The Justice Department’s recent approval of Charles Schwab’s $26 billion acquisition of brokerage firm TD Ameritrade creates a $5 trillion giant that will increase the already dangerous amount of systemic risk in the financial sector. In the past, consolidation of assets and financial services on this scale has encouraged excessive risk taking and resulted in greater pressures on the corporations that depend on these funds for investment. Such deals also generally harm the public by raising the prices of basic financial services. 

By some measures, this takeover solidifies the position of Schwab as the third-largest financial institution in the world. Only BlackRock and Vanguard rank ahead of Schwab, with $7 trillion and $6 trillion in client assets under management, respectively. UBS is fourth, with $3 trillion under management. The move would also add about 12 million more client accounts under the control of Schwab.

The consequences of extreme consolidation in the financial industry were made clear by the financial crisis and Great Recession of 2007 to 2009. As Simon Johnson and James Kwak describe what happened in their 2011 book 13 Bankers, “banks used huge balance sheets to place bets in brand-new financial markets, stirring together complex derivatives with exotic mortgages in a toxic brew that ultimately poisoned the global economy.” Because of the banks’ size, the federal government ended up treating these banks as “too big to fail” and used billions of dollars of taxpayers’ money to bail out many of these corporations and their investors.

The Schwab-TD Ameritrade merger raises the risk that the failure of a single institution could cause a domino effect on other firms. As Saule Omarova, a professor of law at Cornell University, put it in a recent paper, “The structural complexity and the speed of contagion in the financial market often render important market governance mechanisms, designed to resolve various market frictions, potentially ineffective.”  

Additionally, Charles Schwab’s increased assets will give it larger ownership shares in corporations throughout the U.S. economy. This raises significant antitrust questions, because this type of common investor ownership means that Schwab will have significantly more influence over boardroom decision-making than other shareholders have. One result is to make it easier for investors to carry information and practices from one corporation to another, in ways that can result in cartel-like behavior.

In a 2018 paper, Jose Azar presented evidence of how this practice works in the airline industry, where financial institutions have large holdings. Azar argued that the controlled firms “have reduced incentives to compete due to common ownership, prices are higher and output is lower.” Fiona Scott Morton and Herbert Hovenkamp also addressed the problem in a 2018 paper, which found that these concentrations of power can result in higher prices for products and services.

Schwab’s takeover of TD Ameritrade also gives the new corporation roughly 65% to 70% of the custody market for Registered Investment Advisors (RIA). RIAs are persons or firms that provide financial advice to and manage the investments of clients. RIAs keep their clients’ assets deposited in custodian banks, including Schwab and TD Ameritrade. But Schwab competes against these RIAs for Americans’ investments, so Schwab’s increased market power will allow it to increase prices for custodial services or otherwise manipulate the terms of service. A price hike would increase the pressure on many RIAs, which could either drive Schwab’s competitors out of business or drive their clients to Schwab.

Americans have succeeded in preventing similar concentrations of power and control in the financial system many times in the past. The federal government passed the Federal Reserve Act of 1913 in part to break up similar concentrations of power and control on Wall Street. The Bank Merger Act Amendments of 1966 prohibited bank mergers that led to monopolization or were deemed anti-competitive. The Riegle-Neal Act of 1994 forbade banks from holding more than 10% of retail deposits in the country. 

The Justice Department’s approval of the deal also makes it more likely that other deals will be proposed and approved. This includes financial giant Morgan Stanley’s pending acquisition of brokerage firm E-Trade, which would be the largest takeover by any bank since the Great Recession. The deal would give Morgan Stanley another $360 billion in assets and substantially consolidate the industry even further.

President Donald Trump released an executive order on May 28 in response to Twitter labeling the president’s tweets as misleading. The executive order instructs federal agencies such as the Federal Communications Commission and the Federal Trade Commission to reinterpret Section 230 of the Communications Decency Act. Section 230 provides online platforms, such as Facebook and Twitter, broad legal immunity for the content on their platforms and for the removal of content from their platforms. 

A wide array of other politicians, grassroots activists, and media outlets have presented the situation as a choice between allowing private control over speech or compelling platforms to broadcast all speech including the president’s, which routinely incorporates libel and hate speech. The Open Markets Institute, however, believes this is a false choice.  

In a May 28 statement, Open Markets Executive Director Barry Lynn said that we should act now to protect all essential communications platforms from coming under the arbitrary control of either private corporate bosses or the government. “A third option is to return to the principles and practices that Americans long used to promote true freedom of speech and of the press, by offering equal and open public access to any essential communications technology, even when it is privately owned,” Lynn said.

The full Open Markets statement can be read here. For additional perspective, read this Slate interview with Lynn in August 2018, during the debate about whether to censor Alex Jones.

The Open Markets Institute, in partnership with The American Prospect, United for Respect, and Change to Win, hosted an online conference on June 2 about building a pro-worker anti-monopoly movement. The event was an opportunity for workers, organizers, and experts to bring their diverse perspectives to bear on the national conversation on antitrust and anti-monopoly policy. 

The discussion was moderated by David Dayen, executive editor of The Prospect, and additional panelists included Courtenay Brown (warehouse worker at Amazon, and member of United for Respect), Sandeep Vaheesan (legal director of Open Markets Institute), Andrea Dehlendorf (co-director of United for Respect), Brian Callaci (postdoctoral scholar at Data & Society), and Emma Rebhorn (assistant general counsel at Change to Win). 

Participants discussed how large corporations use their size and power to harm workers, independent businesses, and local communities. “It’s important to split up this type of company that’s literally so big that they have people scared to even speak up against them,” said Brown.

Rebhorn called attention to the need for antitrust reform by highlighting the mismatch between how readily the government approves most mergers, and how strongly the government opposes efforts by workers and professionals to organize. “The fact is that antitrust enforcement has posed more of a threat to working people than to the dominant companies that they work for,” Rebhorn said.

The full hourlong conversation can be viewed online here.

📝 WHAT WE'VE BEEN UP TO:

We appreciate your readership. Please consider making a contribution to support the continued publication of this newsletter. 

🔎 TIPS? COMMENTS? SUGGESTIONS?