October 3, 2024

Fair Game: Trying to Pierce a Wall Street Fog

Not much has come out on the case since then, leading some participants in the market to wonder whether this is yet another matter the Justice Department has let slide. A Justice Department spokesman said its investigation was continuing.

Thankfully, though, we may yet learn what actually went on behind the scenes in this trillion-dollar market. Investigators for European regulators are hot on the trail and a handful of pension funds have recently filed two suits against the big banks dominating the swaps arena. These investors contend that they overpaid when they bought and sold the instruments — to the tune of billions each year — because of the banks’ control of the market.

On July 1, the antitrust division of the European Commission announced that its investigators had come to a “preliminary conclusion” that the banks and two entities controlled by them had infringed European antitrust rules. These entities colluded, the commission said, “to prevent exchanges from entering the credit derivatives business between 2006 and 2009.”

Credit default swaps were at the center of the financial crisis. These instruments allow holders of bonds or other debt to hedge their risks in those positions. But the swaps also let speculators bet on a debt issuer’s default. The swaps almost felled the American International Group, the insurance giant, and were embedded in some of the stinkiest mortgage securities ever wrought.

But the market for these swaps has been conducted in the shadows. Trades were made over-the-counter — between private parties and not on an exchange. This meant that participants’ positions were not disclosed to regulators.

Wall Street likes the fog of over-the-counter markets because the profits generated by executing customers’ trades in them are far greater than in more transparent arenas. Think of the way you might shop for a mortgage: if mortgage rates were not publicly available, it would be hard to know whether the rate one banker offered was competitive. Customers that dealt with only one banker on their credit default swaps almost certainly did not get the best prices.

The 13 banks under the microscope on credit default swaps include Bank of America Merrill Lynch, Goldman Sachs, JPMorgan Chase, Morgan Stanley and UBS. Two associated entities controlled by the big banks are also being scrutinized — the International Swaps and Derivatives Association, a lobbying organization, and Markit, a data service provider.

A spokeswoman for the European Commission declined to comment beyond the July 1 announcement of its preliminary conclusions. Now the banks can make their arguments to the commission. If the officials are not persuaded and find enough evidence of antitrust infringements by any of the entities, the commission said, it can impose a fine of up to 10 percent of a bank’s revenue.

The commission began its investigation in April 2011, two years after the Justice Department’s. The European inquiry focused on activities from 2006 to 2009 when two exchanges, the Deutsche Börse and the Chicago Mercantile Exchange, were trying to enter the credit derivatives business.

Both exchanges sought licenses and data from I.S.D.A. and Markit to begin trading futures contracts based on credit default swaps, the commission said. But it said that the banks that control both entities refused to provide licenses for exchange trading, and that several banks tried to shut out the exchanges by choosing another clearing house for trades, ICE Clear Europe, which they owned.

These activities may have delayed the development of exchange trading in these derivatives, the commission said. Investors’ costs are much higher in over-the-counter markets where spreads are wide between the prices they must pay to buy and sell. Trading on an exchange narrows those spreads. According to a 2012 study by Deloitte, for example, spreads between bids and offers on dividend swaps declined by 75 percent after they began trading on the Eurex exchange in 2008.

“There was no question the banks did not want the C.M.E. to make the market more liquid and transparent,” said one person briefed on the banks’ internal discussions who asked for anonymity because he was not authorized to speak publicly. “This was their cash cow, and they didn’t want to give it up.”

None of the banks would comment on either Europe’s investigation or on the recent lawsuits. Steven Kennedy, a spokesman for I.S.D.A., said it was cooperating with the commission. “I.S.D.A. is confident that it has acted properly at all times and has not infringed E.U. competition rules,” he added. He also said the allegations in the lawsuits were meritless.

A spokesman for the Markit Group did not return a phone call seeking comment.

The banks have pushed to keep the market for credit default swaps in the dark. Three years ago, the Dodd-Frank legislation aimed to bring more competition by pushing trading onto exchanges and swap execution facilities. Wall Street tried to beat back regulators’ efforts to write tough rules after the legislation’s lead. They won some and they lost some. For instance, dealers now have to report swap transactions to regulators.

There was a reason for the banks’ pushback: money. The Deloitte study cited a 2010 analysis by Citigroup showing that the big banks’ trading in over-the-counter derivatives generated revenue of $55 billion, or 37 percent of the total at these institutions. Such profits will fall as more swaps trade on swap execution facilities under the new rules.

THE pension fund of the Sheet Metal Workers Local 33 of Cleveland is among the investors who filed the lawsuits against the banks, I.S.D.A. and Markit.

“The antitrust laws are the Magna Carta of free enterprise,” said Christopher M. Burke, a lawyer at Scott Scott in San Diego who represents the pension fund. “When you have markets that are not competitive, opaque and where market players don’t have access to the same information, the markets are not functioning in a competitive fashion. Those that have the information can take advantage of that fact and extract anticompetitive leverage over those that lack the information.”

Mr. Burke pointed out that a private lawsuit, like the pension fund’s, is one way to shed light on anticompetitive behavior. Another is government action. European antitrust laws, unlike those in the United States, allow authorities to pursue remedies for past behavior. That’s a powerful tool for pulling back the curtain on investor-unfriendly practices.

Article source: http://www.nytimes.com/2013/07/21/business/trying-to-pierce-a-wall-street-fog.html?partner=rss&emc=rss

DealBook: An Antitrust Chief at Justice Is Leaving

Sharis A. Pozen, the acting assistant attorney general for the Justice Department's antitrust division.Stephen Crowley/The New York TimesSharis A. Pozen, the acting assistant attorney general for the Justice Department’s antitrust division.

7:31 p.m. | Updated

A shuffling at the top of the Justice Department’s antitrust unit could lead to an election-year fight between President Obama and Senate Republicans.

Sharis A. Pozen, the acting assistant attorney general for the antitrust division, has informed the attorney general, Eric H. Holder Jr., that she will leave by the end of April, the Justice Department announced late Monday.

The leading candidate to replace Ms. Pozen is William J. Baer, head of the antitrust group at the law firm Arnold Porter and a former director of the Federal Trade Commission’s competition bureau, said two people with direct knowledge of the matter who requested anonymity because they were not authorized to discuss it publicly.

Antitrust experts said that Mr. Baer would continue the government’s reinvigorated enforcement of the antitrust laws, recently seen in its vocal opposition to the proposed merger between ATT and T-Mobile USA that collapsed last month. Mr. Baer did not respond to requests for comment.

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The nomination of a permanent antitrust chief could lead to a battle between the White House and Congress. The post requires a Senate confirmation vote, and those normally slow to a trickle during a presidential election year. The White House has expressed frustration with partisanship on Capitol Hill and the slow pace of Congress in confirming judicial nominations and executive branch positions.

The Justice Department has been without a permanent antitrust head since last August, when Ms. Pozen became the interim antitrust chief. She succeeded Christine A. Varney, who was named the government’s top antitrust lawyer by President Obama in January 2009. Ms. Varney left the Justice Department to join the law firm Cravath, Swaine Moore.

When Ms. Pozen succeeded Ms. Varney, she told the White House that she did not want the permanent post but would stay on until the resolution of the ATT-T-Mobile deal. Ms. Pozen joined the Justice Department in 2009 from the law firm Hogan Hartson, where she worked with Ms. Varney. She is expected to return to private practice, though it is unclear where.

A change at the top of the Justice Department’s antitrust unit would also come at a time when the White House is strengthening antitrust enforcement. During the administration of George W. Bush, the government was considered to have had a weak record in policing mergers and bringing monopolization cases. Over the last several decades, the federal courts have also reduced the scope of the antitrust laws.

The government’s newfound toughness was highlighted last month with the scuttling of ATT’s proposed $39 billion acquisition of T-Mobile. Facing hostility from the Obama administration, the two telecommunications companies scrapped the deal.

The Justice Department also collected more than $1 billion in fines and other monetary assessments in 2011, according to a recent report by the law firm Gibson Dunn Crutcher. It was only the third time that the government has surpassed the $1 billion mark for such collections. A recent victory was the division’s securing a dozen guilty pleas in a long-running investigation into bid-rigging in the municipal bond market.

William Baer in 1998Mike Theiler/ReutersWilliam Baer in 1998.

Legal experts say that an antitrust unit under Mr. Baer would remain aggressive. A director of the F.T.C.’s antitrust division from 1995 to 1999, Mr. Baer was seen as a strict enforcer of the antitrust laws, challenging mergers that included the combination of Staples and Office Depot.

“If the rumor turns out to be true, Bill Baer would be a very well-qualified nominee,” said Albert A. Foer, the president of the American Antitrust Institute. “He is organizationally and politically savvy, has top-level experience on the private side and is also unusually personable.”

Mr. Baer, a graduate of Stanford Law School, worked at Arnold Porter before and after his government service during the 1990s. He has had a number of prominent representations in private practice, including successfully defending General Electric from the government’s price-fixing accusations in 1994.

Other contenders to replace Ms. Pozen are Richard Parker, a partner at the law firm O’Melveny Myers, and Seth Bloom, a longtime aide to Senator Herb Kohl, Democrat of Wisconsin and the head of the Senate antitrust subcommittee.

Article source: http://feeds.nytimes.com/click.phdo?i=6e9d9a5ad6d03d7c7dcdc037f6b799f2

The Media Equation: News Corp.’s Soft Power in the U.S.

That could never happen in the United States, right?

As it turns out, a News Corporation division has twice come under significant civil and criminal investigations in the United States, but neither inquiry went anywhere. Given what has happened in Britain with the growing phone-hacking scandal, it is worth wondering why.

Both cases involve News America Marketing, an obscure but lucrative division of the News Corporation that is a big player in the business of retail marketing, including newspaper coupon inserts and in-store promotions. The company has come under scrutiny for a pattern of conduct that includes below-cost pricing, paying customers not to do business with competitors and accusations of computer hacking.

News America Marketing came to control 90 percent of the in-store advertising business, according to Fortune, aided in part by a particularly quick and favorable antitrust decision made by the Justice Department in 1997. That year, the News Corporation announced it wanted to buy Heritage Media, a big competitor, for about $754 million in stock plus $600 million in assumed debt. The News Corporation said it would sell the broadcast properties and hang onto the marketing division, which serviced 40,000 groceries and other retailers.

The deal would make News America Marketing the dominant player in the business and, for that reason, the San Francisco field office of the Justice Department recommended to Washington that the News Corporation’s takeover bid be challenged on antitrust grounds. Typically, such a request from a field office would carry great weight in Washington and, at a minimum, delay the deal for months.

But the Justice Department brass overrode San Francisco’s objections and gave its blessing in just two weeks. So who ran the antitrust division at the Justice Department at the time? Joel Klein, who this year became an executive vice president at the News Corporation, head of its education division and a close adviser to Rupert Murdoch on the phone-hacking scandal in Britain.

It’s worth noting that less than a year later, the Justice Department division led by Mr. Klein blocked the News Corporation from selling its share of a satellite company to PrimeStar, owned by a group of cable providers, on antitrust grounds, so any suggestion that a department of the United States government was snugly in the hip pocket of Mr. Murdoch would not be correct.

None of this suggests that Mr. Klein cut some sort of a deal that resulted in a job 14 years later. But the speed of the antitrust decision surprised even the people involved in the takeover. One of the participants, who declined to be identified discussing private negotiations, said he thought the sale was effectively blocked before the surprising turnaround.

“After that meeting with the San Francisco office, we all looked at each other and said, ‘This deal is not going to happen,’ ” he said.

My colleague Eric Lipton and I spent a few days trying to tease apart who made the actual decision to give the purchase the go-ahead — “It was as if a magic button had been pushed somewhere. We were all in shock,” said one of the same participants in the deal — but there is no paper trail.

People who worked at the Justice Department back then either could not recollect how the decision was made or declined to share information if they knew.

A spokeswoman for the News Corporation released this statement: “Joel didn’t know Mr. Murdoch at the time of the Heritage Media transaction 14 years ago. A year later, the D.O.J. under his leadership challenged the PrimeStar transaction in which News Corporation had a major interest. Any suggested inference is ludicrous.”

A lawyer who worked in the Justice Department in Washington at the time but did not want to be identified discussing internal matters, said: “This decision was made on the merits. The front office in Washington didn’t think a case could be won in court based on the very narrow definition of the market.”

But in retrospect, the anticompetitive fears of the San Francisco office were well founded.

After the Heritage Media deal, News America Marketing was in a position to throw its weight around and it did just that, drawing a variety of lawsuits in which competitors claimed they had been threatened and harassed. The News Corporation has settled those cases at a cost of over $650 million, and now the F.B.I. is looking into whether there was a pattern of illicit tactics by that division of the News Corporation.

E-mail: carr@nytimes.com;

Twitter.com/carr2n

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