer Influenced and Corrupt Organizations Act.
The Racketeer Influenced and Corrupt Organizations Act, commonly referred to as the RICO Act or simply RICO, is a United States federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization. The RICO Act focuses specifically on racketeering, and it allows for the leaders of a syndicate to be tried for the crimes which they ordered others to do or assisted them, closing a perceived loophole that allowed someone who told a man to, for example, murder, to be exempt from the trial because they did not actually do it.
Under RICO, a person who is a member of an enterprise that has committed any two of 35 crimes—27 federal crimes and 8 state crimes—within a 10-year period can be charged with racketeering. Those found guilty of racketeering can be fined up to $25,000 and sentenced to 20 years in prison per racketeering count. In addition, the racketeer must forfeit all ill-gotten gains and interest in any business gained through a pattern of “racketeering activity.” RICO also permits a private individual harmed by the actions of such an enterprise to file a civil suit; if successful, the individual can collect treble damages.
This is a great way to clawback some of those obscene bonuses the banksters have enjoyed while the rest of the country paid the price for their excesses.
Re: the last political cartoon
The banking cartel supported “cap and trade”. Can you guess why?
I’ll bite. Why did they support cap and trade?
Lenders are succeeding in driving prices higher. Do you feel good about being forced to pay more for a house to enrich a bankster.
Zillow: Home Values See Highest Monthly Increase Since 2006
Zillow issued a released Friday reporting that both national home values and rents rose in the month of April.
According to the April Zillow Real Estate Market Reports, national home values rose 0.7 percent in April to a Zillow Home Value Index of $147,300. This is the largest monthly increase in home values since January 2006, and it makes April the second month in a row in which home values climbed up.
Zillow also reported that rents rose from March to April, increasing by 1.6 percent, according to the Zillow Rent Index. Of the 178 markets covered by Zillow, 78 percent experienced a rise in rents.
The Miami-Fort Lauderdale and Phoenix metro areas saw the biggest increases in home values, rising 1.6 and 1.9 percent, respectively. Values continued to decrease in hard-hit markets like Atlanta, where home values fell 0.7 percent.
“The housing market continues to show positive signs, with home values increasing significantly in April,” said Dr. Stan Humphries, chief economist at Zillow. “The recovery is moving in the right direction, but we caution that negative equity will cast a long shadow over the housing market. With almost one-third of homeowners with mortgages underwater and unable to sell their homes, inventory is having a hard time keeping up with increasing demand in many areas. We’ll continue to watch this signal as increasing home values turn from a blip into a trend.”
Foreclosures also continued to decline in April, with 6.8 out of every 10,000 homes being foreclosed across the U.S. That figure was down from 8 out of every 10,000 in March.
“We’ll continue to watch this signal as increasing home values turn from a blip into a trend.”
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Uh… you don’t need a noisy price indice that captures lagging data components to determine “a trend”. Since deleveraging is deflationary–not inflationary, the trend is down.
Nonetheless, as long as $trillions continue to be taken away from savers and transferred to speculators, those proclaiming ‘’recovery’’ are either self-serving beneficiaries or delusional.
“those proclaiming ‘’recovery’’ are either self-serving beneficiaries or delusional”
There are many hoping this “recovery” is real, but with so much bad debt still out there, reality may rain on their parade.
Deleveraging is deflationary I agree, but every subsidy (I’ve lost count) is inflationary. The printing press has no limit, and they are not afraid to use it.
I still shocked that attorney hasn’t tried this in court yet? Missing documentation, but then there is MERS.
There is no advocate for those who want to see less debt and lower house prices. Banks want an ever-expanding load of Ponzi debt, the government wants increased economic activity and tax revenues from the Ponzi spending, and loan owners want higher home values. Few recognize the true benefits of lower home prices and less debt service.
We occasionally would see a RICO action raised by plaintiffs’ attorneys.
The problem is that as quickly as they could file them, we would remove the case to federal court where the wheels of justice turned much quicker (as opposed to state court in CA where it might be 6-9 months before we could get a hearing date). Remember, the goal of many of these foreclosure attorneys was/is simply to delay the foreclosure process (as they were being paid a monthly fee to litigate the case).
The lawsuits had no chance of winning or even surviving, so these attorneys quickly learned to drop any semblance of a federal claim so as to stay in state court.
What do you think would happen if someone brought a RICO case against the banks as described in this post? Any possibility it would survive the opening motions and get heard in court?
I have only a very basic understanding of RICO cases.
I will say that the Judges I appeared in front of were very resistant to allowing a RICO claim go forward. One judge here in the Central District of California had a lengthy form and checklist that attorneys bringing RICO actions had to fill out. Then, the judge would hold a special hearing about the RICO claim. I’m not sure I ever saw one survive.
I’m not sure what RICO offenses you think the banks have committed?
“I’m not sure what RICO offenses you think the banks have committed?”
They are involved in a conspiracy to fix pricing in the real estate market to profit from the higher prices. The CEOs ordered the asset managers to withhold inventory from the MLS for specifically this effect.
I am witnessing this first hand for the ZIPs that I track. Currently 50 houses for sale, one year ago there were 130 houses for sale. The question is how long can this keep up? Sooner or later you will have record low sales with the record low inventory…I am anxiously awaiting those headlines.
Curious to see what the “slow season” later on in the year will bring us.
I’m not sure that price fixing is going to fall into one of the enumerated RICO offenses in the statute. If that were the case, every anti-trust action would also be a RICO action.
Great post. Love the State of the Union cartoon. Thanks, IR.
Thanks for stopping by.
they are able to do this b/c they dont have to mark to mkt, so when are they going to put that back? that would force banks to dispose of their portfolio. It’s going to be hard to prove that the banks colluded.
Reinstituting mark-to-market accounting would help solve the problem because it would force lenders to recognize their losses. They may still chose to keep the houses rather than sell them, but they would have far less incentive to do so. Lenders have only been able to withhold product because bank regulators both don’t require them to acknowledge their losses and don’t require them to sell their REO. In the past, banks could do neither.
Well, based on anecdotal photo evidence, I’d say a major drawback to letting squatters squat is that home maintenance pretty much goes to hell in a hand basket. The whole facade on this one appears to have undergone spontaneous combustion, although it’s more likely just a case of prolonged neglect…
Squatters won’t spend a penny to maintain a house. The only advantage of a squatter is that they will keep away vandals. The rate of decay is marginally slower with a squatter in the house than if it were left empty and subject to vandals.
Your unfettered capitalism comment is untrue. When you have federally insured bank accounts and interest rates dictated by a central bank, capitalism ceases to exist.
We are galaxies away from capitalism.
Capitalism is the ability to move capital/money, which large investors are able to move money, industries oversea at a drop of the hat. The small investor is another matter. Think of gold before Jimmy Carter. The wealthy able to own gold in their foreign accounts and for “industrial usage.” What happen to Joe Six-Packs gold — force to change it to paper money.
Regulated capitalism can still be capitalism. Every system of exchange requires laws to be obeyed so the exchanges can be orderly. The purpose of regulation is to keep the playing field level and ensure contracts are enforced. In the wake of the housing bubble, contracts have been turned to toilet paper and the playing field is anything but level.
rule of law, in place, enforced, contracts upheld, yes. ‘Regulation’ gives such a warm, fuzzy feeling.
Let’s replace the word ‘regulation’ with ‘subsidization’; because essentially many of our ‘regulations’ function as subsidies. Until we remove banking and real estate subsidization, banks will remain overleveraged and house prices will remain inflated. Is it a good idea to subsidize banking and real estate, thus promoting overleverage and high home prices? i dont think so.
I still maintain we should have bailed out none of the banks. Interest rates should be well on their way to 10%, possibly north of 10%. We would have already picked up the pieces and be on a true path to recovery. House prices would be half of what they are currently. They have chosen the path of inflation and overindebtedness.
“I still maintain we should have bailed out none of the banks. Interest rates should be well on their way to 10%, possibly north of 10%. We would have already picked up the pieces and be on a true path to recovery. House prices would be half of what they are currently. They have chosen the path of inflation and overindebtedness.”
On that we totally agree.
I have learned much about interest rates in a centrally planned economy from the housing bubble. In a true market economy, interest rates would have gone up significantly during the bust to properly reprice risk. Instead, the fed took rates down. The key thing I learned is first to figure out what the natural market should do, then expect the opposite as the federal reserve works to soften the blow to the banks.
Is it price fixing when the govt’s regulators are encouraging that behavior?
With FDR came the price controls by way of federal industrial commissions to set trucking rates, airline fares, rail rates, etc. These commissions set production limits, prices and stopped ruthless competition to strengthen and regulate the industries. Most of these commissions have gotten out of the price fixing business in the 1970’s to 1980’s, but the Federal Reserve Bank is alive and still calling the shots.
What would happen to a bank that doesn’t obey the Fed?
This does appear to be an instance when the banks have put themselves above the law. With regulators looking the other way, they are certainly being encouraged to fix prices.
To your other question, if a bank doesn’t obey the fed, they lose their charter, and they are out of business.
That exactly my point. The Fed which is controlled by the banks are keeping all the banks in-line for the “orderly reduction” of the bad loans. That means fixing or “correct setting” of the prices.
I see. That makes sense. If that’s the case, then Ben Bernanke is the head of the cartel, and he should go to jail.
Sometimes the difference between a war criminal and a war hero is who’s side wins.
The FDR interstate commissions set prices and weren’t labeled as criminals. They’re just government sponsored cartels that set prices, regulatated the industry and were ran by the industry and a few government repressentatives. History repeats itself because, 1, people are forgetful, 2. It’s different this time and 3. It’s just the way it is.
Was Lincoln a great president or a tyrant?