Martin Schamlz of Ross Business School has this interesting bit of research.
He says the top American banks are basically owned by top Mutual Funds. This is leading to these MFs grouping together and minimizing competition:
A century ago, J.P. Morgan made a fortune by buying up shares of competing railroad companies with other people’s money. He used cash from savers and financiers to buy shares in competitors. Then Morgan forced those competitors to cooperate. Similarly, Gilded Age “voting trusts” pooled money from individuals to buy shares in competing companies. Then the trusts used shareholder voting rights to restrict competition
These schemes handed their investors huge profits. Yet the unfortunate side effect of uncompetitive markets is that consumers pay higher prices. Given limited budgets, they buy fewer things. Macroeconomic output drops; people become unemployed; and political unrest ensues.
Could something similar to these 19th Century voting trusts be happening today? New research from my coauthors and me suggests that the answer is yes – and that your retirement savings are part of the problem.
Basically, a handful of asset management firms have become the most powerful shareholders of the nation’s largest banks. These mutual fund companies collect cash from retirement savers like you and me. They buy shares with it on our behalf, and vote these shares, usually with one voice. In these key aspects, large mutual fund firms resemble the voting trusts of J.P. Morgan’s time.
And yes, large-scale common ownership nowadays also appears to thwart competition. In “Ultimate Ownership and Bank Competition,” José Azar, Sahil Raina, and I looked at banks across different parts of the United States. We observed a big difference in competitive outcomes between counties where banks are more commonly owned by the same set of investors and counties where they’re not. In counties where common ownership increases, banks raise fees for deposit accounts and lower savings interest rates.
Today’s large-scale common ownership is probably not a deliberate action by a lone capitalist out to throttle competition. It may be more of an accident. Partly due to the decline of corporate pension plans, mutual funds have grown widely popular and commonplace. Index funds have given millions of people relatively low-cost access to the stock market.
How the finance world have come around. At sometime MFs were basically sponsored/supported by banks (directly or indirectly). Now, they own these very banks. All pretty complicated game of ownership…