Price Fixing on Wall Street?

Lessened competition in any industry will lead to wider margins and greater revenue and profit opportunities.

Wall Street circa 2010 is certainly a dramatically changed landscape with significantly lessened competition. Is Wall Street today an honest display of capitalism in which ‘to the victors go the spoils’? Or is Wall Street an oligopoly which is using its increased power and leverage to control, if not outright fix, prices for products and services?

In the midst of all the other issues Washington is facing, I think there is very little focus on this topic, but we overlook it at our peril. Why? Price fixing, or iterations thereof, is nothing more than a vehicle to transfer wealth from consumers to providers. I see further evidence of this reality in a review provided this morning by American Banker. The AB highlights developments within our mortgage industry and writes, Mortgage Sellers Are Fed Up with Megaservicers’ Oligopoly:

The country’s biggest banks are again making handsome profits from buying and servicing home mortgages. The smaller institutions that produce the loans have not been so fortunate.

That imbalance, which many believe is likely to endure, has irked a wide range of loan originators, some of whom argue that the big banks are not only underpaying them for mortgages but also effectively driving up mortgage rates for consumers. The big banks service around 70% of the nation’s home mortgages, and their margins on mortgage purchases, around 25 basis points during the boom years, are routinely four times that now.

The big mortgage aggregators “know their customers hate what they’re doing,” said Ken Richey, partner of Richey May, a national accounting firm for mortgage companies. “But they’re going to milk it as long as they can. … There’s concern as to whether there’s a movement, if you will, for the big to squish the small.”

Do not think for a second that these developments are not very much a part of the game plan of the large banks. I am not stating that they are nefariously plotting amongst each other, although I’m not stating that they are not either. The simple reality is the ‘too big to fail’ banks have the leverage and will use it to crush smaller and less well positioned firms. Which banks? The bulk of this activity is centered in Citi, JP Morgan Chase, Bank of America, and Wells Fargo.

Is this reality truly healthy for our country’s future? Ponder this:

Even loan sellers for whom day-to-day pricing is not the main concern are uneasy with the extent of market concentration.

Matthew Pineda, the president of Castle & Cooke Mortgage in Salt Lake City, said that currently aggregators will buy a plain-vanilla, 5.25% mortgage at a 25-basis-point discount to its face value. Given where securities backed by similar mortgages are trading, he said, it would be reasonable for that loan to fetch a 25-basis-point premium. But the aggregators have no incentive to undercut each other, he said.

“They’ve got the ability to dictate to us the price they’re willing to pay,” Pineda said. “They know what the competition’s buying it for.”

If that does not sound like price-fixing, I do not know what does. Do the regulators care? In my opinion, the regulators — primarily the Federal Reserve — will implicitly support these activities across a wide array of market sectors in hopes the large banks can rebuild their capital base.

What is the ultimate solution to this price fixing? More competition which will only come if the ‘too big to fail’ banks are made smaller. I will discuss this topic this Sunday evening, April 11th on my show No Quarter Radio’s Sense on Cents with Larry Doyle Welcomes 13 Bankers Co-Author James Kwak.

I hope you can listen. If not, the show is taped (I always have an audio player of the most recent show in the top right sidebar), and also available as a podcast on iTunes.

LD