October 12, 2006
Antitrust Problems for Private Equity Funds
The financial news is focusing whether private equity pools violate United States antitrust laws. Are the private equity players fixing the auctions for selling firms? As noting earlier in this blog, pooling capital is fine but an agreement among players determining which players can bit on which companies and in what form is not. Antitrust concerns in our financial markets are not new. Securities underwriting has an antitrust exemption for pooling, formalized in 1952, and was still subject to claims of monopolization in 1953 (the suit was dismissed). Market makers, both on the NYSE and on the NASDAQ, have been accused of violating antitrust laws. The NYSE specialists have an exemption based on SEC regulation; the NASDAQ market makers do not and an inquiry in 1996 resulted in a settlement that changed practices.
The insurance industry exemption is also in the news, as Congress is holding hearings on why policies on flood coverage among companies all look the same. The insurance industry has an antitrust exemption, from the 40s, on data sharing. Baseball has a special antitrust exemption for the owners. The list goes on.
We need to reevaluate all these exemptions. They are too easy to get if one can make a business argument that looks good on paper (has good business justifications for the industry) The problem is that what looks good on paper translates into a practice (hard to police because the players are clever) that stifles competition in unhealthy ways. The private equity pool investigation, if it players out like the others, will be closed without any prosecutions because the prosecutors, who smell the odor of bad practice, cannot find any "smoking gun" documents on any "canaries."
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