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Price Fixing on Wall Street?

Posted by Larry Doyle on April 9, 2010 11:16 AM |

Lessened competition in any industry will lead to wider margins and greater revenue and profit opportunities.

Wall Street circa 2010 is certainly a dramatically changed landscape with significantly lessened competition. Is Wall Street today an honest display of capitalism in which ‘to the victors go the spoils’? Or is Wall Street an oligopoly which is using its increased power and leverage to control, if not outright fix, prices for products and services?

In the midst of all the other issues Washington is facing, I think there is very little focus on this topic, but we overlook it at our peril. Why? Price fixing, or iterations thereof, is nothing more than a vehicle to transfer wealth from consumers to providers. I see further evidence of this reality in a review provided this morning by American Banker. The AB highlights developments within our mortgage industry and writes, Mortgage Sellers Are Fed Up with Megaservicers’ Oligopoly:

The country’s biggest banks are again making handsome profits from buying and servicing home mortgages. The smaller institutions that produce the loans have not been so fortunate.

That imbalance, which many believe is likely to endure, has irked a wide range of loan originators, some of whom argue that the big banks are not only underpaying them for mortgages but also effectively driving up mortgage rates for consumers. The big banks service around 70% of the nation’s home mortgages, and their margins on mortgage purchases, around 25 basis points during the boom years, are routinely four times that now.

The big mortgage aggregators “know their customers hate what they’re doing,” said Ken Richey, partner of Richey May, a national accounting firm for mortgage companies. “But they’re going to milk it as long as they can. … There’s concern as to whether there’s a movement, if you will, for the big to squish the small.”

Do not think for a second that these developments are not very much a part of the game plan of the large banks. I am not stating that they are nefariously plotting amongst each other, although I’m not stating that they are not either. The simple reality is the ‘too big to fail’ banks have the leverage and will use it to crush smaller and less well positioned firms. Which banks? The bulk of this activity is centered in Citi, JP Morgan Chase, Bank of America, and Wells Fargo.

Is this reality truly healthy for our country’s future? Ponder this:

Even loan sellers for whom day-to-day pricing is not the main concern are uneasy with the extent of market concentration.

Matthew Pineda, the president of Castle & Cooke Mortgage in Salt Lake City, said that currently aggregators will buy a plain-vanilla, 5.25% mortgage at a 25-basis-point discount to its face value. Given where securities backed by similar mortgages are trading, he said, it would be reasonable for that loan to fetch a 25-basis-point premium. But the aggregators have no incentive to undercut each other, he said.

“They’ve got the ability to dictate to us the price they’re willing to pay,” Pineda said. “They know what the competition’s buying it for.”

If that does not sound like price-fixing, I do not know what does. Do the regulators care? In my opinion, the regulators — primarily the Federal Reserve — will implicitly support these activities across a wide array of market sectors in hopes the large banks can rebuild their capital base.

What is the ultimate solution to this price fixing? More competition which will only come if the ‘too big to fail’ banks are made smaller. I will discuss this topic this Sunday evening, April 11th on my show No Quarter Radio’s Sense on Cents with Larry Doyle Welcomes 13 Bankers Co-Author James Kwak.

I hope you can listen. If not, the show is taped (I always have an audio player of the most recent show in the top right sidebar), and also available as a podcast on iTunes.


  • phil trupp

    This is a cogent insight to the toxic role of consolidation and the ever-increasing rise of monopoly capitalism. We are rapidly moving away from a traditional competitive model, an “open market” system. Instead, we are dashing headlong toward a new definition of “free market” in which the most powerful financiers are “free” to create a Wal-Mart style dominance in which sellers, not producers, dictate prices and dominate entire markets. Does anyone consider Wal-Mart or Colgate or JNJ, to name only a few monopolies, too big to fail? I’d argue there is little fundamental difference between the consolidated power of these trading companies and the powers granted to Wall Street bankers to distort our economy. Simon Johnson recently wrote that Henry Paulson used tax dollars to reinforce–or at least suggest–that Wall Street investment banks were, indeed, too big to fail. Paulson, among others, frightened Washington into believing this myth. Barry C. Lynn, in his recent book, “Cornered: The New Monopoly Capitalism and the Economics of Destruction,” correctly points out that the Bush and Obama administrations, along with Congress, responded to the 2008 meltdown of the financial system “in most instances by accelerating consolidation” and monopoly. We see it in banking, real estate and consumer sectors. And the result of all this piling up of power, being anti-competitive by definition, is summed up nicely by a recent Financial Times editorial headlined, “THE BIGGER THEY COME THE HARDER WE FALL.” The escalating power of financiers over basic institutions and the political economy has distorted competition; it has crept into our political economy and industrial systems as well. It is wrong to view consolidation as the maker of market efficiency. If anything, it is the wrecking ball of open market capitalism as we know it.

    • LD


      You have nailed it. While the bankers and regulators are touting how they have ‘saved’ our economy, the fact of the matter is they have merely more firmly established an economic system which is truly not in the interests of American citizens.

      If anybody thinks I am railing on capitalism, you got the wrong guy. I am the ultimate free market capitalist. That is not what we have. Wall Street is now an oligopoly in support of an oligarchy.

      Why is the Tea Party movement gaining such momentum? American citizens see the power base from both ends of the spectrum closing in on their lives and future opportunities. America is justifiably pissed.

      Thanks for your wisdom.

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