When one company acquires another company in the same sector, two things often occur. One is that the combined value of the two companies often rises, which is seen as an acquisition premium. The other thing that occurs is that policymakers review the proposed acquisition to see whether the desire to merge these two companies is coming from reduced competition or from efficiency benefits. EconoSpeak’s Michael Perelman treats us to a discussion of some research from Elijah Brewer III and Julapa Jagtiani that offers a third possibility:
These researchers, Elijah Brewer III and Julapa Jagtiani, combed through 13 years of banking merger data to establish whether banks were willing to pay extra premiums to attain TBTF status, which they concluded was around $100 billion in assets. Indeed, the researchers found that premiums shot up when a bank did a deal that vaulted it over the $100 billion asset threshold. Overall, the nine banks that did such deals paid an additional $14 billion to $16.5 billion to get to that gold-plated TBTF status. “It’s more than Too Big To Fail. It includes all the benefits of being so big and powerful. These may not just be benefits from being bailed out, but being able to talk to the White House and Congress,” Ms. Jagtiani said in an interview. “There is a lot of subsidy provided to really large banks,” she added, noting that the study was the opinion of the authors and not the Federal Reserve. “It seems like we may be encouraging misallocation of resources.” She did caution that “at the Federal
Reserve, we don’t have a list of Too Big To Fail banks.”
Whether it is s policymakers deeming large banks to too big to fail or it’s giving large banks subsidies, the authors may be onto something that policymakers should rethink.
Update: AB reader Eleanor wondered if we were still enforcing the anti-trust laws. My short answer is yes with a longer discussion to be found here. Of course – some idiots like Donald Luskin worry that we are too vigorous in enforcing our anti-trust laws such as this rant. While I did not explicitly state this 26 months ago, Luskin’s rant was perhaps the most clear example of why he deserves the title Stupidest Man Alive.