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.
Take a look on the table below
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.
To restore competition, regulators have several options.
- Reduce the size of the large, diversified asset management firms
- Limit the power of large mutual fund companies
- Strengthen the clout of activist investors
Read More on on HBR.com. Written by Martin Schmalz (June 13, 2016).
