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News and Letters Editorial May 1998
Capitalism's merger mania
The most spectacular of the financial sector mergers that made headlines
last month was the one between Citicorp and the Travelers group. The $70
billion merger is the largest in finance ever, and the new Citigroup will
be the world's largest financial institution. Yet what makes this merger
spectacular is not only its size, but also its brazen flouting of the law.
The merger violates two laws, one dating back to the Great Depression,
which separate commercial banking from investment banking and insurance
underwriting. Only if Congress repeals these laws can the merger become
permanent. Yet, despite continuous repeal efforts over the last 20 years,
the laws remain in effect. They protect the public against some shady
practices-banks cannot hard-sell their own insurance policies to loan
applicants, or dump bad securities they have underwritten into their
customers' portfolios.
PROTECTIVE LAWS IGNORED
This, however, is far from the reason these laws remain in effect.
Congress, and especially the members of its banking committees, are
certainly beholden to a finance and real estate industry that has given
nearly $50 million in campaign contributions since the 1996 elections.
Rather, the laws remain in effect simply because the different parts of the
financial industry, which each seek the right to invade the others' turf
while shielding their own turf from competition, have fought each other to
a standstill. Citicorp and Travelers are confident that their power and the
power of their campaign contributions, $1.3 million since the 1996
elections, will finally break the logjam.
The financial industry invokes the mantra of "competition" in support of
such mergers. Yet studies have found that neither cost reductions nor lower
prices to consumers result from medium-sized banks becoming big or big
banks becoming bigger, or from financial companies selling a wider range of
products.
More importantly, despite the mantra of "competition," the government's
guarantee of deposit insurance makes the banking industry one of the prime
recipients of state-capitalist largess, and the Citicorp-Travelers merger
threatens to extend the subsidy to other financial industries as well,
which together comprise 18% of the U.S. economy. Due to the ever-present
fear that the financial system may collapse, the government's "too big to
fail" doctrine protects big banks from going under and thereby setting off
a chain reaction. Faced with an imminent bankruptcy of, say, the insurance
arm of Citigroup or another of the conglomerates-to-come, the government is
now likely to bail it out in order to prevent the conglomerate's banking
arm from failing as well. The result could make the savings and loan crisis
look like peanuts.
Other gargantuan banking mergers, worth $60 billion and $30 billion, came
on the heels of the Citicorp-Travelers deal, as did other financial sector
mergers worth "only" $8.6 billion and $7 billion. Yet the merger mania is
certainly not limited to the financial industry. Mergers and acquisitions
reached a record $957 billion last year, a figure nearly three times the
previous record. This year, if the current pace continues, the value of
mergers will top $1.5 trillion. Obsession with globalization not
withstanding, it is also on the national level that Marx's law of the
concentration and centralization of capitals is alive and kicking as never
before.
In part, the merger wave is both cause and consequence of the run-up of
stock prices. The mergers tend to inflate stock prices and inflated stock
portfolios provide a cheap means by which to finance new mergers. Despite
the economic crisis in East Asia and mediocre profits at home-and despite a
Japanese economy which is mired in sluggishness and, if Sony's chairman is
to be believed, is "on the verge of collapse"-U.S. stock markets continue
to boom.
FORBES PREDICTION
On Wall Street, a popular explanation of this anomaly is that stock prices
will remain permanently higher, because globalization and high-tech have
ushered in a new era of faster growth and increased profitability.
Likewise, pointing to stock price and profit rate data, some Marxist
economists argue that the slump in the world economy has ended, and that we
have entered a new "long swing" expansion. We read predictions like those
in FORBES, trumpeting the onset of "a new industrial era in this country.
We are making progress industrially and economically...on a perfectly
heroic scale."
Unfortunately for FORBES, this particular forecast appeared in its JUNE
1929 issue, only four months before the stock market crashed and the world
economy plummeted into the Great Depression. Thus, side-by-side with the
triumphalism come sober cautions even from decidedly non-Marxist quarters.
The International Monetary Fund's chief economist, for instance, recently
voiced concern over the prospect of a sharp plunge in the U.S. stock and
bond markets. And in its April 18 cover story, "America's Bubble Economy,"
THE ECONOMIST warned that the bursting of the bubble "poses a bigger and
more imminent threat to the global economy" than either the slump in Japan
or the financial fragility that brought down East Asia.
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