For Consumers, the Raw Deal

By Steven Pearlstein
Wednesday, April 18, 2007

The Bush administration may have failed in its efforts to roll back Franklin Roosevelt's New Deal, but it's racking up more success with Teddy Roosevelt's Square Deal. Health and safety regulation. Labor protections. And certainly the centerpiece of progressive-era economic policy, the antitrust law.

It should tell you something that when Sallie Mae, the big kahuna in the college loan business, agreed this week to be bought by a group that included two of its three biggest rivals, Bank of America and J.P. Morgan, the question of whether this would reduce competition barely came up. Estimates vary, but the merged company would control 25 to 40 percent of the college loan business.

Tom Joyce, Sallie Mae's spokesman, claims there will be no antitrust problem because the two banks and Sallie would continue to run their college lending businesses separately, competing vigorously. Not only is this notion laughable, it is immediately undercut by corporate officers trying to convince Wall Street about the synergies and efficiencies of the deal.

Joyce stepped on his own story line when he told my colleague David Hilzenrath that the deal would enable Sallie to sell its products, such as its tax-free college savings plans, through Bank of America and J.P. Morgan branches.

And J. Christopher Flowers, one of the private-equity investors in the deal, predicted that Sallie would be able to use credit-analysis capabilities developed by the banks to better target and price its own products.

"We hope to reach more students and offer them better deals using the combined technology capability of all three companies," Flowers told The Post's Tomoeh Tse. Call me cynical, but it doesn't sound like these "competitors" are going to launch price wars against one another anytime soon.

Perhaps the most telling piece of evidence is the 50 percent premium the banks and their partners are willing to pay for a company even before they know how the Democratic Congress is going to change the federal student loan program, as it is inclined to do. As analyst Matt Snowling of Friedman Billings, Ramsey put it, there's no way to justify the $60 per share offer without assuming the benefits of integrating the three college-lending operations. For the banks, he reckons, buying Sallie was a "defensive move" -- in other words, a way to foreclose competition.

Ten years ago, there was little doubt this transaction would have faced an uphill fight. Not only would regulators have found the combined market share troubling, they would have worried about how the three players would use their clout to drive out small competitors, prevent new ones from entering and punishing those who got too aggressive about price-cutting. They would have worried about Sallie & Friends spreading around even more largesse to get themselves onto colleges' preferred-lender lists. Or that the combined company would have made it harder for competitors to package loans and sell them to investors.

But these days, antitrust enforcement has become so lax that even lawyers who might have questions about a deal are advising clients to give it a try. That was one of the conclusions reached by two well-known academics, Jonathan Baker of American University and Carl Shapiro of the University of California at Berkeley, in a paper presented yesterday at an antitrust conference organized by Georgetown University Law Center.

Baker and Shapiro asked 100 of the country's top antitrust lawyers whether mergers between firms in the same industry are more likely to be approved than they were a decade ago. On a scale of 1 to 5, with 5 being "significantly more favorable," the average score was 4.9.

And there's good reason for the changed perception. Analyzing the percentage of proposed mergers and acquisitions that have been challenged by regulators, Baker and Shapiro found the rate had fallen only slightly at the Federal Trade Commission but by more than half at the other agency that reviews proposed deals, the Justice Department's antitrust division.

Robert Pitofsky, a former FTC chairman, opened the conference by asking whether the pendulum had swung too far -- from antitrust enforcement that interfered too much in business dealings to enforcement that interfered too little. From the papers and discussions, there was a general feeling that it had.

Among the cases frequently cited was the Justice Department's approval of the recent merger of Whirlpool and Maytag, with a combined market share of 70 percent, which rested largely on the premise that because an Asian manufacturer had gained a toehold in the U.S. market, it and other foreign companies would provide sufficient competition.

To the surprise of many, the Bush Justice Department tried to block the merger of business software rivals Oracle and PeopleSoft. But even that effort was overturned by Judge Vaughn Walker of U.S. District Court in Northern California. Walker ignored the views of regulators and customers -- along with decades of legal precedent -- to rule that only mergers resulting in monopolies or near-monopolies can be blocked.

Judges like Walker, and regulators like Justice Department antitrust chief Tom Barnett, have adopted the same kind of rigid, ideological approach that liberal judges and regulators took until the 1980s. Under the new orthodoxy, any merger that enhances efficiency and leaves at least one competitor standing is presumed to improve consumer welfare. So do once-suspect practices like tying one product to another, setting minimum retail prices and driving weak competitors out of business through predatory pricing.

This is a view unsupported by economic theory or real-world evidence. And if allowed to prevail, it threatens to suck the diversity, vibrancy and innovative potential from what has been the world's most competitive economy.


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