MF Global, Corzine & Gensler

The lead staff editorial in Thursday's Wall Street Journal provides a nice overview of what's wrong with federal regulation of the banking and securities sector.

The piece details how, once Jon Corzine became CEO of MF Global, the Fed reconsidered and reversed its earlier decision to deny the firm its request to become a primary dealer.

The Journal notes that MF Global had posted six losses in the past seven quarters, but drew no extra regulatory scrutiny. It was more than halfway through that period when the Fed granted MF Global its primary dealer status.

What the editorial explains, correctly, I believe, is that it's not quite correct to simply say that Dodd-Frank and the overall federal regulatory scheme worked, because MF Global failed without larger consequences or incidence. But the apparent misuse of customer funds, and outsized position risks taken by the firm, were completely overlooked by regulators.

Isn't that what the system is supposed to prevent? The actual illegal and overly risky types of actions which MF Global is suspected to have taken?

Gensler recused himself from the case, which tells you how much this is all about crony capitalism, which the Journal contends. Either Gensler shouldn't have had to recuse himself, or he should have admitted the cronyism back when Corzine took the helm of MF Global.

It's tempting to write off the MF Global collapse as a one-off, smallish, successful proof of Dodd-Frank. But, in reality, it's proof that our federal financial system regulations don't seem to have clear-cut objectives, or, quite likely, if they do, are not capable of actually implementing them and protecting anyone or anything- not customers, shareholders or the larger US financial system.

MF Global's Regulatory Lessons

Holman Jenkins, Jr., wrote a thoughtful piece in his weekend edition column regarding MF Global's demise. Jenkins rebuked those who were disappointed with the regulatory failure involving the firm. He celebrated that a financial firm engaged in overly risky activity and paid the price with bankruptcy, without government intervention.

I agree with him on that point.

However, I think he misinterprets the motivation for some, including me, to express consternation that new regulatory agencies, powers and legislation did nothing to prevent the collapse of MF Global.

I actually don't support the bulk of existing financial regulatory legislation and agencies. In my opinion, they represent the foolish wishes of largely inept, naive members of Congress and various administrations that it is practical or effective to have our existing, expensive and intrusive regulatory machinery.

It doesn't work. It gives investors, borrowers and depositors false hope. It risks making those parties insensitive to the realities of the marketplace and the vendors with whom they choose to do business.

I'd prefer to see government leave the business of deposit insurance, financial statement regulation, and most other detailed, intrusive financial regulatory areas.

Without such government-provided, monopolistic services, private solutions would arise. Firms would offer competitively-priced deposit insurance, differing by bank, thus providing an implicit credit rating. The same would be true for the purchase of various levels of audit attestation.

I'm not upset that government regulatory personnel failed to understand MF Global's condition until it was too late, or that it may have failed to identify the wrongful use of customer funds by the firm, if that occurred.

Rather, I see MF Global as the latest poster child for throwing in the towel on regulatory solutions and ripping out most of them as ineffective and overly expensive.

What's worse, looking out for your own interests, or wrongly believing the government's regulators will inform you, in advance, when your interests are in jeopardy?

MF's Illegal Use of Customer Funds

You'd think it would be a business news sensation. Perhaps earning a picture on the front page of the Wall Street Journal.

A former co-head of Goldman Sachs, former US Senator from and Governor of New Jersey, gone missing. His residence staked out and the FBI reportedly examining the books of MF Global.

More detail regarding not just a 'missing' $600-900MM of funding in the company's books, causing Interactive Brokers to walk away from a bid to buy MF Global, but the misuse of money in that general amount from customer accounts.

I wrote this post a few days ago regarding the rather mild story of MF Global's Corzine-led big bet on European debt.

Now the story has become much deeper. At least the Wall Street Journal managed a brief piece yesterday suggesting that Chris Flowers, Corzine's backer as CEO of MF Global, has lost his golden touch of late. But no reminder of the connection which the Journal exposed in its January piece on Corzine's appointment as CEO of the firm.

Curiously, this wasn't a big story this morning on CNBC. As a frequent guest host, you'd think they'd have discussed it. But I'm being sarcastic- CNBC is a heavily liberal-leaning network, so it was and is unlikely to do much more than broadcast stories the staff has already read in the New York Times or Wall Street Journal. Bloomberg wasn't much better.

At least I had the satisfaction of watching Bloomberg use the headline of this recent post nearly verbatim on Friday morning.

Of course, MF Global's rapid demise begs the question of how US financial regulators can possibly handle a large, allegedly 'too big to fail' institution, when they were caught flatfooted by the broker's situation. As a registered Fed dealer, one wonders where that regulator was? Not just because of the excessive risk in the European bond positions but, now, the news of misusing customer funds in an attempt to avoid collapse.

It's as if the umpires of a AA minor league baseball game gone wrong are suddenly sent to handle a World Series. If regulators can't identify and measure such outsized risk as MF Global took, not to mention the funny business with customer funds, how are they ever going to manage to pre-emptively flag and liquidate an excessively-risky Citi, BofA or Chase?

Answer- they can't and won't.

Meanwhile, it should be an interesting week for breaking news on Corzine and MF Global.

Goldman Sachs' Earnings

It's beginning to get positively humorous listening to various bank sector analysts and fund managers discuss recent earnings and hoped-for future performances of six large US financial institutions: large commercial banks Citigroup, Chase, WellsFargo, BofA, and the one-time investment banks MorganStanley and Goldman Sachs.

Nearby is a price chart for the six, plus the S&P500 Index, for the past two years. Some results surprised me, while others did not.

The S&P outperformed all six banks, which I expected. That Citi was next best was a shock. I suppose it's because of a rebound effect of coming out of government ownership. Careful examination reveals that the formerly-insolvent bank has headed downward in terms of shareholder value since the beginning of the year.

The next pair of banks tracked each other closely- Wells and Chase. Neither one was close to failing, but, then again, neither was ever really a stellar bank, either. Solid middling finishes below the Index.

Last come BofA, MorganStanley and Goldman.

BofA I would have expected, as well as MS. Goldman has been declining all year, along with the other two.

Yesterday, I listened to some pundit on CNBC declare that he confused Goldman's results with MorganStanley's, so mediocre were they. Much was made of Goldman's pullback from risk, thus causing a precipitous drop in trading earnings. That the firm is not diversified and balanced, like Chase or Wells, so it's suffering from the misfortunes of only one business. The Wall Street Journal carried a prominent piece critiquing the firm's quarterly performance, as well.

Noises are being made about Goldman tightening its belt for a lean year, cutting staff and riding out the near term markets.

However, stepping back a bit to study the price chart above, I think something else is finally occurring.

The most significant feature of the chart, for me, is that the S&P500 has outperformed all six banks over the two years. Further, all six are generally in decline since January, while the Index has flattened or been slightly positive.

Here we are, two years after the recent global market lows, and the largest US financial firms haven't been able to outperform the broad market.

One-time thoroughbreds MorganStanley and Goldman Sachs are slumping, likely the victims of intended consequences of the Dodd-Frank regulations. Ordinarily, I'd say bet on monoline financial service firms. But given the punitive nature of Dodd-Frank, and the reasonable effort to separate risky trading activities from government-insured businesses, that probably no longer holds for these two firms.

As for the other banks, well, I think it boils down to this. Sector analysts like Tom Brown and Dick Bove have to make a living, so they'll be calling an eternal horse race among the four. But BofA remains poorly-run and generally expected to splinter at some point in the near future. Citi remains a wreck, too. Once the various capital market effects of its brush with death fade, it can return to being a large, poorly-run, badly-designed large bank. Perhaps, like BofA, it, too, will finally shed some of the more cumbersome businesses in its portfolio.

Which leaves the two mediocre leviathans, WellsFargo and Chase. Neither is anything to write home about. They will likely remain timing plays for the analysts to use as fodder for their cable television appearances as the banks rise and fall over the ongoing quarters. If BofA and Citi become less horrific, they can rejoin that short list.

Whether Goldman or MorganStanley return to private partnerships is unclear. With the former's downward vector, it would be a classically bold, yet sensible move for the firm to buy itself when others see little value in owning it.

But what's pretty clear is that we are witnessing the last stages of consolidation and stagnation of publicly-held private financial sector firms in the US. Conventional commercial banking among the large players has become predictable, overly-regulated, costly and uninteresting. Investment banking looks to be suffering as intended under Dodd-Frank.

The US banking sector, at the large end, is nearly at the point of being appropriately uninteresting as a home for long term, consistently superior total return performers.

Large US Bank Performance In The Wake of Concerns Over Increased Capital Requirements

Tom Brown's announcement in early June that he had bought BofA shares for his sector fund. That post was on June 3rd, so Brown bought no later than that- perhaps in late May, perhaps earlier that week.

On June 9th, I wrote this post discussing the subsequent call by various regulators for large "too big to fail" banks to hold from 3% to perhaps 7% additional capital.

As of yesterday, the major US banks included in the nearby price chart, have all declined since late May. The S&P500 Index is about flat.

We don't know precisely when Tom Brown bought his fund's BofA shares, but all of the banks shown- Citigroup, Chase, BofA and Wells Fargo- have declined absolutely and relative to the S&P for the past three months.

No wonder Brown was cheering on Jamie Dimon's objections to the sensible call for these banks to be capitalized as, well, banks, rather than unsecured loan providers.

Could it be that between the divestitures and closures of now disallowed businesses, and the specter of higher capital requirements, these banks are in for a long term correction down to price levels more consistent with giant, slow-growing, government-insured deposit-taking financial utilities?

The Fed's Proposed Large Bank Regulatory Capital Increase

The banking community is shocked- shocked!- at the Fed's proposal to add about 3% to required regulatory capital for the 'too big to fail' crowd.

One large bank CEO, Jaime Dimon of Chase, went so far as to try to embarrass Helicopter Ben during the Q&A after his speech in Atlanta yesterday. I just saw Bernanke's reply on CNBC a few minutes ago, after having to endure senior economic idiot Steve Liesman's attempt to restate Dimon's comments. Fortunately, though, there was audio of the native New Yorker's signature accent delivering his diatribe.

Much was made of how great Chase was, how it was a lower-risk bank during the financial crisis, and how important a CEO Dimon is. The implication being that since Jaime asked these questions and pointed out various facts, well, they must be important.

What Dimon asked, to summarize, was why, with SIVs gone, CDOs moribund, some banks gone, and most housing finance excess gone, there was now a need to raise capital requirements on large banks? And did anyone study the potential effects of such increased regulatory capital on interest rates, loan volumes, economic activity and- hold your breath, because Dimon gets positively statesmanlike on this next one- JOB GROWTH!

My God! Raising capital requirements must be un-American!

Well, not quite.

I've written in a post some years ago that banks want to portray themselves as competitive companies in terms of equity values and growth, even though the business in which they are in doesn't lend itself- no pun intended- to such dynamics. And the traditional nosebleed level of regulatory capital/risk assets doesn't really matter once risk becomes loss. Which happens in as little as one or two days, if not overnight. Ask the former executives of Bear Stearns.

Although banks like Chase have been forced to lessen their proprietary equity trading, their business is to hold financial assets, some of which have values which can change rapidly and, at times, in unexpected directions.

Current capital levels don't begin to cover what can occur on a large bank's balance sheet. Never mind, now that Dodd-Frank is law, what the geniuses at the banks will invent next, now that they have a fixed regulatory target around which to maneuver to evade capital requirements and other nettlesome regulations.

Former Goldman banking analyst Bob Albertson was on CNBC as a follow-up to the Bernanke-Dimon exchange to shill for the banks. He sagely intoned that nobody in government knows what the effects of their regulations will be.

True enough. And Dimon's question regarding research into said effects was simply theatrical. Everyone knows that such research wasn't and won't be undertaken. From a statistical sense, it's likely far too complicated, with too many variables for which to control, and too many to study, to ever develop sufficient data to draw conclusions.

But after you get by Dimon's- and Albertson's- smoke and mirrors, remember that this sector ran amok only a few years ago, with the help of Congress, sleepy Fed and FDIC regulators, and Fannie and Freddie buying off overseers and most of Congress. Collectively, the American taxpayer and the economy footed the bill for these excesses, next to which an added 3% of risk assets is a pittance.

Will BofA's equity be diluted nearly 50%? Maybe so. And maybe Tom Brown will have second thoughts. He was on Bloomberg yesterday morning singing Dimon's praises- no surprise there, eh?

The reality of large bank equities, however, is that they are timing plays. These companies don't typically exhibit consistent behavior. So once you acknowledge that to buy and sell them is to engage in market or sector or even company timing, surprises like added capital requirements are just part of the risk of playing that game.

From a historical perspective, however, it's hard to argue that having large, nearly-unmanageable and uncontrollable financial institutions which are slated to be taken over by the government after their next series of lethal mistakes, hold some added capital, is indefensible.

Invisible Economic Red Tape

I've read and collected several recent editorials from the Wall Street Journal which, taken together, provide a clearer picture of how our government is strangling the US economy and perverting energy policy in ways which aren't hitting the front pages of the nation's newspapers, nor the headlines of the conventional broadcast network news programs.


Item One
A Journal staff editorial from the Memorial day weekend contends,


"The regulatory tax on Americans is now larger than the income tax."


It cites two Lafayette College economists, in a study "sponsored by the Small Business Administration" as finding that federal regulatory compliance costs the US $1.7T annually. So much for Cass Sunstein's little piece claiming that regulatory burdens are shrinking.


In one incredible passage, the editorial notes,


"In one case, the (CTFC) lawyers even insisted that the only costs they needed to count were what a company would have to spend to find out if a rule applied to it, but not the costs of actually complying with the rule."


Item Two
Nick Schulz of the American Enterprise Institute reviewed the book Great Again by Henry R. Nothhaft.


Schulz writes,


"Nothhaft is not one of those professional declinists.....a veteran Silicon Valley entrepreneur who is the CEO of.....Tessera."

The review describes one California company being forced to pay a state 'use' tax of $1MM on top of the $10MM it paid for the German production equipment.

Nothhaft recounts how a prior startup which he took public spent $3MM on Sarbanes-Oxley compliance, far in excess of the bill's average estimated $91K.

America's tax rates are also excoriated. With reductions in many European national rates and the Chinese competing aggressively with low tax rates, including special low rates for semiconductor manufacturers, one venture capitalist explains that his firm won't even bother trying to start those kind of ventures in the US anymore. They'll choose China instead.

Item Three
Yesterday's lead staff Journal editorial detailed how the current administration is implementing a sort of 'pocket veto' of Alaskan oil exploration, production, and usage of the North Slope pipeline.

What the average American doesn't know is that, once the pipeline no longer pumps oil, it must be dismantled. Well, the original North Slope fields are aged and pumping about a third of their peak production. This results in slow-moving oil that causes damage to the pipeline.

Meanwhile, although the Bush administration auctioned leases for one section of the North Slope expected to contain more oil than the original find, the Obama administration has allowed green anti-oil lawyers to block development of the leases, leading to Shell to shut down said attempts at development. ANWR remains off limits, as does at least one other large block of almost-proven tens of billions of oil reserves.

The net result is to silently shut down Alaska's potential oil production and, in the process, force the owners of the pipeline to dismantle it, making subsequent construction in this age of greater environmental obstructions, nearly impossible.

So much for government's solutions to spending hundreds of billions on Arab oil. And for removing regulatory constraints on the American economy.

Holman Jenkins, Jr. On The Missing Rajaratnam Fallout

The Wall Street Journal's Holman Jenkins, Jr. wrote a recent column concerning the Rajaratnam trial and verdict.

Leaving aside the allegations of Jenkins and others that Rajaratnam's crimes were more or less victimless, he rightly expressed outrage that, so far, the real crimes unveiled have gone unpunished.

Specifically, a McKinsey consultant leaking client information, Intel being betrayed by one of its executives and Goldman board meetings being compromised.

Whether or not these are prosecuted, they seem to have paled besides what remains problematic insider trading rules. And how those rules seem to run counter to the principle of wanting as much information represented in stock prices as possible.

It's pretty clear that Rajaratnam knew he was almost certainly violating SEC rules and existing law. It remains unclear whether those laws do much more than occasionally make people feel better by seeing someone prosecuted for violating laws that have dubious value in the first place.

But knowing that these other business people fed Rajaratnam information which was clearly wrongly disclosed is distressing.

As Jenkins noted, those, at least, are the real crimes we can all agree should be wrongful behavior and prosecuted.

The Magic of Blogging, Search & Social Networking

My blog is one of at least thousands which presume to observe and comment on business matters. Its followers number less than 10, and I don't believe it's permanently linked to any large, famous blogs.


On an average day, it probably draws 50-70 readers. Most, I know from Sitemeter, find a specific post due to a search. Sometimes a post about a company is linked on some major stock information site and draws above-average traffic.


Occasionally, one of my posts, such as a prescient one about unfundable municipal pensions, over a year ago, become a lightning rod and draw a few hundred visitors. That post was linked on the main page of some national government workers union's website, accounting for the stampeded of readers eager to learn, before the topic was so mainstream, that, and why, they may never receive their pensions.


Yesterday, however, saw a very new, yet commonplace combination of new media occurrences drive readership of my blog over the 1,000 mark for the first time. It took a little digging into Sitemeter's referral data to learn why.


Apparently, sometime yesterday afternoon, Dave Ramsey twittered about this post I wrote last year, prior to the elections last year. I know of Ramsey from his weekly appearances on Neil Cavuto's Fox News program at 4PM, but I have never listened to his radio program.

What surprises me is that my post is over six months old. It was written about a piece that Art Laffer wrote in the Wall Street Journal concerning Bill Gates, Sr.'s funding of a campaign to initiate a personal income tax in Washington state. Laffer presented some empirical work which clearly demonstrated that US states with higher tax rates experienced less economic growth than states with lower rates. No real surprise there, but some people refuse to acknowledge natural human economic behavior.

So, perhaps since it's tax season, or because Congressional Democrats and our president want to raise tax rates again, Ramsey somehow found my post and twittered Laffer's conclusion, with a URL for my post. I'm sure Ramsey has a ton of followers- he's a very popular radio personality. Next thing I know, by mid-evening yesterday, I had over 300 visitors, mostly from Twitter or iPhone apps.

Clearly, mobile and social networking access, combined with Twitter, catapulted my brief, derivative, dated blog post into brief popularity. There are still visitors coming on today based on the same twitter link. Apparently Facebook is also involved, as quite a few referring URLs are that site's exit page. Perhaps Ramsey's Facebook page has his Twitter link.

In any case, it's a testament to the unpredictability of the effect of current communications technologies.

Who would have guessed that, on some random day, a well-known radio personality's brief comment about the effect of state tax rates, as discovered by Art Laffer, in a major daily paper without free access to archived material, then observed by me, in a public venue, months ago, would result in a torrent of mobile traffic to my blog?

If you need some evidence of why we don't want excessive FCC regulation, this anecdote is a good one.

Myopia From Dinallo & Geithner On CNBC This Morning

Sometimes you can understand why business people have such fear of government. This morning's incredibly myopic comments and narrow minded recollection of history by former New York Insurance Commissioner Eric Dinallo and Treasury Secretary Tim Geithner gave clear examples of grounds for this fear.

First Dinallo crowed about how effective his and Geithner's illegal taking of AIG by declaring it insolvent had been. It was truly scary to listen to Dinallo self-absorbed remarks, never allowing for the possibility, as several observers described at the time, that AIG's troubled financial products unit could have been separated from the solvent insurance operations, and separately taken through a Chapter 11 process, with all derivatives creditors taking proportional haircuts to resolve the unit's problems.

To hear Dinallo tell it, he crafted the best of all possible solutions, irrespective of the capricious nature of the seizing, or the general sense that, due to former NY AG Eliot Spitzer's animus toward AIG's former CEO, Hank Greenberg, the giant insurer was in for some truly 'special' treatment at the hands of New York and the feds.

Sadly, the co-anchors on the set let Dinallo spin his fairy tale of the soundness of the AIG seizure without a single probing question.

Then Tim Geithner appeared from Washington to easily hit some softball questions from the networks  hapless senior economic reporter. Once again, the government official was allowed to go on and on without any interruptions for probing questions or serious challenges to his fairy tale.

In Geithner's case, the fairy tale is that yesterday's S&P warning on US debt is misplaced. That we haven't created too much debt which will be bequeathed to our children, and that extra spending on infrastructure and education is perfectly fine. Yes, the debt needs to be reduced, but certainly not at the cost of reining in special spending. Make sense? Not to me, either.

Both Dinallo's and Geithner's nearly robotic, surreal views that ignore reality ought to put fear into business people throughout  the US. This is the attitude that causes investment to remain on the sidelines and hiring to be delayed. With government officials like these two inventing their own reality to justify power grabs and fiscal imprudence, there's no telling what overreach could come next from Washington or your own state capital.

At this point, in the interest of truth in packaging, CNBC should just relabel itself as a government public relations agency.

Another Reason Why Business Fears Government

Back almost a month ago, the Wall Street Journal published a staff editorial entitled President Warren's Empire. It dealt with the tortured details of Warren's position as head of the newly-created Consumer Financial Protection Bureau.

If you want to understand why job creation and investment are growing so slowly in the US, this story is instructive.

Given the politics of the moment last year, Democrats wrote the unnecessary Dodd-Frank regulatory legislation in such a way as to shield Warren and her agency from possible Republican legislative retribution, should they have, as they did, retake control of the House.

Warren's agency is funded mandatory out of the Fed's budget, and the Fed's chairman can't object. So Congress has no budgetary authority over the agency. And Warren dodged confirmation hearings because she was appointed as a White House staffer.

The overall effect has been for Democrats to organize the agency and treat Warren in such a way as to leave both effectively without any oversight or restraints by Congress.

As the editorial observes at its close,

"This is no way to run a government, especially not one that Madison envisioned. The consumer bureau is essentially a bureaucratic rogue....But at the very least Congress should remove it from the Fed, make it part of the Treasury and subject it to annual appropriations. No one elected- or even nominated' Elizabeth Warren."

Meanwhile, from this bureaucratic tangle, Warren and her fellow appointees have already begun to coerce and shake down banks to forgive mortgage principle, or face further harassment.

Indeed, this was not the sort of federal government the Framers had in mind. With such capricious, deliberately-opaque and unresponsive design of so-called regulatory agencies, you can't blame business managers for withholding investment due to uncertainty of government intervention and coercion, disguised as 'regulation.'

Paul Singer On Inflation, Dodd-Frank Regulation, & The Next Financial Meltdown

This past weekend's Wall Street Journal main interview was with hedge fund manager Paul Singer. I can't say I was acquainted with his work prior to reading the interview, but I was heartened, in a way, that so much of what he espoused was similar to some of my own previously-written views.

For example, Singer was unequivocal regarding coming inflation. When a guy like this begins citing 1930s era European treatises on the Germany currency debasement, you should be worried. I already am, but, of course, Helicopter Ben keeps telling people like me to have faith and quit being concerned.

Let me put it this way. Singer has built a multi-billion hedge fund by relying on his own analyses, conclusions and instincts. Ben The Bernanke is a high-level civil servant who will probably be offered another high-level, lucrative position after being Fed Chairman, no matter how badly he messes up in that role.

Of the two, Singer or Bernanke, whom do you think has the greater risk in being wrong, and, therefore, is more likely to get the current economic situation correct? And, by the way, Bernanke, as a sitting Fed Chairman, pretty much has to cheer lead on topics like saying economic growth is coming or here, inflation won't be a problem, and the world's investors won't be concerned about continued US monetary debasement.

For once, in Singer, I've found someone who echoes my own views of large US commercial banks as totally unattractive investments. James Freeman's interview quotes him as saying,

"You don't know the financial condition of [Citigroup], JP Morgan, Bank of America, any of them. Mr. Singer believes the big banks still carry too much leverage, and he doesn't trust regulators to monitor them effectively.

The largest financial institutions, he says, are "a random collection of survivors. Almost none of the survivors exist because of their perspicacity, risk controls and sound management- even the ones that are vaunted along those lines...How and why do they exist? Mostly on accident, meaning who got bailed out first and who was saved next and how did people feel and what did people say the weekend Merrill was under pressure [in September 2008]." "

Singer goes further in the next paragraphs, citing one of my own favorite risks- counterparty. He says that his fund complex has removed itself as much as possible from having any of the large US commercial banks and "the Street" as counterparties.

Singer sees Dodd-Frank as I, and many others, do, as described in the interview thus,

"The authors of Dodd-Frank claim that the law prevents the government from bailing out any particular firm, but the Fed can still provide emergency loans to a failing giant as long as it offers similar financing to other firms.

"It's a very important part of this equation that a few survivors exist in this peculiar relationship with government, having to kowtow to government, make relationships with regulators," says Mr. Singer. "Are they puppets of the government? Are they cronies of the government? Will their lending be affected by the perceived whims or beliefs of the particular government regulators existing at a particular time? Yes."
If the government deems a firm not "systemically important," Mr. Singer forecasts, it could spell its doom. "Small and medium-sized financial institutions may be disadvantaged, may be sacrificed in the next crisis to protect these behemoths," he says.
It gets even worse, Mr. Singer says, if the government ever deems a financial giant "in danger of default"—a judgment that can be made without the consent of the firm or its investors. The business is then taken over by the Federal Deposit Insurance Corporation, with its Orderly Liquidation Authority.
Once in charge of the firm, the government can discriminate among similarly situated creditors and transfer assets out of the business at will. Because of this, says Mr. Singer, creditors and trading counterparties might flee even faster than they would from a firm headed toward bankruptcy, where at least there is established law instead of regulator discretion.
"You don't know how you will be treated," he says of financial institutions under the new FDIC regime. "If there are companies that are also counterparties alongside you but they've been designated systemically important, that's a clue. It's like a game of treasure hunt. It's a clue that you're going to get disadvantaged compared to them."

So maybe FDIC chairman Sheila Bair and the authors of Dodd-Frank were right about one thing: Perhaps their new process for resolving failing giants really will discourage some people from lending to the biggest banks—but only at the worst possible moment.
The problem, in Mr. Singer's view, will be the jarring shift from one day being an investor in a member of the "systemically important" club, to the next day being a creditor whose claim is determined by bureaucratic whim. This may be welcome news to government pension funds that will want to be bailed out, but certainly not for private investors.
The speed at which a firm will collapse as word gets around that it might be headed to FDIC resolution could be "amazing," says Mr. Singer. And that "speed will drive the size of the losses."
This "atmosphere of unpredictability" is harmful to America's place in the financial world, he says, and "it doesn't make the system any safer. . . . This is nuts to be identifying systemically important institutions." He views it as a poor "substitute for creating soundness and reasonable levels of leverage throughout the system."


Phrases like "bureaucratic whim" ought to make you cringe. Don't you think they have that effect on investors in, lenders and counterparties to such institutions? I do. Singer's comments confirm what many others, including me, have contended, i.e., that the comparatively predictable existing bankruptcy laws have been replaced by liquidation-by-whim and cronyism. Singer is correct to predict that funds will leave a troubled firm much faster than anyone can imagine. And, ironically, that being in a group of selectively preferred, "systematically important" designated firms lending to or investing in a large bank is actually dangerous, because you will be the least-advantaged party. The one most likely to be at the very end of any line to collect on funds due.

Thus, in Singer's view, you have government-backed large institutions continuing with risky behaviors, and counterparties like them doing the same. This, he worries, is the seed bed for the next financial meltdown. Dodd-Frank and the FDIC have replaced uncertainty with respect to government backing for large firms in the event of another financial crisis with absolute certainty that select "systematically important" banking firms will be rescued. Moral hazard is now legislatively and regulatorily banished, leading to another round of excessive risk-taking.

The final passage of Freeman's interview says a lot about Singer,

"One reason his firm has survived for 34 years, he says, is that "we try to be very respectful of the unpredictability of markets. We try to at all times at least assume that the world is not being properly run." A safe assumption. "

Sad but, in this case, so true.

Cloud Computing, Net Neutrality, Regulation & Economics

The Wall Street Journal columnist Holman Jenkins, Jr., wrote an interesting piece last week entitled What Price the Cloud?

In it, he reviewed  the evolving situation regarding heavy internet capacity usage by firms like Netflix and Google, who, of course, want no pricing actions taken against them.

Jenkins wrote, in reference to "once-great firms like Digital Equipment and Wang Labs,"

"The scariest part: Even leaders who grasp what's happening to them often can't change cost structures and business models fast enough to survive."

That's actually a misunderstanding. DEC and Wang really never had a chance once the PC began to spread. No change in cost structure for producing a Wang system could save the company, because the product was just archaic in the face of a multi-functional PC of the late 1980s.

I'm rather surprised Jenkins made this mistake. Schumpeterian dynamics don't typically allow for accommodation by older firms to the newer trends which supplant them. There is little or no effective response. Rather, the older approaches simply disappear.

Still, the core of Jenkins' piece involves whether repricing of bandwidth will hurt companies like Netflix. Everyone's nightmare, of course, is that the cable companies begin to meter individual usage and charge for such usage volumes over a certain level. Jenkins notes how the introduction of ever lower-priced smart phones is driving up bandwidth demand from mobile sources.

He refers to an A.T. Kearney report which finds current economics of the internet unsustainable without some transfer of bandwidth costs to those that generate traffic. But for me, the key passage is this one,

"...but who's to say consumers can't judge for themselves if the restrictions are worth the price?"

Just the other day, I went online and selected three Netflix movies to view on my television. Into the instant queue they went, and I watched them, with no particular interruption, that afternoon (Although, I should note that Netflix has had some recent problems, disappearing from my Tivo unit for a day or so, and freezing up the system on occasion. I suspect usage overload).

What's that worth? For a flat monthly fee, I could watch 30 movies/month. I think that comes out to about 50 cents/film, and considerably less on a per/hour basis for entertainment.

If my cable bill rose by $10 for this level of service, will I really care? Is $10 so much that I'd revert to mailing discs back and forth to Netflix? Unlikely.

I saw the excellent movie Barney's Version in an art house theatre last weekend with a friend. It cost about $25 all in. The price differential between first-run movie experiences and arm-chair selection and viewing off of Netflix remains enormous. Temporarily raising the price of using bandwidth, until the traffic generators respond with more efficient delivery to economize on bandwidth usage, probably won't be crippling for most consumers.

What's really at issue here is this. Having learned the ability to buy, perhaps at artificially low prices, cloud-based experiences involving high-speed transfers of video and other high-volume communications applications, will consumers just return to old, pre-cloud habits, or will they willingly pay something for the ability to maintain their new levels of cloud-based information consumption?

But, in the short term, Jenkins is entirely correct when he writes of Apple, Netflix, Amazon and Google,

"All are betting heavily on the cloud. All need to start dealing realistically with the question of how the necessary bandwidth will be paid for."

Current enjoyment of on-demand, large swatches of bandwidth for free can't last much longer. The electronic highway is getting crowded, and sooner or later, tolls will have to be charged to allocate usage, or we'll all experience an inability to view full motion video in a manner that's appealing or worthwhile.

Wilbur Ross vs. Liesman on CNBC This Morning

This morning, on CNBC, viewers were treated yet another example of why the network must fire Steve Liesman.

Under discussion was the proposition that the Dodd-Frank law has solved nothing, and only added to regulatory costs and uncertainties. Wilbur Ross opined that nothing in Dodd-Frank that was new would have prevented any of the of the recent mortgage-related financial excesses. Another guest echoed Ross' comments.

Leave it the networks senior economic idiot, Liesman, to begin yelling over and at Ross, claiming that he disagreed. Not once, but two or three times, did Liesman interrupt or shout over guests with actual, successful experience in the sector, to object to their opinions and tell them they were wrong.

When he finally sputtered to a stop, the uncredentialed reporter uttered some barely-comprehensible, feeble and, frankly, unbelievable reason that he felt Dodd-Frank would have improved upon prior regulatory schemes. I seem to recall him repeatedly yelling,

'but Fannie and Freddie......,'

so it's likely his mistaken belief had something to do with safeguards involving the GSEs.

You had to see this exchange, though, to truly appreciate just how clueless and pompous Liesman has become. It would have been one thing for him to ask Ross and the other guest a question focused on what he believed was a feature of the recent regulatory law that may have had a positive effect on the crisis. But without any credible basis for his comments, to simply try to shout down two more involved and experienced businessmen on the topic, was just deplorable.

Liesman has become a glaring liability for CNBC. It would not surprise me if Ross conditioned his next appearance upon Liesman being banned from the set for the duration of his visit.

Holman Jenkins On Apple, Goldman & Facebook

Holman Jenkins, Jr.'s editorial in yesterday's Wall Street Journal dealt with the uselessness of the SEC. He approached the topic rather ingeniously, using the recent news concerning Apple and Facebook.


Regarding Apple, Jenkins simply noted that the firm has disclosed what it felt was sufficient regarding the health of its iconic CEO, Steve Jobs. After that, shareholders are free to buy, sell, or hold the stock, as they wish.


For what it's worth, I believe Jenkins is the first major pundit whom I've read that has explicitly stated the same sentiment I share on this topic, i.e., shareholders have the ability to exit their position in a stock, at nominal cost, if they don't like something about the way the firm is managed. Period. Stop whining.


On the matter of Facebook and Goldman Sachs, Jenkins concluded his brief series of pieces which have generally lauded Facebook's management and absolved Goldman of anything other than simply doing their usual job. Since I wrote this post last week, Goldman yanked its Facebook private placement from its domestic clients, ostensibly to avoid potential SEC sanctions, and, instead, turned to its overseas client base. This has reputedly resulted in a lot of angry domestic clients.

Jenkins has written several pieces extolling Facebook's Zuckerberg's right to remain private, maturity in recognizing his own not-yet-ready-for-prime-time management expertise, and the victimless nature of the firm's right to use a private offering rather than an IPO to raise more capital.

I continue to disagree, somewhat, with Jenkins on the matter of public access to such firms only after the big initial gains are locked in for the wealthy few. But I enjoyed reading his clever turn on the SEC, contending that Goldman's sudden reversal makes a mockery of the agency.

Specifically, Jenkins contends that the SEC made noises about the lack of total privacy of the Facebook private placement in part to look aggressive and tough in the wake of its lapses in the Madoff case and the implosion of the major investment banks, under its watch, during the 2007-09 financial crisis.

On both Apple and the SEC, I concur with Jenkins. He's especially astute to point out how the SEC, by its very existence, has ironically resulted in more investor risk, not less, since many believe the SEC has made investing safe.

Obviously, it hasn't, which creates an enormous and expensive unintended consequence. The core benefits of the agency, whatever they would be, could no doubt be achieved for less money and with less interference in market activities.

Banks Begin To Exhibit Consequences of New Regulations

Yesterday I wrote this post concerning David Malpass' recent insightful Wall Street Journal editorial, and his subsequent defense of it, if that's the right word to describe the one-sided conversation Malpass had on CNBC that day with the network's faux-economic reporter Steve Liesman.

My mind had more or less blocked out the details of that discussion, until I read two articles in yesterday's Journal concerning bank earnings and capital requirements.

The two articles concerned Goldman's recent earnings, which were down 40% from last year. It's not a big secret what happened. In the anticipation of the eventually-passed Congressional financial regulation bill, the firm trimmed its proprietary trading activities and began to keep capital more liquid, earning less, in reaction to the looming regulatory and capital requirement uncertainties.

Right underneath that article on page C3 in yesterday's Journal was one entitled Banks Confront Weight of Risk. That piece discussed the consequences of the new Basel III bank capital rules. In Goldman's case, the firm's CFO explained that regulatory capital would need to rise from $451B to $750B. Elsewhere in the article, it was explained that the new Basel rules increase capital ratios on risky assets, while simultaneously reducing the types of liabilities which are allowed to count as capital. One example of the first effect was an estimate that "Morgan Stanley's risk-weighted assets will jump 80% under the new Basel rules."

Any way you look at it, Basel III alone will begin to rein in decades of profligate, risky banking behavior by many firms which either were, or became, federally-backed institutions.

This isn't a bad thing, in my opinion. As I've contended in earlier posts, banking, in its totality, should never have become a growth industry. Sure, individual businesses, such as mortgage lending, consumer finance, or various structured instruments, might grow at elevated rates for short periods of time. But overall, banking is an economically derivative sector. It can't, in total, over time, grow faster than the economy it serves, without essentially taking more risks.

Again, as I've written in prior posts, there are and, now, will certainly be cases in which bank managers can't profitably deploy all the risk capital assigned to their positions, when capital costs are included in those profits. In short, properly risk-adjusted returns will fall, capital will shrink, and aggregate bank total returns will probably become appropriately more sluggish.

If anything, this regulatory change will push more risky finance business into the privately-held sector. Which, if you think about it, is a regulatory response to the decades-long trend of investment and commercial banks taking excessive risks while selling the ownership of such risk to the public. Looks like riskier financial business is headed back to private partnerships, as it was prior to the 1970s.

What does this have to do with David Malpass and yesterday's post?

Well, as my memory of his comments recovered, I recall his arguing that it isn't high interest rates that is holding back US economic recovery, but, rather, uncertainty on many fronts- regulatory, legislative, fiscal and monetary policy. In response, the economically unschooled Liesman repeated various platitudes about 'no double dip,' gradual recovery, etc., etc., etc.

Goldman's explicit statements about reining in activity in anticipation of greater regulatory burdens, the exact nature of which is as yet uncertain, supports Malpass' positions. Especially as they accompany such a precipitous fall in net income.

How's that for empirical evidence of an economist's contentions?

Further Politicization of Financial Sector Bankruptcies

Last Friday's Wall Street Journal carried an article about the FDIC and bank dissolutions with this chilling subtitle- FDIC Expected to Use Discretion to Rank the Creditors; That Can Be Tricky.

Among the more ludicrous parts of the article was the report that current FDIC chair Sheila Bair,

"said at a board meeting last week that the authority to differentiate among creditors "will be used rarely" and only in instances where additional payments to certain creditors are "essential" to maximizing the value of a firm or to conduct its operations."

There is so much subjective judgment loaded into Bair's statement as to make it meaningless.

Essentially, recent new regulations have made financial sector bankruptcy a completely subjective, politically-determined process.

Whoever heads the FDIC has the power to effectively choose which firms will be propped up, which will be chosen to 'fail,' and, for the latter, which counterparties will be rewarded with better repayment terms than others.

Bair can talk until she's blue in the face, but it won't change two realities.

One, Bair can't bind subsequent FDIC chairpersons to her allegedly-limited intended use of the newly-granted powers to favor some creditors over others, with no basis in law.

Two, the simple existence of these powers means that all counterparties to financial institutions now realize they may lose their capital at risk at the whim of an FDIC chair. Whether their debtor is declared insolvent and, if so, what treatment the lender/counterparty receives, will potentially be totally a function of the subjective feelings that the sitting FDIC head has for that firm.

Nothing else has to matter.

The article continues,

"John Douglas, a partner at Davis Polk LLP and a former general counsel at the FDIC, said such differentiation could foster instability by driving more Wall Street financing to the short-term. The problems of both Bear Stearns and Lehman Brothers were exacerbated by short-term creditors, who pulled out amid concerns about the firms' health.

"You're giving the FDIC the authority to differentiate and....people are going to try to game the system in a way to minimize the possibility of getting hurt," he said, "If you're a short-term creditor...you've got a chance every night to decide whether to fund or not."

In another astute observation, the article quotes Kenneth Scott, a Stanford law and business professor, as saying,

"Discretion breeds uncertainty; it creates additional risk. Despite what your intent might be, it may lead creditors to cut off funding sooner and accelerate the process, not in any sense ameliorate it."

Any way you slice it, informed observers of this new regulatory power resident at the FDIC think it will drive more funding to shorter terms, so that such funding may be curtailed faster than the FDIC can freeze it.

Once again proving how often legislation causes unintended consequences.

By ignoring prudent, risk-averse behavior of capital-providing financial institutions, Congress has, in its idiocy, written laws injecting more uncertainty and subjectivity into the bankruptcy process for large banks, thus driving their funding counterparties to take steps in the future to limit their risks to such subjective, unpredictable processes for repaying counterparties to a seized institution.

Chase's Commodities Chief Blythe Masters & Her Bad Bets

If you want to understand why it's so dangerous to allow US commercial banks with access to federal deposit insurance to engage in proprietary trading, you need look no further than this past weekend's article in the Wall Street Journal describing Chase commodities chief Blythe Masters' missteps, and the bank's continued support of her activities.

The Journal piece observes,

"One of J.P. Morgan's most powerful executives, the 41-year-old Ms. Masters is charged with turning around the commodities operation and building it into the biggest on Wall Street. And though the blunt executive has been given many resources, her division recently has suffered defections and miscues while falling far short of expectations in 2010.

Barring a remarkable turnaround, commodities will end the year far behind a $1.78 billion revenue goal. Part of the problem was a loss on a bad coal bet in the second quarter. The third quarter improved, with a gain of about $154 million in revenue through Sept. 30. But commodities is up only about $189 million in revenue for the year, said a person familiar with the results.


That disappointing performance comes after a costly and bold effort to build the commodities division, one of the bank's biggest bets. Since 2008, the bank spent more than $2 billion buying commodities-trading operations, including Bear Stearns, parts of UBS Commodities and, most recently, assets from RBS Sempra Commodities in 2010.


The bank's push into commodities roiled a lucrative sector dominated by Goldman Sachs Group Inc. and Morgan Stanley as J.P. Morgan poached executives from rivals and boosted its work force from roughly 125 in 2006 to 1,800 today. That makes the commodities desk the biggest on Wall Street that trades everything from power to silver.


Yet it remains trailing its top two rivals in market share. According to people familiar with the situation, the unit has duplicative systems and overlapping technical and support staff, despite 100 job cuts this year. Company executives, acknowledging the problems, are addressing them, the people say.


On a July 22 conference call with her group, she speculated about whether competitors had planted stories about the business and encouraged her employees to speak up if they knew the source, according to a recording of the call. She assured employees on the call that rivals are "scared s—less of us" and promised that "we are going to build and finish building the No. 1 commodities-trading franchise on the planet."


When she took over the commodities business in 2006, Ms. Masters clashed with several high-profile traders who weren't as enthusiastic about their new boss and where she wanted to take the unit, people familiar with the matter said."


Scary, isn't it? your tax dollars are basically underwriting Masters' risky plan to build Chase into a pre-eminent commodities trading presence. Competing with notionally-commercial, ex-investment banks Goldman Sachs and Morgan Stanley.
 
Doesn't this begin to smack of the mortgage financing bubble all over again?
 
Let's review the situation. Commodities are hot in part because of globally-competitive sovereign currency devaluations. As currencies are depreciated by their own governments, prices of commodities rise. Many central banks, notably the US Fed, claim that inflation is running below targets. However, as CNBC's Rick Santelli has explained earlier this year, and, again, recently, commodity prices are heading out of sight. Surely, these prices are a type of inflation. Just not what the Fed wants to measure and observe, because, well, it's an inconvenient exception to the Fed's chosen story line.
 
Of course, eventually, commodities of the non-investing sort, such as agricultural, steel and the like, depend upon demand. And if global economic demand isn't sustained, recent commodity price rises will turn out to be a bubble.
 
My point is, it's not such a simple, one-way bet. There's risk. But Chase's Masters is moving full speed ahead to become a major, risk-taking player in this always-risky market.
 
Does this sound like an activity which you want your federally-insured bank to be ramping up?

What To Expect from the Bureau of Consumer Financial Protection

Much has been made of Elizabeth Warren's rather tortured, strangely-handled appointment to head the federal government's new Bureau of Consumer Financial Protection. I've written about that aspect of her long-awaited appointment here on my companion political blog.

In this post, though, I'd like to consider what this new agency is likely to do to and for US financial consumers.

According to a Wall Street Journal article on the subject, Warren is to oversee a staff which will now commence writing hundreds of pages of new rules and policies governing practices at financial firms.

Warren is now attempting to spin her efforts as being "willing to cooperate with business leaders."

Unlikely.

Anyone who's seen Warren's scolding, imperious, inquisitorial manner during her TARP Oversight Committee will find it hard to believe that statement.

Instead, Warren has spoken of "tricks and traps" that consumer lenders employ, and of calling for "fundamental changes to the way rules are written in Washington." According to the Journal article, Warren wants two-pages contracts for mortgages and credit cards. It's not clear how that would offer more protection to consumers, unless the language is so sweeping as to provide for nearly-unlimited lender liability.

You don't really have to know just what new regulations will be written to understand the effects they are likely to have on consumer lending. Rather than allocate credit according to a consumer's ability to pay, new regulations are more likely to result in no access to credit whatsoever for borderline borrowers.

If consumer lending documents truly become distilled to one or two pages, it's reasonable to assume that only the safest credits will be funded. The fewer terms and conditions are allowed, the more assured lenders will want to be that their customers, and their loans to them, are very low-risk.

Just stepping back and considering Warren's overall belief that lenders have behaved predatorily, and consumers need to be 'protected,' it's a good bet that the price of credit will rise, when it's available.

Perhaps a good example of this likelihood was Warren's reaction to a question from Jack Welch on CNBC's morning program yesterday. When Welch asked Warren if she thought her efforts would increase the price of credit, she replied,

'That's the wrong question to ask.'

Amazing, isn't she? Simply ruling an inconvenient question off limits, out of bounds, to be ignored. Which she did.

She went on to claim, without any examples, that whole companies existed simply to take advantage of consumers with 'tricks' to make them pay exhorbitant fees and rates. Then resorted to the hoary old references to 'families' to contend that all was amiss in the finance industry. Not just a few bad apples, according to Warren, because she never actually admitted that there were honest lenders out there.

Instead, Warren painted a picture of poor, uneducated, stupid consumers waiting to be fleeced by sharp lenders. In her world, consumers sign loan agreements they don't read or understand, despite being adults and understanding that nobody is making them borrow money. For a glimpse of this, go find and watch CNBC's House of Cards documentary. The scene with the large California woman who knew she couldn't afford her mortgage, but figured that 'if they want to give me the money, they must believe it's okay and I can afford it.'

That woman is the prime example of the average consumer in Elizabeth Warren's world. In reality, of course, no amount of regulation or protection will prevent such a person from making mistakes, borrowing too much money, at unaffordable rates. But don't try to tell that to Warren.

Thus, as with most regulatory overkill, the results of her efforts will, typically, be the opposite of intentions. In this case, it will not facilitate borrowing for lower-income borrowers, but probably eliminate them from qualifying for loans at all.

Is Google A Monopolist?

That was the title of last Friday's Wall Street Journal presentation of two editorials arguing the question.

It's nice to have a topic to discuss that involves more pure business and strategy than government intervention, although, the very question actually begs the latter.

The Google case seems, on the surface, to resemble that of the infamous browser wars in which Microsoft drove Netscape into oblivion. That certainly is the contention of one of the editorialists, Rick Rule, now retained by Microsoft and other firms in an anti-trust action against Google.

However, as I thought about this question over the weekend, I found myself believing that Mr. Rule is engaging in a deceptive and erroneous comparison.

Google offers a free search engine to anyone wishing to use it. But it is not the only search engine available. In fact, so robust is the search engine market that Microsoft re-entered the fray recently with its branded Bing service. And just this past week, a co-anchor on CNBC announced that she had gone back to Yahoo's search engine and found it better than the other two.

Since one accesses Google's search engine as an online service, it immediately begins to depart from the browser example, in that those software programs were coming pre-loaded on personal computers of the day.

If memory serves, one of the major anti-competitive behaviors by Microsoft involved tying its browser to its Windows personal computer operating system when selling the latter to PC producers such as Dell. The argument against Microsoft was that it was illegally using the ability of Dell to sell PCs pre-loaded with the most popular operating system, Windows, to force it to also pre-load the included Internet Explorer web browser, and exclude Netscape's or any other firm's browser.

As such, Microsoft's alleged anti-competitive behavior involved violating the Robinson-Patman Act's provisions involving illegal tying.

Google, however, isn't tying anything to a product for which money is paid.

No, the current argument is really about advertising market foreclosure. Even the debate concerning Google's alleged manipulation of search results is baseless in that nobody pays for searches.

Thus, despite a long-winded diatribe, Mr. Rule's only real well-founded point is that Google's share of online advertising exceeds 70%, which he claims exceeds the Sherman Act's "consensus" threshhold.

However, again, online advertising isn't "sold" to users. It's bought by those wishing to advertise, and they can choose all three search engines, if they wish, on which to advertise their products and services.

It reminds me of my local, freely-distributed weekly 'newspaper.' Many communities have them. A local publisher prints and distributes variants of the same weekly paper to many nearby towns through contracted carriers. Nobody pays for these nuisances, and often they receive multiple copies. Thus, it could be said that the publisher in question has a monopoly, in that every house in a town is given at least one copy of the paper. Companies pay to advertise in the paper, but nobody suggests that these small entities have a harmful monopoly on advertising.

Mr. Singhal, a Google fellow and the Journal's choice to represent Google's viewpoint in the other editorial, argues that Google is always vulnerable to its search engine being eclipsed by a better one, thus upsetting its business model. I wrote a post several years ago contending precisely this case. Everything else that Google has pursued has necessarily been dependent upon revenues from search-related advertising. If search goes down, Google's entire empire is in jeopardy.

As an aside, while I understand that Google's, and other search providers, receive their ad revenues from those wishing to place product and service ads, I continue to marvel that companies do this. My own behavior almost never results in purchasing goods or services directly from an ad on an online search. True, a company purchasing a keyword might get a click-through from me, but rarely a purchase.

In any case, businesses do see value in buying various search words and terms, fueling Google's, Yahoo's and Microsoft's search-related advertising revenues.

But none of those seem to even remotely pass the test of current anti-trust laws which require the guilty party to actively foreclose markets to suppliers or predatorily price goods or services to buyers in order to eliminate competitors.

It seems that, like it or not, existing anti-trust laws do not easily apply to the world of online search and advertising. Google's predominance, when viewed objectively, would not seem to be a result of any illegal activity, whether it is a monopoly, or not.