Antitrust: Too Big to Fail. The Case against AIG.

Mississippi 4th District U.S. Rep. Gene Taylor and fellow Democratic Rep. Peter DeFazio of Oregon filed a bill Thursday to remove the federal antitrust exemption from the insurance industry. The introduction of H.R. 1583, the Insurance Industry Competition Act, would repeal the 1945 McCarron-Ferguson Act that provides federal antitrust exemptions to insurance companies. If the Taylor and DeFazio Bill is passed it would grant the U.S. Department of Justice and the Federal Trade Commission the legal authority to apply antitrust laws to insurers’ anticompetitive behavior.
"AIG was gambling with people’s life savings," said DeFazion, "and lost it all to speculative and shady transactions and contributed to the current crisis. We must insure this never happens again."

According to a news release from Taylor's office, the insurance exemption from antitrust laws gave AIG a free pass to become "too big to fail," leaving taxpayers to bail them out or risk further damage to the U.S. economy.

Marliss McManus, senior federal affairs director in the Washington office of the National Assn. of Mutual Insurance Cos., said in a statement: "To assert that the insurance industry is exempt from federal antitrust laws is completely inaccurate. The McCarran-Ferguson Act allows for a very narrow and limited exemption for certain activities such as standardized policy language."

Is this a time for increased antitrust regulation of both financial and insurance markets that have created gigantic global market actors with the potential to wipe out large amounts of accumulated market wealth? I would say yeah.

The McCarran-Ferguson Act was passed by Congress in 1945 in response to the U.S. Supreme Court Case of U.S. v. South-Eastern Underwriters, 332 U.S. 533 (1944) which held that the federal government could regulate insurance via the Commerce Clause as interstate commerce. The Act empowered Congress to pass laws in the future regulating the insurance business but limited the South-Eastern Underwriters case by providing that federal antitrust laws will not apply to insurance companies if state antitrust law applies, except where cases of intimidation, coercion, and boycott arise. Accordingly, Ms. McManus' recent statement describing the the exemption as "very narrow and limited" for "certain activities such as standardized policy language" is an understatement of exemption.

What are the aims of antitrust laws?

The aims of antitrust laws are to: (1) prohibit agreements or practices that restrict free trading and competition between business entities, such as collusion and the development of cartels. (2) regulate anti-competitive and abusive practices that lead to market dominances, such as predatory pricing, refusal to deal, price gouging, and typing. (3) supervise the mergers and acquisitions of large companies, including some joint ventures, to guard against unhealthy market dominance.

But what is the fundmental goal of antitrust law?

It is to protect consumers. Economists will argue that economic efficiency alone is the fundamental goal of antitrust and competition laws in society. Often the two -- consumer protection and promoting the increase of total wealth -- are on the same team. The current example provided by the financial and insurance sectors indicate that consumers have been greatly impacted financially by the operations of dominate corporate actors. The result has been a dramatic lost of total wealth, as can be seen in the steady decrease in the value of the global stock markets that represent a great part of consumer wealth in modern societies. The decrease in total wealth coincides quite precisely with violations of consumer trust in the operation of both financial and insurance markets.

Should there be an exemption, even narrowly, as characterized by McManus, for sectors such as insurance companies who are operating beyond U.S. state borders and even beyond national borders? The rigors of maintaining the trust of the markets as envisioned by antitrust laws require national oversight of huge market participants such as AIG. The idea that state laws could adequately regulate such a global actor is ridiculously niave. The "too big to fail" language that now dominates market discussions is one of the main concerns of antitrust law, namely, to protect consumers from behavior that deprives them of the benefits of competition. "Too big to fail" means that there has existed a fundamental lack of competition in a sector of the market that has resulted in an unhealthy dominance by a company. Diversification is healthy and recommended in investments and the same underlying principal applies to the need for diversifying the concentration of wealth in the hands of companies now dominating the market for financial and insurance products.

Diversification is good. Dominance is bad. It is unhealthy for the failure of one entity to have such a huge impact on the wealth of a nation. The goal of government is to protect consumers from behavior that deprive them of the benefits of competition. In the U.S., now is the time to revisit any antitrust exemption to insurance companies that 1) hold previously unimaginable amounts of consumer wealth, 2) operate nationally and internationally, and 3) would potentially paralyze the financial markets upon dissolution.

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